Private equity is front and center in the courtroom these days thanks to two high-profile cases sure to influence the sentiment and structure of future transactions.
First, department store chain Mervyn’s LLC has filed suit against a slew of players, including LBO firms
Meanwhile, Huntsman Corp.’s action against
Geoffrey Parnass, who heads up the corporate law and transactions department at Shustak Frost & Partners, believes that both cases will be fairly influential, particularly if the Mervyn’s lawsuit joins Huntsman Corp.’s by going to trial. “It’s rare that a lot of judicial scrutiny is given to LBOs,” Parnass said. “These cases hardly ever make it to trial —a settlement is usually worked out—so people will be paying attention.”
Phillip Mills, a partner with Davis Polk & Wardell, the firm that represented the banks in the Clear Channel Communications case, said he looks forward to seeing how the court evaluates Hexion Specialty Chemicals’s “material adverse change,” or MAC claim, which would let it escape its deal scot-free. “The real issue is can they get out for nothing or will they have to pay the break-up fee,” Mills said, adding that, in general, MAC claims face a good degree of skepticism.
Gabor Garai, who chairs Foley & Lardner LLP’s private equity and venture capital practice, said that what constitutes a MAC in this kind of economic environment is difficult to pin down. “People haven’t been forced to make distinctions like this in the past,” he said. Looking ahead, Garai expects to see changes in how deals are structured as these cases get litigated and discussed. His feeling, without regard to any individual case, is that it all goes back to leverage at the negotiating table.
“Deals are done in the practical world and [sellers] just don’t want to take the same chances now that they have in the past,” Garai said. “If I am advising a seller dealing with a private equity firm, we’ll have to come up with ideas that take this into account.”