Termination Fees in Public and Private Acquisitions: Drafting Forward and Reverse Breakup Fees

Termination fees--also known as breakup fees--are now the most common type of lock-up device in M&A transactions. By agreeing to liquidated damages in the event of a breach, parties add certainty to a transaction. Termination fees also serve as insurance and deter breaches of an M&A agreement by a party having second thoughts about the deal it has struck.

In private company deals, forward termination fees often arise when the target company is presented with and wants to accept a more favorable offer after entering into a merger agreement. Public merger agreements typically contain detailed trigger provisions addressing other reasons for termination, such as failure to obtain shareholder approval. The amount of the breakup fee may vary depending on the reason the target is terminating the transaction.

The acquirer pays reverse termination fees if it is unable to close on the acquisition due to a failure to obtain financing or satisfy other conditions of closing. Often the acquirer's ability to meet such requirements requires the cooperation of the seller, so counsel must draft such reverse fee provisions with care.

The details within both types of breakup fee provisions provide for many points of negotiation and potential dispute if the deal does not close. Delaware courts have often based enforceability decisions on whether the arrangement is reasonable under the circumstances. In contrast, New York courts have looked at whether the provision contains the proper components for an enforceable liquidated damages clause.

Listen as our authoritative panel discusses breakup fees from the perspective of both the acquirer and the target. The panel will also discuss the drafting components to breakup fee provisions, including trigger provisions and tiered fees.