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ANALYSIS: How Wide Can Reverse Termination Fees Range in Deals?

Aug. 24, 2022, 9:00 AM

Reverse termination fees in large M&A deals can vary as much as the terms of the agreements they are found in.

Reverse termination fees are included in M&A agreements as a risk-shifting mechanism, through which the acquirer pays a fee to the target if the transaction is terminated for reasons enumerated in the agreement.

Bloomberg Law tracks reverse termination fees in large deals. As part of this effort, we reviewed 78 publicly filed agreements for pending and completed M&A deals for US targets, announced between Jan. 1, 2020 and July 18, 2022, that had transaction values of $5 billion or greater and contained reverse termination fees.

In the 78 deals reviewed, the reverse termination fees ranged from an overall low of 0.3% of total deal value to a high of 15%.

Fees Reached as High as 15% of Total Deal Values

Twenty-one of the 78 M&A agreements reviewed were for deals signed in 2020. These deals contained reverse termination fees that ranged from 0.3% to 5.7% of the total deal values.

The range of the reverse termination fees encompassed in agreements signed in 2021 was much wider—the reverse termination fees in those 38 deals ranged from 1.1% to 15% of the total deal values.

The remaining 19 agreements—signed through mid-July of 2022—showed a similar range of percentages to the range in 2021. Specifically, these agreements’ reverse termination fees ranged from 1.6% to 14.7% of total deal value.

Made with Flourish

Explore the reverse termination fee percentages for large deals in the interactive graphic above. Hover over circles to see details of each deal, including the parties and the announced dollar value. If you’re reading this article on the Bloomberg Terminal, click here to view this interactive graphic.

The 2021 and 2022 ranges for reverse termination fees as percentages of total transaction value are visibly wider than the range in 2020. Indeed, the ranges in 2021 and 2022 are nearly three times as wide: 2020 had a 5.4 percentage-point span in the range, while 2021 and 2022 had spreads of 13.9 and 13.1 percentage points, respectively.

Regulatory and Non-Regulatory Fees

In our analysis of the 78 agreements, we also noted whether the reverse termination fees included in the deals were regulatory or non-regulatory reverse termination fees.

Regulatory reverse termination fees are those fees payable by the acquirer to the target because the parties were unable to obtain, or declined to further pursue, regulatory approval (e.g., antitrust approvals, regulatory agency approvals). Non-regulatory reverse termination fees are payable by the acquirer to the target for termination of the deal without an explicitly enumerated regulatory trigger for the fee.

Twenty-six of the 78 agreements reviewed contained regulatory reverse termination fees, while 70 of the 78 agreements reviewed contained non-regulatory reverse termination fees. (Eighteen agreements contained both.)

Among the 26 agreements that contained regulatory reverse termination fees, the average regulatory reverse termination fee was 3.5% of total deal value. The average for the 70 non-regulatory reverse termination fees was slightly higher, at 4.8%.

When broken down year by year, the averages for regulatory reverse termination fees were fairly consistent from 2020 to 2022, while the averages for non-regulatory reverse termination fees rose from 3.7% in 2020 to 4.7% in 2021 and to 5.8% in 2022.

2022 Highs and Lows

Focusing just on the deals signed in 2022 through mid-July, we identified which came in at the lowest and highest ends of the spectrum in terms of their reverse termination fees.

The transaction at the lowest end of 2022’s range, with a regulatory reverse termination fee that represents 1.6% of the total deal value, is an agreement and plan of merger signed on Feb. 22 by TEGNA Inc., Teton Parent Corp., and Standard General L.P., among other parties to the agreement. (This transaction also contained a non-regulatory reverse termination fee that was 3.1% of the total deal value, which falls within 2022’s overall range.)

At the other end of the spectrum for 2022 thus far, with a non-regulatory reverse termination fee that represents 14.7% of the total deal value, is an agreement and plan of merger signed on April 24 by PS Business Parks Inc. and Blackstone Inc., among other parties to the agreement.

To provide a frame of reference for all these numbers, the reverse termination fee included in the April 25 definitive agreement for the takeover of Twitter Inc. by Elon Musk—which is now subject to a Delaware Court of Chancery suit and was purportedly terminated as of the date we pulled our set of pending and completed deals and thus was not included in the 78 agreements reviewed—has a value of $1 billion, representing 2.3% of the total deal value. This reverse termination fee places this deal on the lower end of 2022’s range in terms of percentage of total deal value.

With assistance from Linda Ouyang.

Bloomberg Law subscribers can access our Reverse Termination Fees Drafting Guide and find related content on our M&A Deal Analytics resource.

If you’re reading this on the Bloomberg Terminal, please run BLAW OUT <GO> in order to access the hyperlinked content or click here to view the web version of this article.