After Energy Future Holdings (EFH), maybe not so much. The size of the break-up fee approved by the bankruptcy court in EFH was undoubtedly large by any account – US$275 million. But it was approved following all necessary filings, notice and hearings. All parties and counsel involved were highly sophisticated and experienced. The court that approved the fee was the Delaware bankruptcy court, by all accounts one of the most experienced and sophisticated bankruptcy courts in the nation. And there wasn’t even a hint of fraud, misrepresentation or failure to disclose material facts. Yet, NextEra was eventually denied its approved break-up fee. How did that happen?
The bankruptcy court approved a merger agreement with NextEra that called for a US$275 million termination fee. Texas regulators did not approve the deal, and pursuant to the termination provisions of the agreement, should the regulator not approve the deal and EFH terminated it as a result, the termination fee would be due. As EFH counsel admitted, the termination provision was incredibly detailed. And the transcript of the hearing on the approval of the agreement shows that the parties explained the termination provisions, although, as is usually the case, oral argument does not follow the various nuances of the detailed drafting. It also appears that some of the statements made in court by EFH’s counsel were not entirely accurate. Again, not necessarily a unique occurrence when dealing with lengthy and complicated agreements.
After the regulator rejected the agreement, EFH terminated it and entered into a different agreement with a third party. NextEra sought its break-up fee pursuant to the terms of the approved agreement. Upon objections, the bankruptcy court reconsidered its prior approval and denied payment of the fee holding that it had “fundamentally misapprehended the facts,” and had it understood the facts correctly, it would not have approved the termination fee as drafted. NextEra appealed.
The Third Circuit, in a 2-1 opinion, affirmed. The majority first held that the approval order was interlocutory, in a reasoning some could question. The court found it to be interlocutory because the order left open the allocation of the fee among the debtors (an issue that had no impact on NextEra), the order retained jurisdiction over disputes relating to interpretation, enforcement and implementation of the order (boilerplate language that is part of essentially every bankruptcy court order), and the debtors’ argument that NextEra should not be paid the fee because it breached the agreement (an issue that could require a trial, but is entirely divorced from the approved fee).
Having found that the order was interlocutory, the majority held that the bankruptcy court’s reconsideration of its prior approval order under rule 59(e) was justified because there was a need to correct a clear error of fact, to which the bankruptcy judge freely admitted, and prevent manifest injustice.
The dissent had none of it, holding that the bankruptcy court abused its discretion by granting the motion for reconsideration: “The Bankruptcy Court may have ‘misapprehended’ that the Fee would be payable in the situation that developed, but this was no legal or factual error. It was simply a failure to appreciate a particular set of potential consequences which became apparent in the light of day. But hindsight cannot justify nullifying a material term of the deal that was struck with all of the facts on the table.”
Where do we go from here? NextEra’s petition for rehearing or rehearing en banc was denied. Whether NextEra will apply for Supreme Court review, and whether the Court would accept the case, is speculative. But, if the opinion stands, it could open Pandora’s Box – whenever a court decides in hindsight that maybe it is not so fair to have a failed bidder walk away with a substantial break-up fee, it could reconsider the approved fee based on some perceived mistake of fact and notions of justice to deny the previously approved fee. Does this opinion open the gates for endless challenges to approved break-up fees (as well as challenges to other bankruptcy court orders)? Time will tell. But it does add an unneeded dose of uncertainty to what constitutes a final order in bankruptcy cases.
The lesson from this saga is that counsel for the stalking horse bidder must take pains to ensure that the presentation of the agreement to the bankruptcy court at oral argument is airtight in its accuracy, and that the termination events giving rise to the payment of the break-up fee are described in great detail.
So, is your approved break-up fee safe? Less than it was before EFH.