This is a really interesting classroom case study.
As I originally blogged about here, it all begins with Spirit and Frontier agreeing to a stock deal – non-Revlon – and JetBlue swooping in with a topping cash bid.
Spirit’s management resisted, arguing that there was far more regulatory/antitrust risk with the JetBlue deal than with the Frontier deal. But JetBlue kept insisting that regulatory risks could be managed, and offered an extremely generous set of reverse termination provisions if the deal was blocked (more on those in a minute).
Ultimately, Spirit’s management caved to the demands of its shareholders; it was clear they would reject Frontier in favor of JetBlue. And the deal was, in fact, blocked on antitrust grounds.
The parties had agreed to use best efforts to complete the deal, including to appeal any court orders enjoining the merger. As the agreement states:
both Parent and Company (and their respective Subsidiaries and Affiliates) shall contest, defend and appeal any Proceedings brought by a Governmental Entity, whether judicial or administrative, challenging or seeking to restrain or prohibit the consummation of the Merger or seeking to compel any divestiture by Parent or the Company or any of their respective Subsidiaries of shares of capital stock or of any business, assets or property, or to impose any limitation on the ability of any of them to conduct their businesses or to own or exercise control of such assets, properties or stock to avoid or eliminate any impediment under the HSR Act or similar applicable Law,
Termination cannot formally occur until all appeals have been exhausted.
JetBlue agreed to the following reverse termination fees to mitigate the risk of deal failure due to antitrust enforcement. First, it agreed to pay $70 million to Spirit. Second – and more unusually – it agreed to pay $400 million to Spirit shareholders. And third, it agreed to a “prepayment” scheme, of sorts. An initial payment of $2.50 per share was made to Spirit shareholders right after they voted in favor of the merger; after that, Spirit shareholders have been receiving a $0.10 per share “ticking fee” for every month of delay. If the deal goes through, these payments are deducted from the merger consideration. If the deal does not go through, shareholders get to keep them, plus whatever else is necessary to reach the $400 million mark. If the deal is delayed to the point where the prepayments exceed $400 million, as I understand it – and someone please correct me if I’m getting this wrong – JetBlue keeps paying them, as long as the deal has not been formally terminated. In other words, the longer the appeal process takes, the more likely it is JetBlue will have to pay reverse termination fees to Spirit shareholders in excess of $400 million.
I have no idea where the numbers are right now, but obviously, that makes fruitless appeals a lot less attractive.
Edit: A reader pointed out that there is an outside date of July 2024, which is likely far too soon for any appeals to conclude, and JetBlue can terminate then. But the ticking fees, I believe, still tick until then, and JetBlue cannot end this earlier, which means, Spirit does still have that leverage.
Which is why it’s understandable that, according to reports, JetBlue is not sure it wants to appeal. And why it’s understandable that Spirit is insisting on adherence to the contract. But there is a twist: Spirit’s financial condition is so poor that there are reports denying an imminent bankruptcy. According to Reuters:
JetBlue… is also mindful that Spirit’s business has deteriorated significantly since the two agreed the tie-up in July 2022, …
Spirit, which like other airlines took a financial hit during the COVID-19 pandemic, has struggled more than its peers to recover, because its low-budget price model has left it little room to raise air fares after fuel prices rose. Its net debt rose from $3.3 billion to $5.5 billion over the past two years as its losses widened.
Which makes me think that JetBlue is considering pulling the MAE card. Spirit experiencing an MAE is a separate and independent grounds for JetBlue to terminate, and the merger agreement definition of an MAE has a carve-back for disproportionate impact:
“Company Material Adverse Effect” means any change, event, circumstance, development, condition, occurrence or effect that (a) has had, or would reasonably be expected to have, individually or in the aggregate, a material adverse effect on the business, financial condition, assets, liabilities or results of operations of the Company Group, taken as a whole, or (b) prevents, or materially delays, the ability of the Company to consummate the transactions contemplated by this Agreement; provided, however, that none of the following will be deemed in themselves, either alone or in combination, to constitute, and that none of the following will be taken into account in determining whether there has been or will be, a Company Material Adverse Effect: … (iv) acts of war, outbreak or escalation of hostilities, terrorism or sabotage, or other changes in geopolitical conditions, earthquakes, hurricanes, tsunamis, tornados, floods, mudslides, wild fires or other natural disasters, any epidemic, pandemic, outbreak of illness or other public health event (including, for the avoidance of doubt, COVID-19 and impact of COVID-19 on the Company) and other similar events in the United States or any other country or region in the world in which the Company conducts business; (v) any failure by the Company to meet any internal or published (including analyst) projections, expectations, forecasts or predictions in respect of the Company’s revenue, earnings or other financial performance or results of operations (it being understood that the underlying facts and circumstances giving rise to such event may be deemed to constitute, and may be taken into consideration in determining whether there has been, a Company Material Adverse Effect); … or (vii) any change in the market price or trading volume, or the downgrade in rating, of the Company’s securities (it being understood that the underlying facts and circumstances giving rise to such event may be deemed to constitute, and may be taken into consideration into determining whether there has been, a Company Material Adverse Effect); provided, further, that the effects or changes set forth in the foregoing clauses … (iv) shall be taken into account in determining whether there has occurred a Company Material Adverse Effect only to the extent such developments have, individually or in the aggregate, a disproportionate impact on the Company relative to other companies in the airline industry, in which case only the incremental disproportionate impact may be taken into account.
From my 30,000 foot view analysis, I’d say JetBlue has a stronger MAE argument than, you know, Musk did when trying to avoid the Twitter deal, and it makes me think that the whole situation could resolve – as is typical – in a settlement, say, where JetBlue pays an additional fee to avoid the appeals.
If that happens, I suppose there may remain messy questions like, will Spirit shareholders sue claiming they missed out on those additional ticking fees they were supposed to receive while appeals were pending? Will they have a chance, given the merger agreement’s (typical) disclaimer of any third-party beneficiaries?
Anyhoo, Matt Levine said it first (naturally) but it’s worth reiterating: This was a classic case where Spirit shareholders wanted something, its management wanted something else, and management was right. I mean, the company not only lost the JetBlue and Frontier deals, but it’s obviously in pretty dire circumstances without either. This is why management ultimately has such power under Delaware law.
On the other hand, I’ll need someone else to do the math, but maybe this was in fact the best outcome for diversified shareholders (who presumably are perfectly happy to simply own a JetBlue and a Frontier with one less competitor), and in some ways, that’s also what the law is designed to do.
Update: Looks like they went with the appeal after all.