I have just been told by someone who attended the 10:45 a.m. hearing this morning in Justice Helen Freedman’s courtroom in New York state court that the Clear Channel litigation brought by private equity buyers against their lenders – the litigation that the media kept saying over the past two days was *about* to settle – is going to trial at 2 p.m. today. Ha! What happened to the settlement? Will this litigation settle in the next few days or are the lenders going to roll the dice and gut through a trial in New York state court?
First, the backstory: In May of last year, private equity buyers signed a merger agreement to acquire Clear Channel Communications, Inc. The private equity buyers (entities affiliated with Bain Capital Partners and Thomas H. Lee Partners) were to borrow about $22 billion to fund this deal, and their lenders included Wachovia, RBS, Citigroup, and Deutsche Bank. The lenders and the buyers executed a commitment letter, addressed to Clear Channel, which spelled out the lenders’ basic commitment to finance the deal for the private equity buyers.
When the credit markets tightened this past summer, we saw a range of lenders trying to get out of their obligations to finance various deals. The lenders in the Clear Channel acquisition were no different, and in the fall or winter of 2007, the lenders tried both to renegotiate the terms of their obligation to finance the private equity buyers’ Clear Channel purchase and to get out of the deal entirely. Apparently the lenders tried to push the private equity buyers to accept some unacceptable terms, such that, on March 26, 2008, the private equity buyers filed suit in New York state court against the lenders for various claims including breach of contract and fraud. Basically the buyers maintained that the lenders had committed “anticipatory breach” of their obligation to lend the money to finance the Clear Channel purchase. The lenders made a motion for summary judgment in this case.
On the same day, in Texas state court, Clear Channel filed suit against the banks for tortious interference of contract, maintaining that the lenders were interfering with the merger agreement between Clear Channel and the buyers by refusing (or threatening to refuse) to finance the deal.
On May 7, 2008, Justice Helen Freedman in the New York State Supreme Court, denied in part the defendant lenders’ motion for summary judgment, such that trial became inevitable. While Justice Freedman dismissed the private equity buyers’ claims of fraud, Justice Freedman left open the issue of anticipatory breach of contract. Moreover, Justice Freedman left open the issue of specific performance – the buyers maintained that they were entitled to specific performance under the lending agreement, such that the banks should be forced to finance the $22 billion acquisition. Justice Freedman, in her May 7 opinion, said that she could not decide the issue of whether specific performance was available based on the limited pleadings before her, but she said the issue could be revisited after trial, if the lenders were found to have breached their lending obligations. So anticipatory breach and specific performance as a remedy were left as unanswered questions for resolution after trial.
This past weekend, word on the Street was that the lenders, buyers, and Clear Channel were trying to negotiate a new deal whereby the private equity buyers would acquire Clear Channel at a reduced price, to settle the litigation, consummate the acquisition and avoid trial. Indeed, terms of the “settlement” had been produced by the media.
Yet, at a 10:45 a.m. hearing today in court in New York, Justice Freedman said trial in this case will begin today at 2 p.m., indicating that the widely-touted settlement has not been forged.
What does this mean? Will there be a settlement inked at 1:59 p.m. today? Or did the media miss the boat on this one? Or will there be a settlement in a few days, but before the end of the trial?
From the standpoint of the lenders, there is not a whole lot to lose other than the cost of litigation from going to trial. According to the lenders, if they are forced to do this deal, they will lose a huge amount of money. So, if they settle this matter in the way the media has reported – by financing a deal at a slightly cheaper price ($36 per Clear Channel share versus $39 per share) – it seems that the lenders will lose at least a significant portion of the money they stood to lose by financing the deal they originally agreed to support. Settlement – of the sort the WSJ indicated was looming – was not a great option for the lenders. However, if the lenders go to trial, one of three things can happen:
(a) The lenders can win, with Freedman finding that there was no anticipatory breach, such that the banks can continue to negotiate aggressively with the buyers over the terms of the financing generally sketched out in the commitment letter from May 2007 and the banks might even be able to drive the buyers away,
(b) The lenders can lose, with Freedman finding that there was anticipatory breach, and the lenders are liable for damages, which might be tied to the increased price of financing the buyers will be forced to seek from other lenders, or
( c) The lenders can lose, with Freedman finding that there was anticipatory breach *and* the buyers are entitled to specific performance, such that the lenders will have to finance the original deal that is only incrementally worse than the settlement the Street was reporting to have been reached this weekend.
From the lenders’ standpoint, options “a” and “b” are better than the settlement that was rumored over the past couple of days. Since two out of three possible outcomes at trial are better than the settlement that was reported in the media today and yesterday, and the third outcome is only marginally worse, I would not be surprised if this case does not settle and goes straight through trial. Moreover, even if option “c” above is marginally worse than what the lenders were reported to have achieved in settlement over the weekend, option “c” above will give the lenders the intangible benefit of certainty. Meaning, the lenders will walk away from this particular deal burned, but they will walk away knowing that, from now on, they can insist on an iron-clad provision in any commitment letter making clear that specific performance is not even remotely an option. Moreover, lenders in the future will be on good footing to insist on a letter from the target/seller wherein the target is forced to certify that it understands, prior to receiving a commitment letter, that its remedies against the lenders (if any) will not include specific performance.
It will be interesting to see how this plays out….
Edited at the end of the day on Tuesday: This just in – the parties *have* reached a deal in principle, though the deal has not yet been announced by anyone other than Reuters (e.g. no press releases from the companies that I have seen).