A simple failure by the seller’s shareholders to approve the deal is an unusual termination fee trigger. In fact, according to the latest ABA Deal Points survey, this so-called “naked no vote” trigger appears in fewer than 3% of public deals. But it does appear in the merger agreement for one of this year’s more high-profile transactions, Google’s pending $2.1 billion acquisition of Fitbit.
Section 8.01(b)(ii) of the merger agreement gives either party the right to terminate if “the Requisite [Fitbit] Stockholder Approval shall not have been obtained at the Company Meeting or at any adjournment or postponement thereof, in each case, at which a vote on such adoption was taken.” In turn, Section 8.03(a)(ii) provides that “If, but only if, this Agreement is terminated by either [Google] or [Fibit] pursuant to Section 8.01(b)(ii), the Company shall pay, or cause to be paid, to Parent or Parent’s designee(s), as the case may be, an amount equal to $21,000,000 (such amount, the “No Vote Fee”).
One thing worth noting here is that the size of the No Vote Fee is much smaller than the size of the termination fee otherwise payable under the more customary triggers found in the agreement. The No Vote Fee represents about 1% of the deal’s equity value, while the termination fee payable in other situations represents about 3.8% of its equity value.
The No Vote Fee raises a couple of questions. The first one is – does this pass muster in Delaware? There’s certainly a risk that, in some situations, a deal protection like this might be viewed as unduly coercive, but a naked no vote termination fee trigger has been upheld by the Delaware Chancery Court in at least one case, based upon the Court’s assessment of the strength of the sale process. In re Lear Corp. Shareholder Litigation,(Del. Ch.; 9/08).
The second question is the more interesting one – namely, why did the parties agree to the No Vote Fee? My guess is that it may have had a lot to do with the fact that, as described in the “Background of the Merger” section of Fitbit’s preliminary proxy statement, Google had formidable competition for the deal – in the form of a perhaps not so mysterious bidder identified in the proxy as “Party A.” That competing bidder may have been unsuccessful in its bid to buy Fitbit, but it was extremely successful in driving up the price Google had to pay to get the deal.
My suspicion is that this competition & the uncertainty about whether the parties have heard the last from Party A may help explain both Google’s insistence on the No Vote Fee & the relatively large size of the termination fee payable in other circumstances. From Fitbit’s perspective, the results of the sale process, which saw Google raise its bid from $4.59 per share to $7.35 per share, as well as the fact that the size of the No Vote Fee approximated the size of the naked no vote fee that passed muster in the Lear case, may have made it comfortable in agreeing to pay such a fee.
The No Vote Fee isn’t the only interesting termination fee potentially payable under the merger agreement. There’s also a whopping $250 million reverse termination fee that comes into play if the deal doesn’t receive antitrust clearance. (Section 8.03(b)). That fee represents 12% of the deal’s equity value, and is 4x higher than the 3.1% median strategic buyer reverse termination fee set forth in the latest data from Houlihan Lokey.
Of course, all of the tech giants are under intense antitrust scrutiny right now, & this deal doesn’t include the kind of “hell or high water” covenant sometimes seen in deals where significant antitrust problems are anticipated, so those factors likely had a lot to do with the size of the reverse termination fee.
– John Jenkins