![]() Shareholder Litigation, 877 A.2d 975 (Del. One of the leading cases dealing with these issues came out of the Delaware Court of Chancery in 2005 where then-Vice Chancellor Strine explained in In re Toys “R” Us, Inc. Furthermore, the bidders participating in a sale may feel undue pressure to pursue the stapled financing in order to ensure equal treatment in the auction process. The financial advisor may also be inappropriately incentivized to steer a sale to the bidders that are more likely to use their stapled financing, as opposed to the bidder that may be more strategically appropriate. Given that the lender may stand to make tens of millions in additional fees if a financing package is accepted (fees for advising on a corporate sale are typically around 0.5 to 1.5 percent of the transaction value, depending on the transaction size, while a lead arranger of loans for a leveraged buyout can make up to 3 percent of the loan’s value), it may be inappropriately incentivized to encourage the target company to proceed with a sale that may not otherwise be in the company’s best financial interest. The primary drawback to a lender serving the dual role of the target company’s financial advisor and the buyer’s financier is the potential conflict of interest. It may also provide a level of comfort to bidders that the lender offering the package is, after conducting its own due diligence or from having a prior working relationship with the target, confident in the future profitability of the company. ![]() In a tight credit market, as has been the case in recent years, stapled financing has the added benefit of guaranteeing that financing will be available. It may also encourage more aggressive bidding by strategic buyers (entities that typically finance an acquisition on their own balance sheets or through the capital markets) as the presence of a stapled financing package could cause a strategic buyer to regard competition from private equity sponsors as more likely. In addition to creating a pricing floor, it has the added benefits of strengthening deal certainty and speeding up the transaction, and increasing confidentiality by reducing the need for bidders to contact alternative financing sources. The potential benefits of stapled financing are numerous and well established. The financing is generally not required to be utilized by the buyer, and arises in connection with the sale of both public and private companies, including subsidiaries and divisions. “Stapled financing” colloquially refers to the commitment letter and term sheet provided by a target company’s financial advisor containing the principal terms of a financing package that is “stapled” to the back of the offering materials prepared by such advisors and distributed to potential bidders. While this structure has received a fair amount of judicial attention in recent years, private equity firms can still take advantage of the benefits of stapled financing, especially when avoiding five specific pitfalls highlighted in Del Monte. ![]() 14, 2011), there remains an abundance of uncertainty in the financing market as to whether stapled financing is still a viable source of buy-side financing in merger and acquisition transactions. More than a year after the Delaware Court of Chancery handed down its decision in In Re Del Monte Foods Company Shareholders Litigation, 25 A.3d 813 (Del. ![]()
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