Throughout 2022, the Department of Justice’s Antitrust Division (the “DOJ”) and Federal Trade Commission (“FTC”) continued with aggressive enforcement efforts. As a result, parties to transactions have come to anticipate longer merger review timelines, more frequent second requests and a higher likelihood that litigation against the government will be needed in order to get deals closed. Furthermore, despite a string of enforcement action losses in court during 2022, the agencies’ efforts have resulted in a meaningful number of abandoned transactions, whether during an in-depth second request process or after the FTC or DOJ filed a complaint initiating litigation. These recent developments have led to modifications of customary terms of acquisition agreements, as M&A lawyers seek to address issues resulting from this new regulatory environment. Below, we highlight provisions of certain acquisition agreements that parties have used to navigate the increase in regulatory deal risk.
Longer “Drop-Dead” Dates: Prior to 2021, most acquisition agreements had a termination date of 12 months or less, with an extension of up to six months in the event of delays in obtaining regulatory clearance. Recently, however, with the prospect of a more drawn-out regulatory process, some parties have opted for longer “drop-dead” dates. For example, the agreements for JetBlue’s $3.6 billion1 acquisition of Spirit Airlines, CVS Pharmacy’s $7.2 billion acquisition of Signify Health and Kroger’s $19.5 billion acquisition of Albertsons all provide for termination dates that can be extended out to two years in order to obtain regulatory approval. Long termination dates can be subject to active negotiation, however, as some parties may prefer to preserve the right to terminate the transaction if the regulatory process continues for well over a year. For example, a shorter termination date might be preferred by a buyer that is using committed financing to pay the purchase price or a target company that would like to escape compliance with interim operating covenants in the acquisition agreement if the transaction becomes subject to a long regulatory review. A shorter termination date might also be preferred by a target company that is looking to reduce uncertainty for its customers and other business partners or minimize loss of employees.
Reverse Termination Fees Scaling with Antitrust Risk: The current enforcement regime has pushed parties to do a more thorough antitrust analysis at the beginning of a potential transaction, prior to the acquisition agreement being executed. As a result, parties are able to better understand potential “problem areas” and the likelihood of government challenge and fashion terms to reflect the parties’ allocation of closing risk. While a target company would typically negotiate for a reverse termination fee in the event the transaction is terminated for failure to obtain antitrust clearance, some acquisition agreements are providing for more than the typical reverse termination fee structure. In several recent deals, the reverse termination remedies have had features beyond a single fee amount and were tailored to account for the passage of time during the pendency of the regulatory review process or specific business needs of the target companies. For example:
- Google’s $5.4 billion acquisition of Mandiant: The buyer agreed to pay Mandiant a higher reverse termination fee the longer the regulatory review process continued. The reverse termination fee started at $328 million (which amount was effective through one year after signing), and then would increase to $394 million for the period thereafter and through 15 months after signing, and then to $460 million after that.
- Microsoft’s $74 billion acquisition of Activision: Similar to the Google/Mandiant fee, the reverse termination fee started at $2 billion (which amount was effective through one year after signing), and then would increase to $2.5 billion for the period thereafter and through 15 months after signing, and then to $3 billion after that.
- Medtronic’s $936 million acquisition of Intersect ENT: The buyer agreed to provide Intersect with a credit facility of up to $75 million, funded in five quarterly tranches, at the option of Intersect. If the transaction did not close due to failure to obtain regulatory clearance, repayment of the amounts outstanding under the credit facility (plus accrued and unpaid interest) would be waived.
Use of Ticking Fees: “Ticking fees” can be useful if parties anticipate longer regulatory timelines. “Ticking fees” can be structured in different ways, but generally provide a mechanism for target company stockholders (as opposed to the target company itself, such as in the case of reverse termination fees) to receive additional consideration as the time between signing and closing stretches past certain specified milestones. Some recent examples of the use of ticking fees include:
- Standard General’s $5.1 billion acquisition of TEGNA: In addition to receiving the base price per share, TEGNA stockholders were entitled to receive a daily per share ticking fee equivalent to $0.05 per month if the closing occurs between the 9- and 12-month anniversary of signing, increasing to $0.075 per month if the closing occurs between the 12- and 13-month anniversary of signing, $0.10 per month if the closing occurs between the 13- and 14-month anniversary of signing and $0.125 per month if the closing occurs between the 14- and 15-month anniversary of signing.
