What protects a merger: fees, go-shops and conditions
A plain guide: how the terms fit together, each linked to its own page.
A merger agreement sets each side's rights and obligations if the deal doesn't close. The buyer may get a termination fee and limits on how the target handles rival offers. The target may get a reverse termination fee and the buyer's promises on financing and approvals.
Two sides, two sets of protections
Between signing and closing, either side may want out. The target may get a better offer. The buyer may lose its financing, or a regulator may refuse the deal.
The target's business may also decline. The merger agreement can protect each side against these risks:
- For the buyer
- Limits on how the target seeks rival offers, a termination fee in the listed cases, and a material adverse effect condition.
- For the target
- A reverse termination fee in the listed cases, the right to seek specific performance, and no financing condition. Also the buyer's promises on approvals, such as a duty to litigate or a divestiture commitment.
Each deal negotiates its own: which protections it has, and how far each one goes.
- Termination feeThe fee the target pays the buyer if the agreement ends in one of the cases it lists. Typically, the target ends the agreement to accept a better offer from another buyer.
- Reverse termination feeThe fee the buyer pays the target if the agreement ends in one of the cases it lists. Typically, a regulator refuses approval or the buyer's financing fails.
When the target can still take a better offer
Agreements usually limit how the target can look for rival offers.
Even so, the target may be able to end the agreement to accept a superior proposal. The agreement sets the terms: what counts as one, the steps, any time limits and the fee.
Some agreements give the target a go-shop instead. It's a set period after signing when the target can actively look for offers. A lower fee often applies to some bidders who make proposals during it.
For US public targets in 2024, the median termination fee was 2.6% of transaction value.
Some deals had a lower fee for a period after signing: a median of 1.3% during that period, and 2.7% after it.
When the buyer doesn't have to close
The buyer must close once the closing conditions are met, or waived where allowed. They can include required regulatory approvals, shareholder approval and no material adverse effect.
Before 2005, private equity deals usually had a financing condition. The buyer only had to close if it got the financing the agreement names.
Whether a failure costs the buyer a reverse termination fee depends on the fee's triggers in the agreement. They're separate from the conditions.
For US public targets in 2024, about 69% of deals had a reverse fee. The median was 3.8% of transaction value, and 4.8% with financial buyers.
- Material adverse effectAn adverse change defined in the merger agreement. If a change meets the agreement's requirements, it can excuse the buyer from closing.
- Closing conditionsWhat must happen before the deal can close, such as holder approval, antitrust clearance or other approvals.
- Financing conditionA closing condition that lets the buyer refuse to close if it can't raise the money to pay.
Can the target make the buyer close?
Specific performance is a court order to do what the agreement requires. Here, that means closing. Whether a target can get one depends on the agreement, the governing law and the court.
In Hexion v. Huntsman (2008), the court ordered the buyer to perform its other obligations, but not to close. The agreement didn't let the target force the closing itself.
In many private equity deals, the reverse fee caps what the fund owes for a failed deal. The agreement sets the target's other remedies.
- Specific performanceThe target's right to ask a court to order the buyer to complete the deal, instead of only collecting a fee or damages.
- Duty to litigateThe buyer's promise to fight in court, if a regulator sues to block the deal, to get the approvals.
- Divestiture commitmentHow much the buyer has agreed to sell or give up to win antitrust or regulatory approval.
Questions
What are deal protections in M&A?
Provisions in a merger agreement that set what happens if the deal doesn't close. The term usually means the buyer's protections against rival bids, like limits on seeking other offers and the termination fee. It can also cover protections for the target, such as a reverse termination fee.
What happens if a buyer backs out of a merger?
It depends on the agreement and the reason. A failed condition, such as a material adverse effect, can excuse the buyer, and the agreement says whether a fee is then owed. If the agreement puts the failure on the buyer, it may owe a reverse termination fee. The target may also be able to ask a court to order the closing.
Can a company accept a better offer after signing a merger agreement?
Often yes, if the agreement allows it. The target may be able to end the deal for a superior proposal, following the agreement's steps and time limits and paying the termination fee.
Sources
Tracking AlphaBy Jera Value · Reviewed
Related terms
- Deal valueThe total value of the deal as the companies state it when they announce or revise it.
- ProtectionsSeven contract facts the list draws as dots, one per fact, so they can be compared down the column.
- HSRThe US antitrust review under the Hart-Scott-Rodino Act: the parties notify the FTC and the Justice Department and wait out a set period before they may close.
