Breakup Fees and Other Provisions to Halt Backing Out of a Deal
Maintaining trust in a healthcare transaction is important in order for both parties to see the deal through to the end. While trust is usually built in between two parties, there are still provisions that can help prevent one party backing out of the deal at the final hour. The Ambulatory M&A Advisor discusses the ins and outs of standstill provisions like breakup fees and other processes that can be included in a deal that would prevent loss of money on either side due to cold feet.
Bill Horton, partner at the law firm of Jones Walker LLP, says that as far as common standstill agreements, it is more typical to see breakup fees and similar provisions that are intended to protect the buyer, not the seller. However, Horton says he has recently seen some deals that have a reverse breakup fee in them.
According to Horton, a reverse breakup fee provides that, if the seller has met its obligations to close and the buyer decides to walk away, then the buyer will actually have to pay a breakup fee to the seller.
“That’s not something that you see very often, and it tends to be negotiated fairly narrowly so that the buyer, for example, is still going to have the benefit of a financing contingency or that sort of thing that is outside of the buyer’s control. However, it does show some sign of seriousness on the part of the buyer,” Horton says.
“The other things that you normally see are just very tightly drafted closing conditions so that you make it harder for the buyer to walk away without being in breach of the agreement. For example, if I’m a seller, I want to resist a financing contingency in favor of the buyer. I want the buyer to be able to represent that it has the money and that it is not dependent on financing to close the deal. If I can’t get that, then I may want to try to negotiate a very narrow financing contingency that limits the ability of the buyer to avoid closing on its financing except in extraordinary circumstances.”
Andrew Wachler, partner at Wachler and Associates, explains that the breakup fee is a provision in a contract that would require the seller to pay a set amount in violation of the provision if the seller was accepting another buyer or offer.
“The seller may have a duty to get the best price but the buyer may be asking for a standstill. They will ask that that since they are acting in good faith that the seller does not deal with other purchasers. They are investing time and money and performing due diligence; after that, if the buyer is going to just use the buyer to negotiate a better deal somewhere else, then the buyer wants to be compensated for their time and deter the buyer from not honoring their commitment,” Wachler says.
Horton adds that breakup fees have historically been more common in situations involving public company transactions. He says this is because there are more opportunities in a public transaction for a seller to get out of a deal through use of a “fiduciary out”, where the seller has the right to terminate the agreement if the seller’s board determines that closing the deal would violate its fiduciary duties.
“You don’t see them as often in smaller deals just because there are not typically going to be fiduciary outs in those deals. It’s just harder for the seller to walk away. In some respects, if you are the buyer, you may want to resist putting a price on letting the seller walk away from the deal. You may not want to suggest that there is such a price and rely on your contract remedies to prevent the seller from breaching the agreement,” Horton says.
Wachler says that despite the past, in today’s market, breakup fees are reasonably common.
“I’m not sure that you are going to see them in every deal, but I think that it would not be viewed as outside the norm and should be something a seller should expect to face when entering a deal,” Wachler says.
“I think they may be able to negotiate it away, but it wouldn’t seem like a completely unreasonable request. I think a standstill agreement is a very common concept. The distinction here is that you are putting an actual penalty on it. “
According to Wachler the concept of a standstill agreement is that the parties are not going to look for other parties to deal with on the transaction and will stand still on other potential buyers and sellers. The buyer is not going to look for another ASC that they can get cheaper, and the seller is not going to look for other buyers that they can get more from.
The importance of these provisions matter to who is being represented and matters to the circumstances of the deal, Wachler says.
“There is an argument that the board has a fiduciary obligation to get the best price on either parties side. If you go exclusive, you may lose that and you may lose some of your bargaining power. If I am the seller, and I have two buyers, I want to play them against each other. That is always more attractive to have another buyer. It just matters where you are sitting. If you are a buyer and you have two or three ASCs you are looking at, then you don’t want to be exclusive either,” Wachler says.
According to Steven Gravely, partner with Troutman Sanders LLP , exclusive negotiations are actually quite common in healthcare transactions because the management company or the acquirer is concerned that they are going to invest time and money in the target.
Gravely says if the target is out there shopping themselves to three or four different acquirers or competing entities, obviously, there is a much greater risk of the deal falling through.
“When this happens, you have ultimately wasted your time and your money from the point of view of the management company or the acquirer…They like to tie up their targets for some period of time in hopes that it will increase the likelihood that the deal gets closed,” Gravely says.
In some circles, the terms of an exclusive negotiation can be deemed a “trap.” Gravely says the reason that it could be called a trap from the perspective of the target or the physician practice would be because the seller can only negotiate with one party and are not necessarily able to have other parties compete with each other for your practice.
Horton says that as far as the types of fees parties face under these provisions, they are normally seen as a percentage of the purchase price.
“This is anywhere from 1 to 5 percent of the purchase price, where the smaller the deal, the larger the percentage tends to be. Sometimes you will see it expressed as a fixed dollar amount, but even so, that fixed dollar amount is usually negotiated based on what percentage of the purchase price it represents,” Horton says.
Wachler says he thinks the set price is a combination of not wanting to kill the deal on a breakup fee, and also wanting to have the appropriate deterrent and compensation if there is a violation of that provision.
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.