- JetBlue’s $3.6 billion acquisition of Spirit: JetBlue agreed to pay $0.10 per share per month to Spirit stockholders (commencing on a specified date) until the closing or termination of the transaction. If the closing of the transaction were to occur during the first 12 months during which the payments were made, the payments would be treated as pre-payments of the base price per share in the deal, thereby reducing the per share amount paid at the closing, up to a maximum aggregate reduction of $1.15 per share. However, if the closing were to occur after the first 12 months during which payments were made, any payments in excess of $1.15 per share would not be treated as pre-payments of the base price per share and instead would thereby increase the aggregate per share amount paid to Spirit stockholders. Importantly, in a twist on the typical ticking fee mechanism, if the transaction were to be terminated, Spirit stockholders would be entitled to retain all amounts they had been paid prior to termination.
Negotiating Remedies into the Acquisition Agreement: Given the increased likelihood of government challenge, and thus the need to litigate in order to get a transaction completed, some parties are negotiating into acquisition agreements the structural remedies that they will proffer to obtain regulatory clearance. For example:
- Kroger’s $19.5 billion proposed acquisition of Albertsons: The parties agreed to, if necessary, divest up to 650 Kroger and/or Albertsons stores (in total). As of the time of this publication, the transaction is under review by the FTC.
- JetBlue’s $3.6 billion proposed acquisition of Spirit Airlines: The buyer agreed to, if necessary, divest certain assets set forth on a schedule, as well as to make any other divestitures determined in its sole discretion. As of the time of this publication, the transaction is under review by the DOJ.
We have also now seen how this approach has played out in some of the transactions that were signed up earlier in the current antitrust administration’s tenure. For example:
- UnitedHealth’s $7.8 billion acquisition of Change Healthcare: The parties agreed in principle that divestitures could occur, and, while the DOJ investigation was ongoing, UnitedHealth announced its intent to sell a certain business of Change Healthcare to a private equity firm if such a divestment was required to obtain regulatory approval for its acquisition of Change Healthcare. UnitedHealth and the private equity firm entered into a purchase agreement after the DOJ initiated litigation challenging the deal. The US District Court for the District of Columbia later held that the antitrust issues that the DOJ had identified were remedied by the parties’ proposed divestiture, which the DOJ had rejected, and the transaction was cleared to close.
- Medtronic’s $936 million acquisition of Intersect ENT: The parties agreed to the divestiture of a business that had been acquired by Intersect in the prior year. This remedy was accepted by the FTC as a condition to clear the transaction.
Infrequent Use of “Hell or High Water” Standard: The “hell or high water” efforts standard, requiring that the buyer take on all antitrust risk and do everything that is required to obtain clearance of the transaction, is rare and is used in only a small minority of acquisition agreements. A recent example of a hell or high water provision can be found in the agreement for Danfoss’s $3.3 billion acquisition of Eaton, which did not have a reverse termination fee. Notably, in the current regulatory environment, a hell or high water efforts standard might not provide sellers the same level of closing certainty as they might have expected in the past. In transactions where enforcers will not accept any remedies and will not clear a deal under any circumstances, there will be nothing that a buyer can do to obtain transaction clearance and a hell or high water provision will not affect that. In those cases, a seller would be well served to have express remedies, such as a reverse termination fee, provided for in the agreement. In addition, when comparing the potential remedy offered by a hell or high water provision against that of a reverse termination fee, rather than go to court to fight over whether the buyer did all that it was required to do under the efforts covenant, a target company might prefer to instead collect a known payment if the transaction does not close by a particular date.
In light of continued antitrust enforcement efforts, it remains critical for M&A lawyers to continue to work closely with their clients to identify creative and deal-specific approaches to mitigating regulatory closing risk.
1 Transaction values throughout this article are equity value as provided by Deal Point Data.