1. Reverse Breakup Fee
2. Advantages of the Reverse Breakup Fee
3. Advantages of the Reverse Breakup FeeReverse Breakup Fee Clause in a Contract
4. Why Would a Buyer Not Close the Deal?
5. Remedy Due to the Buyer’s Failed Financing

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.

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.

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.

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

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.

If you need help learning more about a reverse breakup fee, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.