Reverse Termination Fee Provisions in Acquisition Agreements

Reverse termination fee provisions have appeared in mergers and acquisitions agreements since at least 1985, but little is known about how often they are included in merger agreements, and what, if any, impact these fees have on the likelihood that a deal will be consummated or abandoned. Target-payable termination fees in the context of mergers and acquisitions have been analyzed in the finance, law, and management literature, but reverse termination fees, payable by a bidder if a transaction is not consummated, have not yet been examined in depth. This paper offers the first comprehensive empirical analysis of this important contractual provision in modern mergers and acquisitions agreements. In this paper, I examine the inclusion of reverse termination fee clauses in acquisition agreements for deals announced from 1997 through 2007, using a data set of 2,024 observations. I document the prevalence of reverse termination fee provisions, the average size of these fees, the relationship between transaction size and fee provision, and the incidence of reverse termination fee provisions in deals that are abandoned by the bidder. Given the infancy of the research on reverse termination fee provisions, this paper is exploratory in nature, raising important questions for finance and corporate law scholars to consider further.