A reverse termination fee is a payment made by the acquirer to the target in the event of the acquirer deciding against consummating the deal. Although this fee is commonly referred to as a “Reverse Breakup fee”, there is rarely any mention of this terminology in official documents (see example below). The fee is contrasted with the Termination Fee. Historically, the absence of a reverse termination fee has been cited as one of the major potential causes of a deal failing to consummate. However, with the increase in popularity of this action to the point of standard procedure, alternative issues have risen in prominence for which merger arbitrageurs must be aware.
This specified provision within the merger agreement highlights the commitment of the acquirer and offers additional motivation to the buyer 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, for example during the Covid-19 pandemic or a significant change in corporate strategy. Fees often range between 3% – 4% of the deal value.
Reverse Termination Fee Example
The following passage is taken from an 8-K form that was filed with the SEC made by Forescout Technologies (FSCT) on February 7, 2020
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 termination fee payable, should the target break the deal is approximately 6% which is the level expected for a deal of this type.. The figure is exactly double the reverse termination fee that would be payable to the acquirer if the target is liable.
