Publications: Ungaretti Partner Serves as Expert Witness in High-Profile Case

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David A. Bronner, a senior partner in the Corporate, Securities & Finance Department of Ungaretti & Harris LLP, acted as an expert witness in a recent Tennessee case that is on the leading edge of a flood of anticipated litigation in the M&A field. Mr. Bronner testified for UBS (after being selected by UBS’s legal counsel, Latham & Watkins) on the scope of one of the carve-outs to the definition of material adverse change. The court agreed with Mr. Bronner’s opinion.

The case arises from Genesco’s attempt to force The Finish Line to close on the proposed acquisition of Genesco and for UBS to fund a large part of the purchase price of the acquisition.

Two major issues were addressed in the case:

• first, whether Genesco had suffered a material adverse change; and
• second, whether one of the carve-outs from the material adverse change would nevertheless require The Finish Line to complete the acquisition of Genesco.

Material Adverse Change Decision
In contrast to decisions in other jurisdictions, the Tennessee court found that Genesco had suffered a material adverse change, even though Genesco’s financial downturn had been relatively brief. This was the case even though The Finish Line is a strategic buyer of Genesco, which normally raises the bar for a finding that a material adverse change has occurred.

Carve-out From Material Adverse Change
As is common in many merger agreements, Genesco had negotiated a number of carveouts from the definition of a material adverse change, including “changes in the national or world economy or financial markets as a whole or changes in general economic conditions that affect the industries in which Genesco conducts its business....” The Tennessee court concluded that general economic conditions, including higher gasoline, heating oil and food prices, housing and mortgage issues and increased consumer debt loads had caused the downturn in Genesco’s results. Therefore, The Finish Line and UBS could not walk away from the deal on the grounds of the material adverse change in Genesco’s business.

Two important lessons can be drawn from this case. First, a substantial downturn in the operations of a company, even if it is relatively short in duration, can be sufficient to be a material adverse change, especially in the context of a highly leveraged transaction where a buyer is dependent on ongoing cash flow to satisfy debt and grow the merged company. Second, all carve-outs from the definition of material adverse change should be closely reviewed. Otherwise, a buyer could be compelled to purchase a company whose value has substantially diminished.