Key Takeaways

  • A reverse termination fee (or reverse breakup fee) is a payment made by the buyer to the seller if the buyer cannot complete an M&A transaction, often due to financing failure, regulatory issues, or shareholder disapproval.
  • These fees act as a risk allocation tool, offering sellers compensation for lost opportunities and costs if a deal collapses.
  • Reverse termination fees can also incentivize buyers to complete due diligence and secure financing early in the process.
  • Negotiated terms, including triggers, payment amounts, guarantees, and exceptions, are crucial to ensuring the fee functions as intended.
  • Complex deals may include tiered reverse termination clauses, escalating fees based on the reason for termination or the deal stage.
  • Regulatory scrutiny, shareholder actions, and unforeseen external events can all influence whether and how a reverse termination fee is triggered.

Reverse Breakup Fee

A reverse breakup fee, also referred to as a reverse termination fee, is generally seen in the mergers and acquisitions (M&A) area, as it operates as an allocated risk in terms and M&A contracts. Specifically, this fee is usually made from the purchaser to the seller if the buyer fails to close the transaction that was mutually agreed upon in the contract. However, this fee could also be charged to the seller if the seller chooses not to close the deal. This fee will give some confidence to the other party and essentially operates as a risk mitigation tool.

Understanding the Purpose of a Reverse Termination Fee

A reverse termination fee serves as a risk-management mechanism in merger and acquisition (M&A) transactions, designed to protect the seller if the buyer cannot close the deal. It reflects the buyer’s commitment and provides financial compensation if the transaction falls through for reasons beyond the seller’s control. In essence, the fee helps allocate risk between parties — ensuring that the seller is not left without recourse after dedicating significant time, resources, and opportunity costs to the proposed deal.

Reverse termination fees are common in deals where there is significant uncertainty about financing, regulatory approvals, or other closing conditions. They also serve as a negotiating tool, often increasing the seller’s confidence that the buyer is committed to the transaction, and deterring buyers from walking away lightly.

Advantages of the Reverse Breakup Fee

There are many advantages to utilizing this fee, including:

  • Minimizes the buyer’s exposure under the contract
  • Significantly reduces contractual disputes
  • Limits the seller’s ability to bring a contractual dispute

If the buyer pays this fee when a specific event is triggered, it reduces the likelihood of a contractual dispute in the future if the buyer is unable to close the transaction. In fact, such payment will limit the seller’s ability to bring a legal dispute against the buyer, particularly for specific performance.

Key Factors in Negotiating a Reverse Termination Fee

When negotiating a reverse termination fee, parties should carefully define the triggering events, fee amount, and any exceptions. These terms can significantly influence the balance of power and incentives in the deal:

  • Triggering Events: Most commonly include failed financing, regulatory disapproval, shareholder rejection, or a breach of representations and warranties.
  • Fee Amount: Typically ranges from 2% to 7% of the total transaction value, though high-risk deals may command higher percentages.
  • Tiered Structures: Some contracts include escalating fees depending on the reason for termination or the stage at which the deal fails.
  • Carve-Outs: Buyers may negotiate exceptions for unforeseen external events (e.g., pandemics or government intervention).
  • Parent Guarantees: If the buyer is a special-purpose acquisition vehicle (SPV) or shell entity, the seller often demands a parent company guarantee to ensure payment.

Well-drafted provisions balance the buyer’s need to limit exposure with the seller’s need for compensation, ensuring the fee supports rather than undermines deal certainty.

Advantages of the Reverse Breakup FeeReverse Breakup Fee Clause in a Contract

The fees can be included in the contract, which contains information regarding if and/or when the fee applies. If the buyer fails to pay, then the seller can bring a legal dispute for breach of contract. While the court might not require specific performance on the part of the buyer, the court will apply the contract terms with regard to the reverse breakup fee. Therefore, the buyer will be forced to pay the fee to make the seller somewhat whole again.

You might also include language in the contract regarding a two-tier fee. Specifically, one fee will relate to the dissolution of the contract and the other fee will be charged for any breach of the contractual terms and provisions. For example, in 2016, Microsoft acquired LinkedIn. The contract itself included a reverse breakup fee of approximately $725 million if LinkedIn’s Board of Directors changed their minds, if more than 50% of LinkedIn’s shareholders failed to approve the deal, or if LinkedIn simply breached the contract and chose another bidder.

