Stephen Foley: Why the courts should remember the first rule of business: a deal is a deal
Saturday 23 October 2010
US Outlook: David Boies, America's most famous litigator, has been having a busy few days.
The British private equity baron Guy Hands hired him to front his case against Citigroup over the buy-out of EMI, but Mr Hands had to take a day-long break from his gruelling testimony this week so that Mr Boies could hot foot it over to another Manhattan court house to present closing arguments for another UK client, Barclays, whose acquisition of Lehman Brothers is in dispute. Fresh from wrapping up Barclays' case, Mr Boies was back in court with Mr Hands the next morning, trying to undo some of the damage that the Terra Firma boss's apparentlyselective memory appears to have done to its claim against Citigroup.
What the two court battles have in common, besides an astonishingly hyperactive 69-year-old rock star attorney, is an attempt to renegotiate deals signed at the extremes of the credit boom and bust: Terra Firma's top-dollar acquisition of EMI in 2007, one of the last leveraged deals before the markets froze and Barclays' purchase of Lehman's US brokerage business for a song in September 2008, days after the parent company had collapsed into bankruptcy.
It is obvious why these cases are in court. Mr Hands faces losing all of Terra Firma's £1.6bn investment in EMI if the record company falls into the hands of its bankers and he has personally put more than 60 per cent of his fortune into the repeated cash calls that have been needed to stop EMI breaching its promises to Citigroup. Creditors of the bankrupt Lehman estate watched jealously as Barclays booked a tasty $4.2bn gain from the value of its Lehman businesses in 2009.
Mr Boies is known for his love of gambling, but you don't have to be an ace at the poker table to know that the potential for clawing back billions of dollars makes it worthwhile playing the hand – even at the hourly rates charged by Boies, Schiller & Flexner and its ilk.
Even at this late stage, there could be settlements between the two sides in either case, with the performance of their courtroom champions having changed the balance of the negotiations.
In law – as in poker – it's not necessarily what hand you have, but how you play it.
At this point I suspect there is a divide between folk in the financial and legal worlds, who are thinking "you can't blame them for trying", and the rest, who might rather live by the notion that "a deal's a deal".
The pivotal issues in the twocases are different, naturally, but they touch on first principles. Mr Hands says he overpaid for EMI because Citigroup misled him into believing there were other bidders, but that is not the same thing as saying he was misled over EMI's finances or business prospects, something that really would be grounds for tearing up an acquisition.
As for Lehman Brothers, Barclays bought the brokerage under the so-called "363 provision" of US bankruptcy laws, which has always allowed judges to wave through the sale of rapidly-deteriorating assets (such as brokerages, whose clients tend to desert in droves if the company is in bankruptcy) in order to keep at least some value for creditors.
The 363 transaction process usually tolerates the rushed and incomplete paperwork of which the Lehman estate now complains, which is why forcing Barclays to pay more could have consequences far beyond the FTSE 100 giant's own balance sheet. It could derail other such emergency deals and throw thousands of people in otherwise viable businesses out of work.
The business world has learned a healthy respect for uncertainty after the credit crisis, but too much of it is a paralysing thing, which is why so many business leaders are angry with the Obama administration.
Let's hope that, whatever the outcome in any of Mr Boies's juicy court cases, the legal system at least reaffirms that a deal is a deal.
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