Reverse Termination Fee and Conditional Specific Performance Clause
(Financing Failure)

Summary

This clause contains a seller-favorable specific performance clause and reverse break-up fee provision payable by the buyer for transactions subject to a financing condition. This clause includes practical guidance and, drafting notes. Reverse break-up fees (also referred to as 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 break-up 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 break-up fees are more common in private equity sponsored deals but may also be used in strategic deals. Since reverse break-up fees are not deal protection measures, they are not subject to enhanced scrutiny standards, and thus can be set at virtually any amount on which the parties agree. It is not unusual for reverse break-up 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. In deals that contemplate a buyer's use of financing, the acquisition agreement will be drafted to include one of the following remedies: • a conditional specific performance provision entitling the target to seek specific performance if financing is available and other conditions to closing are satisfied • 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 • 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— • 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 It is important to consider whether an acquisition 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 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 either unconditional or conditional and limited to circumstances in which 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. In using this clause to draft or negotiate a reverse termination fee for the acquirer's failure to satisfy a financing condition, be sure to conform the defined terms to those used in the acquisition agreement, particularly the defined terms for the parties to the acquisition, which terms may very depending on the transaction structure. Also be sure to incorporate any new definitions from this clause into the definitions section to the acquisition agreement. Click here to see recent examples of reverse termination fees triggered by failures of financing conditions in Market Standards—M&A, 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.