Such fees are important because either party wants to protect their interests, especially if the other party might have a better offer after the current deal is publicly announced. The board of directors for the selling company might be inclined to keep the shareholders’ interests at hand and enter into the deal with the purchaser that is offering more money. Therefore, while this type of action could constitute a breach of contract, most companies operating in this area are well aware of such risks and are willing to walk away from the deal without filing a lawsuit so long as the injured party receives the agreed upon reverse breakup fee.

Structuring the Reverse Termination Clause

The reverse termination fee clause should clearly outline conditions, procedures, and remedies to prevent disputes. Common structural components include:

  • Detailed Definitions: Clearly define “financing failure,” “regulatory block,” or “shareholder disapproval” to avoid ambiguity.
  • Notice Requirements: Specify how and when the buyer must notify the seller of its inability to close.
  • Payment Deadlines: Include strict timelines for payment once the clause is triggered.
  • Enforcement Mechanisms: Allow the seller to pursue litigation or arbitration if the fee is not paid.

Some contracts include a dual-tier system, where a lower fee applies if the buyer fails despite good-faith efforts, and a higher fee applies if the buyer breaches its obligations or withdraws without cause.

Why Would a Buyer Not Close the Deal?

There are many situations when a buyer might not have an ability to close the deal, particularly when it comes to M&A deals. Such instances could happen if the buyer fails to obtain:

  • Regulatory approval for the purchase
  • Consent of shareholders
  • Proper financing

Regulatory, Shareholder, and Market Risks

Beyond financing issues, several external factors can prevent deal closure and trigger a reverse termination fee:

  • Regulatory Intervention: Antitrust authorities or foreign investment review boards may block the merger.
  • Shareholder Action: Shareholders might vote against the deal if they believe the price undervalues the company.
  • Market Volatility: Dramatic market changes can impact valuation, financing availability, or strategic rationale.
  • Strategic Shifts: Buyers may reconsider the transaction if a target’s business deteriorates significantly before closing.

Understanding these risks helps both parties structure appropriate fee triggers and carve-outs to reflect realistic deal risks.

Remedy Due to the Buyer’s Failed Financing

There are several items of consideration when seeking remedy for failed financing, including:

  • Trigger event
  • Amount of the fee
  • Guarantees

Trigger Event

The reverse breakup fee will be paid once the contract has been terminated due to the buyer’s inability to obtain proper financing. When the purchase agreement is initially drafted, the parties should determine who can terminate the agreement in the event that the buyer was unable to obtain financing to cover the deal. Generally, the buyer will not want the seller to be able to terminate the agreement if all other conditions have been met or if the seller caused the financing failure, i.e. failing to cooperate with buyer’s attempt to obtain financing. However, the seller might not want the buyer to terminate the agreement if the buyer caused the financing failure, didn’t use sound efforts to try to obtain financing, or didn’t seek alternate financing.

Amount of the Fee

The amount of the fee will be previously agreed upon between both parties. With that said, the fees for financing failure are usually lower than the breakup fee required for an actual breach on the part of the buyer.

Guarantee

If the buyer operates as a shell company, the seller might want to have the parent company or equity sponsor guarantee payment of the fee. In fact, some companies are excluded from giving such guarantees, in which case an indemnity clause will be included in the contract.

Practical Considerations and Case Examples

Real-world examples illustrate how reverse termination fees function in practice. In several high-profile M&A deals, these fees have exceeded hundreds of millions of dollars, highlighting their significance as a strategic tool:

  • In the 2016 Apollo Global Management–ADT merger, Apollo agreed to a $400 million reverse termination fee if financing fell through.
  • In 2022, Elon Musk’s proposed acquisition of Twitter included a $1 billion reverse termination fee to protect Twitter if Musk failed to complete the transaction.

Such cases demonstrate how reverse termination fees serve both as financial protection for sellers and as a credible commitment from buyers. They are also increasingly scrutinized by regulators and investors, emphasizing the importance of careful drafting and negotiation.

Frequently Asked Questions

  1. What is the purpose of a reverse termination fee?
    It compensates the seller if the buyer cannot complete an M&A deal, covering lost opportunities and costs.
  2. How is a reverse termination fee calculated?
    Typically as a percentage of the deal value — usually between 2% and 7%, depending on risk factors and negotiation strength.
  3. What events trigger a reverse termination fee?
    Common triggers include failed financing, regulatory disapproval, shareholder rejection, or a buyer’s breach of obligations.
  4. Can a buyer negotiate exceptions to the fee?
    Yes. Buyers often negotiate carve-outs for unforeseen events or circumstances beyond their control, like government intervention.
  5. Are reverse termination fees enforceable?
    Yes, if properly drafted in the purchase agreement, they are generally enforceable and can be pursued through litigation if unpaid.

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