Forescout sues Advent, asserting MAE, to complete $1.9bn deal

Forescout has filed a complaint with the Delaware Court of Chancery asserting that affiliates of Advent have violated the terms of their merger agreement.

Forescout Technologies plans to take Advent International to court for refusing to close the parties’ $1.9 billion pending transaction under claims of a material adverse effect. 

The publicly-traded cybersecurity company has filed a complaint with the Delaware Court of Chancery asserting that affiliates of Advent have violated the terms of their merger agreement with Forescout, the company announced Wednesday.

Advent on February 6 agreed to acquire Forescout for $33 per share in an all-cash transaction, valuing the company at $1.9 million. Crosspoint Capital Partners, a private equity firm focused on the cybersecurity and privacy industries, said it would take a minority stake alongside Advent.

However, on Friday, May 15, Advent provided notice to Forescout that it would not be proceeding to consummate the acquisition on May 18, as scheduled.

In the legal complaint filed Wednesday, May 20, Forescout asked the Court to compel Advent to honor its commitments and immediately complete the pending take-private acquisition agreed upon three months earlier.

The private equity firm’s reason for not proceeding with the transaction is “a material adverse effect on [Forescout’s] business, financial condition and operational results,” driven by covid-19 pandemic, Advent said Wednesday.

The firm said Forescout has experienced a disproportionate effect on the company’s business relative to its direct peers, most of which have reported strong financial performance in the current environment. The decision was made after an extensive analysis that included information provided by Forescout, the company’s first-quarter 2020 financial results and a detailed forecasting exercise to better understand future performance, said Advent.

Forescout reported $57.2 million in total revenue for Q1, a 24 percent decline over the first quarter of 2019. The company attributed the decline to the economic downturn caused by covid-19 and uncertainty around its pending deal with Advent.

However, according to Forescout, weakened earnings is not an excuse for Advent to walk away from the deal. “Forescout believes that no material adverse effect has occurred, that all closing conditions are satisfied, and that Advent is obligated to close the transaction,” the filing said.

Forescout’s statement also indicated that the merger agreement explicitly allocated the risk of any impacts from covid-19 to Advent.

“We have satisfied all conditions to closing under our merger agreement, and a material adverse effect has not occurred,” Theresia Gouw, chair of the Forescout board, said. “The only change since the merger agreement was jointly executed in February is the deepening of the COVID-19 pandemic, which has significantly impacted global macro-economic conditions. All companies have been challenged by this pandemic, and it is highly disappointing that Advent would attempt to exploit market volatility to renege on its contractual obligations, particularly when the merger agreement explicitly excludes the effects of a pandemic as a material adverse event.”

According to Gouw, the company will take immediate action to enforce Forescout’s rights and ensure that Advent fulfills its obligation.

Advent said the firm is disappointed that Forescout decided to pursue litigation, as it was preparing to consummate an alternative transaction with Forescout and reach an agreement peacefully. Now Advent said it is prepared to respond and will vigorously defend its position in court.

Shares of Forescout dropped on the news almost 8 percent to $19.29 per share, on Wednesday at 12:35pm.

Advent is not the only firm trying to scrap its deal in light of covid-19.

Carlyle Group and Singapore sovereign wealth fund GIC may be able to walk away from an agreed deal with American Express GBT because of what is essentially a logistical issue, PE Hub reported on May 15.

Spokespeople for Forescout and Advent declined to comment beyond the statements.

Action Item: Read more about Advent and Forescout’s deal discussions.

Correction: This report has been updated to clarify that Advent provided notice to Forescout on May 15 that it would not be proceeding with the transaction. A previous version incorrectly stated May 18.