A Reverse Break-Up Fee is a payment made by the acquirer to the target in the event of the acquirer deciding against consummating the deal. This fee is often referred to as a “reverse termination fee”, official documents (see example below). The fee is contrasted with a Break-Up Fee.
This specified provision within the merger agreement motivates the acquirer to close a pending deal. An acquiring company might pay the fee if it decides not to proceed with the purchase. Possibly due to deteriorating markets conditions or a significant change in corporate strategy. Fees often range between 3% – 4% of the deal value.
Reverse Break-up Fee Example
The following passage is taken from an 8-K filing made by Forescout Technologies (FSCT) on February 7, 2020. Note the use of the terminology in this example.
Upon termination of the Merger Agreement under other specified circumstances, Parent will be required to pay the Company a termination fee of $111,664,539. Specifically, if the Merger Agreement is terminated by the Company if (1) Parent fails to consummate the Merger as required pursuant to, and in the circumstances specified in, the Merger Agreement, or (2) Parent or Merger Sub’s material breach of its representations, warranties or covenants in a manner that would cause the related closing conditions to not be satisfied, then, in each case, the termination fee will be payable by Parent to the Company upon termination. Certain funds managed or advised by Advent International Corporation (“Advent”) have provided the Company with a limited guarantee in favor of the Company (the “Limited Guarantee”). The Limited Guarantee guarantees, among other things, the payment of the termination fee payable by Parent, subject to the conditions set forth in the Limited Guarantee.
The proposed value of the deal is $1.9bn. Thus, the reverse break-up fee payable, should the target break the deal is approximately 6%. The figure is exactly double the break-up fee that would be payable to the acquirer if the target is liable.
