Wall St looks for legal precedent in deal disputes
Written on March 10, 2008
Wall Street is closely watching for the next court ruling that might help define when a deal could be broken without penalty, but the wait could be a long one.
With the credit crisis souring many merger agreements and financing commitments, broken financial engagements are spurring lawsuits.
But one case after another has settled before a judge could rule, leaving lawyers with little precedent to gauge how an attempt to use a common contract provision to back out of deals would fare in court.
“It seems as though nobody has the desire to let one of these things go all the way,” said Brett Barragate, a partner at the law firm Jones Day. “The stakes are too high.”
Settlements have deprived lawyers of potential guideposts on how courts could rule on disputes around provisions known as “material adverse change” (MAC) clauses that are included in some form in most deals.
The MAC clauses give parties the right to walk away from a deal if there is a material change that affects the transaction.
A Tennessee court addressed the issue recently in a case over the proposed purchase of shoe and hat retailer Genesco Inc (GCO.N: Quote, Profile, Research), saying the buyer, Finish Line Inc (FINL.O: Quote, Profile, Research), could not walk out of the deal cash advance loan. The parties to the dispute, which also included lender UBS AG (UBSN.VX: Quote, Profile, Research), finally settled.
Lawyers say that ruling was not final as it depended on the outcome of another case in New York and that a decision would have to come from either Delaware or New York, where most of these disputes end up, to have a significant legal impact.
Filed in: management.