in negotiated mergers & acquisitions (M&A) transactions, it is
customary to incorporate various types of deal protection devices in order to
guard against a scenario where the deal falls through before it is completed
and parties have in the meanwhile invested significant time and incurred costs.
Two such deal protection devices that operate almost conversely are break fees
and reverse break fees. They are also known respectively as termination fees and
reverse termination fees.
these two specific deal protection devices as well as their description are set
As for break fees:
break fees are arrangements between a potential bidder and target company,
under which a fee is payable to the potential bidder if a specified event
occurs which prevents the transaction from completing. Break fees are intended
to operate as an incentive on the parties to ensure that the transaction goes
ahead as the payment of the break fees would have lowered the value of the
target company to the rival bidder.
discussion thus far has been restricted to break fees which are agreed to be
payable by the target. Are there situations where the bidder agrees to pay a
break fee for terminating a transaction? In the US, the agreement by the bidder
to pay such a fee is known as a reverse break fee. During the private equity
boom, between 2005 to 2007, where sale processes were competitive and financing
become more readily available, private equity sponsors excluded the financing
condition and in its place, they guaranteed to provide a specified sum
(normally approximately 3% a percentage of the deal value) if there is a breach
of contract on the part of the acquisition vehicle (including failing to close
due to the absence of financing). The reverse break fee was later evolved by
parties to allow the bidder to have complete optionality in deciding to go
ahead with the deal subject to payment of such fee.
increasing importance of such deal protection devices, especially the reverse
break fee, they have recently been subjected to academic analysis. In Transforming
the Allocation of Deal Risk Through Reverse Termination Fees, Professor
Afra Afsharipour conducts a detailed empirical study of reverse termination
fees, and in The
Validity of Deal Protection Devices under Anglo-American Law, Professor Wan
Wai Yee examines the legal aspects and the enforceability of these relatively
novel contractual arrangements.
protection devices were not common on Indian deals, they are making their
presence in more recent ones. On the outbound side, the Apollo-Cooper deal
carried both a break fee as well as a reverse break fee, as discussed here.
Although the deal fell through, it was mired in litigation and given the
disputed circumstances in which the termination occurred, the question of
payments remains unclear. The presence of deal protection devices in this deal
is understandable given that the target was a U.S. company.
reverse break fees are also making their way into inbound deals.
informed (thanks to a young corporate lawyer in Mumbai) that the reverse break
fee arrangement was present and invoked in the deal involving the failed
acquisition of two Jaypee power plants by a consortium led by Abu Dhabi
National Energy Co. PJSC, or Taqa. The deal size was Rs. 9,689 crore and the
reverse break fee was around Rs. 54 crore ($9 million). Since the acquiring
consortium withdrew from the deal, the reverse break fee would have become payable,
subject of course to the detailed contractual arrangements between the parties.
It is a different matter that soon thereafter the power plants become the
subject matter of another
possible risk of failure to close transactions, it is likely that such deal
protection devices will become more common in India, both on inbound and
outbound deals. Perhaps a market practice might have to develop regarding the types
of arrangements, the quantum of amounts involved, and the like. More
importantly, some attention may have to focus on the legal viability and
enforceability of these arrangements under Indian law. Finally, if such
arrangements become common in transactions involving public takeovers, it may
be necessary to consider their impact under the SEBI Takeover Regulations.
Wai Yee & Umakanth Varottil, Mergers
and Acquisitions in Singapore: Law and Practice (Singapore: LexisNexis,
2013), Chap. 8.
Code in the UK as well as the Takeover Code in Singapore expressly stipulate
the extent to which break fees or similar inducement arrangements are