Deal Terms: Break-Up Fees, Covenants to Closing and Material Adverse Change Clauses
The two recent busted mergers of Aetna and Humana and Cigna and Anthem could result in break-up fees of nearly $3 billion dollars, or a combined $15 billion of break-up fees and damages for breach of contract for an alleged wrongful termination of the merger agreement. With billions of dollars at stake, it is likely that we will be learning details about these busted mergers and the resulting lawsuits for months to come. Although it is premature to talk about these deals in detail, we can talk about the deal terms that commonly address the concerns of deals failing to close.
Both of the deals mentioned above included substantial break-up fees. As the name suggests, the fee is meant to compensate one party if the other party unilaterally walks away from a deal. Here, Cigna is claiming both the breakup fee and breach of contract damages for wrongful termination of the merger agreement. Ideally, a purchase or merger agreement would make it clear that the break-up fee constitutes liquidated damages and is the exclusive means of seeking damages from the party terminating the agreement.
In the busted Aetna deal, the DOJ moved to block the merger on the grounds that it lessens competition in the Medicare market. Healthcare insurance is highly regulated. It was foreseeable that federal intervention was possible. In such a situation, a purchase or merger agreement should include all governmental approvals and permits (and absence of governmental injunctions) as a condition to closing.
Also, most deals include a material adverse change (“MAC”) clause that allows a party to terminate the agreement pre-closing if extraordinary events occur to change the basic rationale for doing the deal in the first place.
We are not saying that these provisions were not included in the agreements of the busted deals, or that they were poorly written. But, the reality is that there are ample ways of mitigating risks in mergers and acquisitions.