Optionality in Merger Agreements
Brian JM Quinn
The credit crisis of 2008 and the subsequent collapse of a number of high-profile acquisition transactions put a spotlight on contracting practices that embedded optionality into merger agreements by way of the reverse termination fee and its attendant triggers. This article examines whether reverse termination fees are a symmetrical response to the seller’s judicially mandated fiduciary termination right and whether such fees represent an efficient transactional term. A series of Delaware cases over the last decade limited the degree to which buyers could rely on deal protection measures in merger agreements to prevent a seller from accepting a superior second bid resulting in a judicially-created fiduciary put. Where courts require seller termination rights, it is possible that buyers might attempt to negotiate symmetrical “optionality” for buyers elsewhere in the merger agreement. This article investigates whether the termination triggers that accompany reverse termination fees are that symmetrical response. Using a sample of 644 acquisitions from 2003 through 2008, which includes 105 transactions where strategic buyers negotiated a reverse termination fee, this article provides an empirical account of the use of reverse termination fees by strategic buyers, including the first taxonomy of reverse termination fee triggers. This article concludes first that reverse termination fee triggers are not a symmetrical response to the judicially mandated seller’s fiduciary termination rights. Second, to the extent reverse termination rights mimic termination rights in size, they may be inefficient terms. The results of this study provide some guidance to courts as they are asked to assess the viability of reverse termination fees and the degree of optionality embedded in the modern merger agreement.