Clear Channel from Courts to Closing: Accommodations to Complete a Deal
In March 2008, the private equity buyers who had agreed to purchase Clear Channel Communications, Inc. commenced a lawsuit in New York against the consortium of six banks who had committed to provide the debt financing in the transaction, accusing them of trying to undermine the deal by changing the terms of the financing. In a separate lawsuit launched in Texas by Clear Channel itself, together with the private equity firms, the lenders were accused of interfering with the purchase agreement.
On May 14, 2008, Clear Channel and its prospective private equity buyers, Thomas H. Lee Partners, L.P. and Bain Capital Partners, LLC, announced that the parties had agreed to proceed with the deal but at a reduced purchase price. The final $36 US per-share price was eight per cent below the originally agreed price of $39.20. Clear Channel struck the original deal to be acquired by the private equity buyers in November 2006.
While the litigation has now been settled, it is of interest to note the novel issues of law arising out of failed transactions where at least one of the parties to the transaction believes it will no longer receive the value it originally contemplated. Recent litigation, such as Genesco/Finish Line and Cerberus/United Rentals, while each presenting different facts, are — arguably — fundamentally about the failure of value in light of the difficulties in the credit markets.
In Clear Channel, the New York action was, in effect, a claim that the commitment letter creates a binding obligation on the banks to fund the transaction and that the banks were in breach of that obligation. According to the court documents filed in New York, the banks "pretended to negotiate the final documentation in good faith, but in reality inserted into the final documents ‘poison provisions’" that were contrary to the terms of the commitment letter.
The definitive loan agreements were to contain the material terms as set out in the commitment letter, and other provisions consistent with loan agreements entered into by the private equity sponsors on other transactions. The plaintiffs claimed the banks had insisted on provisions that were onerous and inconsistent with the commitment letter and precedents. The lenders were also accused of delaying the transaction to run past the drop-dead date. The plaintiffs sought an order to require the banks to specifically perform the obligations under the commitment letter, and in the alternative, to pay damages.
In the settlement it appears that each of the three groups, Clear Channel, the buyout group and the lenders, compromised in order to make
the deal happen. The purchase price is lower, the cost of the debt funding is slightly higher, and the banks have provided a seven-year facility.
McCarthy Tétrault Notes:
The difficulties in the credit markets have resulted in litigation of a number of transactions that have been the subject of articles in Volume 2, Issue 4 and Volume 3, Issue 1 of this publication. While the result of the Clear Channel litigation will never be known, the litigation raised interesting questions about the enforceability of contractual promises made in bank commitment letters.
Canada has little case law on the enforceability of bank commitment letters. The prevailing view has been that these letters are not "agreements to fund," but an agreement to work in good faith towards documenting a loan consistent with certain agreed terms. As a result of the settlement, the Clear Channel case will not provide any judicial insight into the nature of a bank commitment.
Interestingly, as part of the settlement, Clear Channel noted that it, its partners and the six lenders had agreed to "fully negotiated and documented definitive agreements" for the financing. In addition, Clear Channel announced that the lenders would be depositing into escrow within 10 days all the cash and letters of credit that Clear Channel will need to close the transaction.