The outside date is a date where both parties have agreed in advance that if the merger or acquisition has not yet completed either side can terminate the merger agreement and walk away from the deal free of any penalties. However, it is often stipulated that if certain duties were not performed by a given party prior to the Effective Time, the act of termination under this clause will not be available.
The actual significance of the date is not as final as it may suggest. The date is neither the forecast completion date, the expected completion date, nor even the latest completion date. It is in rare circumstances such as Qualcom’s (QCOM) bid for NXP Semicondctor (NXPI), that one the parties invoke this clause and walks away, although in QCOM’s case, a reverse termination fee was paid. Having not received clearance from SAMR, QCOM decided the time had come to terminate. Therefore, both parties may agree to extend, if for example more time is required to complete an ongoing regulatory review such as a second request for information under HSR, which is likely to produce a positive outcome. This makes assessing merger arbitrage downside risk, in terms of the potential annualized loss calculation, notoriously difficult to compute.
The outside date may give some indication to the profitability of the investment if deal extension risk becomes an issue. That is, should the deal have been extended for an undisclosed reason, or maybe to accomodate a review from a competition regulator such as in the case of Tiffany & Co. (TIF), the outside date may offer some guidance in updating the profitability calculation or annualized return.
An Example Outside Date
Here is a real life example of the date in actual use. The following quote is taken from the SC TO-T filing made with the SEC made by Arqule (ARQL) on December 17, 2019.
The “Outside Date” means April 6, 2020; provided such date may be extended to September 4, 2020 under certain circumstances, as summarized below in Section 11 – “The Merger Agreement; Other Agreements – Termination.”
In this case, the parties can walk away from the deal on the given date but as always there are exceptions. Such as, circumstances where the date can be extended and what constitutes as an acceptable delay in not assigning responsibility for the failure to complete.
A regular termination fee is are also a possibility when a target decides to terminate the deal for a given reason not otherwise considered exempt. The fee is then paid to the acquirer.
