September 14, 2009
Strategic Deals and Reverse Termination Fees
Posted by Afra Afsharipour

I first want to thank Gordon Smith and company for the invitation to guest blog on The Conglomerate.  I have been a devoted follower of this blog going back to my days as a transactional lawyer.  In fact, Gordon and crew helped to inspire me to enter academia, and I learned a lot from their blog, as well as from other faculty blogs, about how to transition from practice to this fabulous new life.  After seven years as a corporate lawyer, I began teaching at UC Davis School of Law in 2007.

   

I am pretty passionate about corporate law, especially comparative corporate law, transactional law and deal-making.  During my visit, I hope to explore some of these issues, as well as share some thoughts on incorporating transactional law and skills in the classroom.   

 

My current obsession (and my poor family really does see this as an obsession) is with reverse termination fees (RTFs) as a risk allocation tool in merger agreements. While standard termination fees, i.e. fees payable by the seller to the buyer, have been analyzed for years by both practitioners and scholars, RTFs have received minimal attention.  I think that it is time that both scholars and practitioners think more deeply about these and other similar provisions (like ticking fees), their current uses and their potential for deal innovation. It is clear that there are some others who are also thinking about these issues (HT: M&A Law Prof blog).

 

For the past couple of years there have been anecdotal reports of an increasing use of RTFs in strategic deals.  My current paper confirms these reports through a study of strategic acquisition agreements involving US public companies during two separate periods, January 1, 2003 through December 31, 2004 and January 1, 2008 through June 30, 2009.  An analysis of each of these agreements demonstrates that in the 2003-04 period parties predominantly used RTF provisions to allocate similar risks to those allocated by STFs, such as the risk that the buyer would terminate the agreement due to a superior proposal for the buyer.  Thus, it was unsurprising that in a substantial majority of the reviewed agreements, the RTF was equal to the STF.  The findings were quite different for the 2008-09 period.  Not only has there been a significant increase in the use of RTFs, as compared to the 2003-04 period, but the data also shows that while in some transactions RTFs continue to be set at an equal amount to STFs, parties have also become more creative by using hybrid and liability cap approaches.  This more creative approach to RTFs reflects the use of the provisions to allocate deal risk beyond just the risk of non-consummation due to a competing offer for the buyer, such as financing risk or the risk of a breach of contract by the buyerFurthermore, in a sizeable number of the 2008-09 transactions that I studied, parties had altogether abandoned specific performance as a contractual remedy and specified that the RTF was the seller's sole remedy in the event the deal failed to close for any reason.

 

Overall, the study demonstrates that the shift in contractual triggers that give rise to RTFs provides buyers greater flexibility to walk away from transactions.  In future posts I will talk about some theories as to why this shift has occurred and the implications it may have on the ways in which we view merger agreements and review board decision-making.  Suffice it to say, I think that my obsession with RTFs has led me to think and write even more about these issues.

Contracts, M&A, Transactional Law | Bookmark

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