(Reuters) - The COVID-19 pandemic is forcing M&A litigators to think faster than they ever have before. This week’s example: The cybersecurity company Forescout has less than three weeks before the drop-dead date on its $1.9 billion deal to be acquired by the private equity fund Advent, which no longer wants to complete the transaction. Three weeks is flat-out not enough time to litigate the dispute, as I’ll explain. But Forescout’s lawyers at Wilson Sonsini Goodrich & Rosati have come up with another idea.
First, the facts. Advent agreed in early February to buy Forescout for $33 per share, reduced from Advent’s original offer of $41 per share because of Forescout’s disappointing results at the end of 2019 and lowered expectations for 2020. Advent committed to put up about $1.35 billion. It also arranged for outside lenders to put up $400 million in financing. The outside deadline for the transaction was set for June 6.
Forescout shareholders approved the deal on April 23. Advent and the company scheduled a closing for May 18, though Advent pressed Forescout for revised predictions of sales and earnings. On May 15, Advent informed Forescout that the deal was off.
Their merger agreement’s material adverse effects clause contains a pandemic carveout, shifting the risk of a pandemic-related downturn onto Advent. But the private equity fund said Forescout seemed to have been disproportionately hurt, in comparison to its competitors, by the COVID-19 fallout. Advent also claimed that Forescout wasn’t providing updated forecasts. Based on the private equity fund’s models, Advent said, Forescout was facing insolvency. Advent said it would not be able to certify Forescout’s solvency to the lenders supplying $400 million for the deal. So the closing, it said, was off.
These details come from the complaint Forescout filed in Delaware Chancery Court on May 19. Forescout is asking the Delaware court to order Advent to live up to its contractual obligation to close the deal, arguing that it has satisfied all of the conditions on its side so the private equity fund can’t be allowed just to walk away (albeit while paying a breakup fee of up to $110 million).
Advent, predictably, has a different view of its obligations under the Forescout agreement. In an email statement, Advent said that its analysis of Forescout’s first-quarter 2020 results established that even as Forescout’s competitors have thrived in the midst of the pandemic, Forescout “has experienced a material adverse effect on its business, financial condition and operational results.” The private equity fund’s statement said Advent does not believe Forescout complied with its obligation under the merger agreement to operate in the normal course of business. And Advent said it is convinced Forescout would not be able to meet its obligations if the deal were to close.
It’s a good bet that Advent’s lawyers at Ropes & Gray and Quinn Emanuel Urquhart & Sullivan will file their own complaint in the next day or two, seeking a declaratory judgment that Forescout has experienced a material adverse event that not only allows Advent to walk away from the deal but even excuses the private equity fund from paying the breakup fee.
This dispute, in other words, is the latest contractually complicated, factually ornate showdown between a remorseful private equity buyer and a target whose business has been affected by COVID-19. Did Forescout experience an MAE? Did the merger agreement, which was negotiated after COVID-19 began spreading in Asia and specifically includes a pandemic carve-out, shift all of the risk of the COVID-19 downturn onto Advent? Is Advent obligated to find new financing if the banks slated to lend $400 million back out? Even if Forescout’s numbers are down, can Advent walk away from a company whose price was already discounted because of disappointing results in 2019?
And, perhaps most urgently, can Delaware courts figure out any of this by June 6, the drop-dead date specified in the merger agreement?
I’m sure you recall last week’s M&A case-of-the-moment, in which an investor group headed by the private equity fund Certares attempted to force Carlyle and the Singapore sovereign wealth fund GIC to follow through on their billion-dollar commitment to buy a stake in American Express Global Business Travel. Facing a financing deadline of June 30, the Certares group tried to convince Vice Chancellor Joseph Slights to rush through a trial on Carlyle’s MAE claim. The judge denied the request, faulting the Certares group for not suing immediately after Carlyle got cold feet and ultimately concluding that would simply not be possible to hold the trial and reach an outcome in a matter of weeks, especially in pandemic lockdowns.
Forescout was clearly mindful of the Amex GBT case, filing its complaint just days after Advent said it would not close the deal. But the transaction is slated to die on June 6 – less than three weeks from now. How can Forescout possible expect Vice Chancellor Samuel Glasscock, who is overseeing its case, to complete a trial and issue a ruling by June 6?
In a motion filed Wednesday, requesting an expedited proceeding, Forescout argues perfunctorily that Vice Chancellor Glasscock can rush through a trial and a ruling by then. I suspect not even Forescout’s lawyers at Wilson Sonsini truly believe that’s possible, especially in light of all of the complications Vice Chancellor Slights pointed out in last week’s ruling in the Amex GBT case.
But Forescout is asking in the alternative for a temporary restraining order that will, in effect, freeze the deal until Chancery Court can hear its demand for specific performance. Wilson Sonsini wants Vice Chancellor Glasscock to bar Advent from terminating the merger agreement and to prohibit the private equity fund from asserting the failure to close by June 6 as a defense in the subsequent trial to compel it to comply with the deal agreement.
“Advent should not be permitted to walk away from a binding deal because Advent International — a private equity buyer — will no longer make a profit as quickly as it had hoped,” the brief said. “This court retains the power to prevent Advent’s attempt to end-run its ability to enforce Forescout’s contractual right.”
Will the TRO play work? It’s certainly a novel idea – there’s no citation in Forescout’s brief to another case in which a Delaware judge has ordered a TRO to prolong a deal beyond its deadline in order to hold a trial to interpret an MAE and other contract terms. On the other hand, desperate times sometimes demand desperate measures. And for sellers like Forescout these are desperate times indeed.