A drop-dead date is a provision in the merger agreement specifying a deadline that will automatically terminate the agreement. Although the expected completion date may be indicated beforehand, the drop-dead date is the last possible date on which the merger or acquisition must be consummated.
This date may be more formally known as an “Outside Date” and is generally referred to as such in official documents. An example of which can be seen in the PRER14A filing made with the SEC by Tallgrass Energy (TGE) on February 11, 2020 in Section 8.1(b)(ii) on page A-57.
Drop-Dead Date in Use
If the deal in question were subject to an investigation by the regulatory authorities the consummation of the deal could be delayed indefinitely. This may increase the costs of financing the deal as well as other professional services. The Drop-Dead date states in advance a date on which the parties agree “how long is too long”. This agreement can be as complex or as simple as the parties wish it to be. Provisions such as which party has the right to terminate and on what basis are common.
Typically, an acquirer is obligated to gain regulatory clearance by a given date. Should this not be achieved, the target may invoke a termination clause and potentially collect a reverse termination fee from the acquirer. This was the case with Qualcomm (QCOM) and NXP Semiconductors (NXPI). QCOM failed to obtain regulatory clearance in China before the drop-dead date. As the deal was terminated under the agreement, QCOM was obliged to pay NXPI a large reverse termination fee.
A regular termination fee is also a possibility when a target decides to terminate the deal for a given reason not otherwise considered exempt or referred to in the official documentation. The fee is then paid to the acquirer
