Reverse Break-up Fees in Strategic M&A Transactions

Overview

RTFs are a relatively recent development and the scholarly literature and case law analyzing them has been fairly limited. The courts that have addressed RTFs have consistently enforced them, have generally held that RTFs are not subject to the same fiduciary duty challenges as traditional break-up fees, and may thus be set at a much higher amount. On the negative side, RTFs may serve the buyer more than the seller if set too low, acting as a cap on the buyer's liability. In order to be enforceable, the amount of the RTF should always be intended as measurable liquidated damages and not set in an amount unrelated to damages, which could later be construed as an unenforceable penalty. Overall, reverse break-up fees are creative constructs that could provide valuable benefits to both target sellers and buyers and most of the inherent drawbacks may be addressed through careful drafting. Perhaps most important, given that the trend is moving toward the imposition of a fiduciary obligation to include RTFs in agreements or to negotiate for higher RTFs, a failure to include, or at least consider, an RTF in the context of an acquisition may give rise to board member liability.