April 14, 2010
What is going on with reverse termination fees?
We at the M&A Law Prof blog are somewhat enamored of reverse termination fees (RTFs). I have a draft paper (Transforming the Allocation of Deal Risk Through Reverse Termination Fees) coming out this fall in the Vanderbilt Law Review and Brian has a paper (Optionality in Merger Agreements) coming out in the Delaware Journal of Corporate Law. Brian’s paper examines whether reverse termination fees are “a symmetrical response to the seller’s judicially-mandated fiduciary put and whether such fees represent an efficient transactional term.” Brian’s paper is terrific, so I encourage you to read it (and no, he isn’t paying me to tell you this). For those interested in learning more about the history of the use of RTFs, take a look at Elizabeth Nowicki's nifty empirical account of "reverse termination fee clauses in acquisition agreements for deals announced from 1997 through 2007, using a data set of 2,024 observations."
My paper is an account of the use of RTFs in strategic transactions. The abstract gives a summary:
ABSTRACT: Buyers and sellers in strategic acquisition transactions are fundamentally shifting the way they allocate deal risk through their use of reverse termination fees (RTFs). Once relatively obscure in strategic transactions, RTFs have emerged as one of the most significant provisions in agreements that govern multi-million and multi-billion dollar deals. Despite their recent surge in acquisition agreements, RTFs have yet to be examined in any systematic way. This Article presents the first empirical study of RTFs in strategic transactions, demonstrating that these provisions are on the rise. More significantly, this study reveals the changing and increasingly complex nature of RTF provisions and how parties are using them to transform the allocation of deal risk. By exploring the evolution of the use of RTF provisions, this study explicates differing models for structuring deal risk and yields greater insights into how parties use complex contractual provisions not only to shift the allocation of risk, but also to engage in contractual innovation.
My study only spans deals announced before mid-2009, so I am thinking about a part 2 of this paper that looks at the use of RTF structures in deals after mid-2009. My question is whether, and if so how and why, RTF provisions have changed now that they have become a somewhat more mature provision in acquisition agreements and in light of predictions that happy days may be here again for dealmakers. If you have any comments on this paper, they are especially welcome before the end of April but even after that I may be able to make some minor tweaks, so please send me your thoughts.
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