The Impact of Transaction Size on Highly Negotiated M&A Deal Points
Eric Rauch and Brian Burke, 71(3): 835-848 (Summer 2016)
When negotiating mergers or acquisitions, deal lawyers will often support their position by asserting that it is in accord with the “market” based on published deal points studies. However, as many of these lawyers intuit based on their experience, terms vary across the market based on a number of factors including deal size, a factor that no previously published study has examined or accounted for. This article confirms that intuition by surveying the middle market at deal sizes from several million to several billion dollars and showing, for the first time, that highly negotiated deal points tend to become more seller favorable as transaction value increases. This conclusion is based on a review of five terms (liability cap, liability basket amount and type, sellers’ catchall representations, the “no undisclosed liabilities” representation, and closing conditions) across 849 deals from 2007 to 2015, a sample larger than that used in any previously published deal points study of mergers and acquisitions.
The Past and Future of Debt Recharacterization
James M. Wilton and William A. McGee, 74(1) 91-126 (Winter 2018/2019)
The bankruptcy doctrine of debt recharacterization, as developed in four federal circuits, uses multi-factor tests derived from tax cases involving solvent companies. Aspects of these tests make no sense when applied to debt of insolvent companies and the U.S. Treasury has determined that, even for the purpose originally intended, the tests produce “inconsistent and unpredictable results.” The Ninth Circuit has now joined the Fifth Circuit in looking to state law as the basis for determining whether debt claims should be recharacterized as equity and disallowed in bankruptcy cases. This Article examines these two approaches, analyzing arguments for and against application of a federal or a state law rule of decision for debt recharacterization. Drawing on U.S. Supreme Court precedent, statutory analysis, and policy, the Article shows that, under long-standing legal principles, state law provides the proper framework for determining whether debt should be recharacterized as equity in bankruptcy and offers both consistency between state and federal courts and a higher degree of predictability concerning the enforcement of insider debt. The article predicts that the U.S. Supreme Court will ultimately resolve the circuit split in favor of a state law rule of decision. In anticipation of such a ruling, the article concludes by providing an overview of choice of law issues and state law approaches to debt recharacterization.