Break-Up Fees Provisions

Summary

These clauses contain break-up fee provisions that cover both break-up fees payable by the seller as well as reverse break-up fees payable by the buyer. These clauses include practical guidance, drafting notes, and alternate clauses. What are Break-Up Fees? A break-up fee is a fee paid by the seller in the event the transaction does not close due to the seller's termination of the agreement for a more attractive deal or other specified circumstances. A break-up fee provision is a type of a deal protection mechanism and, if structured properly, incentivizes the seller to close the transaction while providing the buyer with some degree of recovery of expenses, investment of time, and opportunity cost if the transaction does not close. Break-up fee provisions, however, have to be evaluated in the context of the fiduciary duties of the seller's board which, in Delaware under Revlon duties, require the board to maximize shareholder value in a change of control transaction. Delaware courts have generally upheld the validity of break-up fee provisions in M&A agreements, as long as they do not preclude potential competing bidders from making an offer that may provide greater value to the target company's shareholders or coerce the target stockholders into voting to approve the transaction. The accepted range for break-up fees that have been upheld by Delaware courts generally is 2%–4% of the transaction value. Break-up fees at or above 4% of the transaction value have been upheld in transactions of smaller size. Delaware courts have noted that the determination as to whether a break-up fee is preclusive or not is a fact-specific inquiry and depends on numerous factors (e.g., expense reimbursement, circumstances triggering payment of break-up fee, deal history) and not on a simple mathematical formula. A reverse break-up fee is a fee paid by the buyer in the event the transaction does not close due to a buyer breach, failure of the buyer to obtain financing, regulatory failure, failure of the buyer's stockholders to approve the transaction, or even at the buyer's "option" to terminate the agreement. Reverse break-up fee provisions are a more recent development and before the 2000s were infrequent in acquisition agreements. In recent years, however, reverse break-up fees have become a standard feature of acquisition agreements. Drafting a Break-Up Fees Provision This provision will stipulate the circumstances in which payment of a break-up fee is to be made by the parties. A break-up fee provision typically relies heavily on cross-referencing other relevant provisions of the agreement, such as termination rights of the parties and specific closing conditions and requires thorough understanding of the mechanics of these provisions taken together. Typical Triggers for Payment of Company (Seller) Break-Up Fee The seller (company) in an acquisition transaction will typically be required to pay a break-up fee in some or all of the following circumstances: (1) the seller terminates the agreement for a competing offer (often referred to as a superior proposal); (2) the seller's board of directors changes or withdraws its recommendation for the transaction; (3) the seller's stockholders fail to approve the transaction; (4) there is a seller's breach of the acquisition agreement; and/or (5) the deadline for completing the transaction, or drop dead date, has passed. Typical Triggers for Payment of Reverse (Buyer) Break-Up Fee The buyer in an acquisition will frequently be required to pay a reverse break-up in some or all of the following circumstances: (1) the buyer terminates the agreement due to a proposal it received for itself; (2) the buyer's stockholders fail to approve the transaction and the buyer subsequently consummates another transaction within a specified time period; (3) there is a buyer's breach of the acquisition agreement; and/or (4) the deadline for completing the transaction (drop dead date) has passed. Relationship with Other Provisions The interplay between the reverse break-up fee and specific performance provisions and/or the ability of the seller to sue for damages is important to consider when drafting break-up fees provisions. Reverse break-up fees provide the seller with an alternative to suing a buyer for damages and/or pursuing specific performance. Reverse break-up fees may also be used in conjunction with these remedies. In that context, a reverse break-up fee generally can be structured as: (1) the only, or exclusive, remedy of the seller such that, in essence, the acquisition agreement is at the "option" of the buyer (i.e., the buyer chooses whether to consummate the transaction or pay the reverse break-up fee and walk away from the deal); (2) a remedy in the event the buyer cannot obtain financing or the required regulatory approvals necessary to close the transaction; or (3) a non-exclusive remedy used in conjunction with the parties' contractual right to specific performance and/or damages. Reverse Break-Up Fees and Specific Performance In Transactions with a Financing Condition Typically, one of the triggers for payment of the reverse break-up fee is the failure of the buyer to obtain financing it requires to complete the transaction. In deals that contemplate a buyer's use of financing, the acquisition agreement will be drafted to include one of the following remedies: (1) a specific performance provision entitling the target to seek specific performance of the agreement by the buyer even though the required financing is not available, which is most commonly found in smaller cash transactions or stock deals; (2) a conditional specific performance provision entitling the target to seek specific performance if financing is available and other conditions to closing are satisfied; (3) a reverse break-up fee payable by the buyer if financing is unavailable, which fee may either be the target's exclusive remedy or a non-exclusive remedy that is available in addition to the target's right to seek damages for willful breaches of the agreement or fraud; or (4) a provision entitling the target to seek unlimited damages for breaches of contract without otherwise providing for a right to specific performance or the payment of a reverse break-up fee. Specific Performance It is important to consider whether a merger or purchase agreement will include a provision for specific performance since, in the absence thereof, the parties will be limited to damages or break-up fees as a remedy in the event of breach and/or termination of the agreement. The inclusion of a contractual specific performance provision strengthens the pursuit of this equitable remedy. Specific performance provisions can be drafted to be unconditional or limited to circumstances in which, as discussed above, financing is available at the closing. Note, however, that although specific performance may be explicitly provided for in an acquisition agreement, it is an equitable remedy and courts may be reluctant to grant such relief. Break-Up Fee Precedents Click here to see recent examples of termination fees in Market Standards, the searchable database of publicly filed M&A deals from Practical Guidance that enables users to search, compare, and analyze its comprehensive database of transactions using over 150 detailed deal points to filter search results. You can customize this search to your needs by adding filters or modifying the search criteria.