We are going back to traditional M&A contracts, says Sharon Geraghty in Financial Post

April 21, 2008

The demand for deal certainty has Canadian lawyers drafting more iron-clad acquisition buyout contracts. The Clear Channel litigation and the breakdown of the Cerberus/United Rentals deal have lawyers revisiting and revising current contracts.

Among the kind of changes to be expected in the current climate are more stringent "material adverse change" (MAC) clauses and higher reverse break fees. There is also speculation that vendors will try to eliminate the reverse break fee (which caps liability) and demand full recourse for the purchase price in event of a default.

At the height of the private equity bubble, quick deals were done with a simple financial commitment letter and contractual intent was sometimes unclear. But "covenant light" deals will be a thing of the past.

"We are going back to traditional contracts," says Sharon Geraghty. "And that may not be a bad thing." Given the new trend, the current climate favours strategic buyers, she adds. The private equity hares, with their quick negotiations and leveraging capabilities, once had a marketplace advantage in negotiating M&A deals. Today, the slow, strategic turtle, with access to its own stream of cash flow or greater access to credit, may win the day.

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