Reverse Termination Fee Clause
(Financing Failure)

Summary

This clause provides for a termination fee (also known as a break-up fee) to be paid by the buyer in the event that it cannot close a transaction because of a failure to obtain financing. This clause contains practical guidance, drafting notes, and an alternate clause. Reverse termination fees are typically a feature of public company transactions but are occasionally, though rarely, used in private deals to address a seller's concerns about a buyer's incentives for closing the deal. Unlike a standard termination fee, which is paid by the target business to the buyer, a reverse break-up fee is paid by the buyer to the target business in the event that the transaction does not close. It usually becomes payable when the acquisition agreement is terminated because the buyer fails to close on financing by the end of the applicable marketing period (the minimum number of days that must elapse before closing to give the buyer time to market its financing arrangements, which period usually begins only after all applicable bank books, rating agency presentations, and bond offering memoranda have been completed and often after stockholder approval of the transaction has been obtained). Reverse termination fees have become common in private equity sponsored deals and are increasingly being used in strategic deals. Since reverse termination fees are not deal protection measures, they are not subject to the enhanced scrutiny standards, and thus can be set at virtually any amount on which the parties agree. It is not unusual for reverse termination fees to reach four percent of equity value or higher. This is because a target business's remedies are often limited if a buyer backs out of a deal that is largely contingent on the buyer securing adequate financing. Meanwhile, it is likely the target business will have sustained significant damages as a result of the failed transaction, including stock price fluctuation, reputational hits, and loss of key officers and talented employees. A reverse break-up fee will ensure the aggrieved target business is not left empty-handed. The alternate clause describes a two-tiered termination fee structure which provides for a different/lesser break-up fee in certain circumstances. In some transactions, the reverse termination fee is the remedy for termination due to the failure to obtain financing, but the target business retains the right to specific performance or damages for willful or other types of breaches. In other transactions, the reverse termination fee is the sole remedy available to the target business for any type of breach (although the fee may be bifurcated so that it is higher for financing failures and lower for other breaches of the agreement). Where the reverse termination fee is the sole remedy, the buyer essentially has a pure option on the target business because the buyer can walk away from the deal for a specific price equal to the amount of the fee. Since the reverse break-up fee, damages, and specific performance provisions are interrelated, it is imperative that the acquisition agreement clearly states which fees or remedies will apply under which circumstances. Critical Boilerplate in Acquisition Agreements — Enforcement; Remedies Cumulative for more discussion. For an example of a reverse termination fee payable upon termination for failure to obtain required regulatory approvals (such as antitrust clearance), see Reverse Termination Fee Clause (Regulatory Failure). Click here to see recent examples of reverse 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. For termination fee and reverse termination fee market trends, see Market Trends 2022: Termination Fees. For further discussion about termination and termination fees, see Termination Rights and Fees in Acquisition Agreements, Termination Triggering Events in M&A Transaction Agreements, and Termination Provisions in M&A Transaction Agreements. For other clauses, see M&A Provisions Resource Kit, Termination Fee Clause (Change in Board Recommendation), Termination Fee Clause (Alternative Acquisition Proposal), Termination Fee/Expense Reimbursement Clause (Failure to Obtain Stockholder Approval), Reverse Termination Fee Clause (Regulatory Failure), and Reverse Break-up Fee and Termination Clause.