Thursday, June 4, 2009
Buy-side optionality in merger agreements is an area of a lot of interest these days. I know Steven has spent time on this blog and over at The Deal Professor blog thinking about it, particularly in the context of financial buyers. I’ve been giving it some thought as well.
When the Brocade-Foundry transaction was announced (July 2008), it was unusual because it involved a strategic 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 reverse termination 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 buyer agrees to pay a fee to a seller, and second at the relative diversity of provisions providing for a fee to be paid to the seller in the event the buyer seeks to terminate. In blog-like fashion, here’s a quick run down.
In my dataset of transactions with only strategic buyers from 2003 to 2008, approximately 18% of those transactions include a reverse termination fee. Of the transactions with reverse termination fees, the vast majority (71%) simply track the termination fee in terms of size. This probably for no other reason than it simplifies negotiation. Of those transactions in which the fees do not track each other, the reverse termination fees are higher than the termination fees (70%). This makes sense if you think there fiduciary duties that constrain the size of termination fees don’t work the same way on the buy-side. There’s something to that.
In terms of triggers, while termination fees are pretty consistently 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 a termination subsequent to a lack of buy-side financing (as in the private equity buyer case). Others are triggered upon a termination subsequent to a competing proposal for the buyer. Terminations for regulatory/anti-trust reasons also can sometimes trigger a reverse termination fee. The extreme case, of course, is triggered when the seller terminates because the buyer refuses to close (all other conditions having been met). This is the ‘pure’ option.
In any event, I hope to get a version of this paper out by August. If you have come across varieties of reverse termination fee triggers that you think are important that I have left out of this brief taxonomy, please feel free to comment below.
Update: Here's an early draft of my paper, Optionality in Merger Agreements.