At long last, the Huntsman case has settled. As recently reported, the banks providing the commitment for the acquisition financing have agreed to pay $1.7 billion (in a combination of cash and debt) to end the litigation.
This case provides a good reminder of the need to be careful when issuing commitment letters. Even though your commitment is conditioned on many things, and even though there are significant events that would appear to trigger a condition that lets you out of the commitment, you can still find yourself out of pocket.
In the Huntsman case, the commitment letter provided by the lenders included a typical condition that the borrower not be insolvent at the time the loan was to be made. When it came time to fund, the banks thought the borrower was in fact insolvent, and refused to fund. Regardless, these lenders have now spent significant time in litigation over this matter, and ended up settling for a not inconsequential sum.
Lenders, like all contracting parties, should be able to rely on the language of their commitment letters. If the commitment letter provides the lender a right to refuse to fund under certain circumstances, and those circumstances come to pass, that right should be given effect. Conditions on the obligation to fund are a necessary part of a commitment, particularly in an acquisition financing where the letter is usually issued in the early stages of the deal – at a time when there are still many unknowns. Including a very clearly worded set of conditions, with strong language that makes the lender’s intentions plain, can help protect the lender.
Of course, most lenders understand that they need to take litigation risk into account, especially when providing commitments for significant acquisitions. It’s part of the cost of doing business. And, any time a very large dollar amount is at stake, the risk of litigation will increase. As the Huntsman case illustrates, nothing is ever certain when litigation is involved. There are costs associated with defending the case even if you ultimately win. Even with a strong case, you may find it advantageous to settle – sometimes for a rather large sum.