Buy-side optionality in merger agreements is an area of alot of interest these days. I knowSteven has spent time on this blogand over at TheDeal Professor blog thinking about it, particularly in the context offinancial buyers. I’ve been giving itsome thought as well.
When the Brocade-Foundrytransaction was announced (July 2008), it was unusual because it involved astrategic buyer and a reverse termination fee and became part of a discussion of increased optionality in merger agreements. Most of that discussion has focused on optionality that private equity buyers have been able to negotiate. I’ve been building a dataset on of reversetermination fees for a paper I’m writing focused on optionality with respect to strategic buyers. I’ve been surprised, first at the number of transactions in which the buyeragrees to pay a fee to a seller, and second at the relative diversity ofprovisions providing for a fee to be paid to the seller in the event the buyerseeks to terminate. In blog-like fashion,here’s a quick run down.
In my dataset of transactions with only strategic buyersfrom 2003 to 2008, approximately 18% of those transactions include a reversetermination fee. Of the transactionswith reverse termination fees, the vast majority (71%) simply track the terminationfee in terms of size. This probably forno other reason than it simplifies negotiation. Of those transactions in which the fees do not track each other, thereverse termination fees are higher than the termination fees (70%). This makes sense if you think there fiduciaryduties that constrain the size of termination fees don’t work the same way on thebuy-side. There’s something tothat.
In terms of triggers, while termination fees are prettyconsistently triggered by some combination of a termination and a competing proposal,reverse termination fees are a little more diverse. Some reverse break fees are triggered by atermination subsequent to a lack of buy-side financing (as in the privateequity buyer case). Others are triggeredupon a termination subsequent to a competing proposal for the buyer. Terminations for regulatory/anti-trust reasonsalso can sometimes trigger a reverse termination fee. The extreme case, of course, is triggeredwhen the seller terminates because the buyer refuses to close (all otherconditions having been met). This is the‘pure’ option.
In any event, I hope to get a version of this paper out byAugust. If you have come acrossvarieties of reverse termination fee triggers that you think are important thatI have left out of this brief taxonomy, please feel free to comment below.
-bjmq
Update: Here's an early draft of my paper, Optionality in Merger Agreements.