M&A Update Template - Kirkland & Ellis

1 Kirkland M&A UPDATEP erhaps no topic has engendered more conversation among dealmakers in recent months than the allocationbetween merging parties of the risk of obtaining antitrust approval of a proposed acquisition. With the increasein strategic combinations and the expectation of a more robust regulatory environment under the currentadministration, many recent merger agreements feature painstakingly negotiated provisions to address theserisks. While much attention has been devoted to headline-grabbing reverse termination fees payable to the sell-er by the buyer upon failure to obtain required antitrust approvals in such deals as Google/Motorola Mobility($ billion or 20% of deal value) and AT&T/T-Mobile (~$6 billion of value/15%), it is important to realizethat the reverse termination fee is just one facet (as often absent as not)

2 Of a complex matrix of provisions inthe merger agreement that ultimately determines the risk-sharing between the parties on this of just some of the other provisions that feature in this matrix Covenant The level of efforts the buyer must exert in seeking the antitrust approvals and thetiming, deadlines and required scope of such Covenant The level of divestitures the buyer is contractually required to accept in order toobtain the required approvals, which can range from silence to the proverbial hell or high water . Conditions What level of challenge from an antitrust authority is required before the buyercan assert that it is not required to and Fee Triggers The events which allow each of the parties to terminate the agreementand the conditions under which the payment of a reverse termination fee is of a Fee For example, whether the fee is the sole and exclusive remedy of the seller forbuyer s failure to obtain regulatory approval and whether the fee increases (a so-called ticking fee )

3 With the passage of time from signing of the brief comparison of the operation of just a few of these provisions from four recent high -profile deals thatfeatured antitrust concerns highlights the importance of looking beyond the simple existence or amount of anyantitrust the Hertz/Dollar Thrifty transaction (which failed for other reasons), Hertz agreed to pay a reverse termina-tion fee of $ million (about 4% of deal value) in the event the transaction did not close because of failureto obtain antitrust approval. Hertz also agreed that its commitment to use reasonable best efforts to obtainthe approvals included an obligation to agree to divest its Advantage brand and additional assets that producedno more than $175 million of revenues.

4 Putting these provisions together, the fee served two purposes: (1) itoffered Hertz an arguably attractively-priced option in the event the antitrust authorities sought more signifi-cant remedies while Hertz was obligated to divest up to the stated threshold to obtain the approval, if theremedies sought exceeded that threshold Hertz could choose to either accept the larger remedies or pay thereverse termination fee and (2) it compensated Dollar Thrifty in the event antitrust approval was not obtainedeither because Hertz exercised its option described above or because approval could not be obtained notwith-September 7, 2011 Kirkland & Ellis LLPW hile much attention has beendevoted to headline-grabbing reversetermination feespayable to the sellerby the buyer uponfailure to obtainrequired antitrustapprovals.

5 It isimportant to realizethat the reverse termination fee isjust one facet of acomplex matrix ofprovisions in themerger agreementthat ultimately determines the risk-sharing between theparties on this issue. Behind the Headlines A Closer Look atAntitrust Reverse Termination FeesAttorney Advertisingstanding the proffered concessions. Note however,that the agreement did not state that the reverse ter-mination fee was Dollar Thrifty s sole and exclusive remedy in the event of failure to achieve antitrustapproval, meaning that Dollar Thrifty had the optionof suing Hertz for specific performance or unlimiteddamages if, for example, it did not offer to make theagreed divestitures up to the stated the Express Scripts/Medco deal, there is a notableabsence of any reverse termination fee.

6 While the agree-ment includes a detailed divestiture covenant outliningcertain specific levels of concessions relating to mail-order and specialty pharma facilities and customer con-tracts that Express Scripts must offer to obtainapproval, if the authorities insist on remedies in excessof these stated levels Express Scripts or Medco are freeto walk away from the transaction without any liability(including no reverse terminate fee).In the Google/Motorola Mobility agreement, the eye-popping reverse termination fee is not linked to anyspecific divestiture covenant at all. Rather, Google issimply required to use its reasonable best efforts toobtain antitrust approval with no identified levels ofmandatory concessions.

7 However, if the deal does notclose because of the failure to obtain antitrust approval(regardless of whether or not Google offers any conces-sions), Google is obligated to pay the $ billionreverse termination fee to Motorola Mobility. As such,the enormous fee represents an unattractively-pricedoption for Google and virtually compels Google tooffer whatever remedies are necessary to obtain theantitrust approvals ( , almost the same practical effectas a hell or high water divestiture covenant).Moreover, the agreement preserves Motorola Mobility sability to seek, in addition to the fee, damages cappedat an additional $ billion if Google s failure to com-ply with its antitrust efforts covenant ( , to use rea-sonable best efforts , a somewhat amorphous notion)resulted in the failure to obtain , in AT&T/T-Mobile (noting that many keyagreement schedules that address these issues have notbeen publicly disclosed)

8 , the agreement includes afairly complex risk sharing mechanism wherebyAT&T has agreed that its reasonable best efforts include making concessions relating primarily to cus-tomers and spectrum where the impact of suchdivestitures (determined under an intricate formula)is less than $ billion. In addition, AT&T is obli-gated to pay a reverse termination fee and transfercertain spectrum to T-Mobile (with an estimatedaggregate value of about $6 billion) if the deal is notapproved notwithstanding these concessions. This feeis the sole and exclusive remedy, meaning that, absentfraud, T-Mobile is not entitled to seek damagesbeyond the fee in the event the approvals are notobtained.

9 Interestingly, the agreement also includes anadjustment (again under a complex formula) wherebythe purchase price to Deutsche Telekom is reduced tocompensate AT&T for the impact of required marketand spectrum divestitures to the extent such impactsexceed $ billion up to the $ billion such, it appears that AT&T alone bears the impactof divestitures up to the $ billion level, while theparties share the risk of remedies in the band from$ billion to $ billion via the purchase priceadjustment (offset, in part, by a right for Deutsche toshare in the proceeds of the relevant divestitures).

10 With the recent DOJ challenges to the AT&T andH&R Block/TaxACT transactions, it is likely thatallocation of antitrust risk will continue to be a keynegotiation in strategic combinations. While theamount of any antitrust reverse termination feepayable by the buyer is an important component ofthis allocation, it must be understood within the con-text of the total antitrust risk allocation package. Asthe examples above show, the headline number oftentells only a small part of the full Update | 2 This communication isdistributed with theunderstanding that theauthor, publisher anddistributor of thiscommunication are notrendering legal,accounting, or otherprofessional advice oropinions on specific factsor matters and,accordingly, assume noliability whatsoever inconnection with its to applicablerules of professionalconduct, thiscommunication mayconstitute AttorneyAdvertising.