January 7, 2020

Termination Fees: An Overview of the “Naked No Vote” Fee

Last month, I blogged about the inclusion of a so-called “naked no vote” termination fee in the merger agreement for Google’s pending acquisition of Fitbit. At the time, I pointed out that this is a fairly unusual provision – and one that the Delaware courts haven’t provided much guidance on.

That lack of guidance makes this recent Kirkland & Ellis memo reviewing the naked no vote fee concept a very helpful resource.  Here’s an excerpt addressing the rationale behind such a fee & the reasons for the relatively small size of a typical naked no vote fee:

M&A parties also often discuss the consequences of a straight no-vote by the target company shareholders in the absence of a competing bid — a so-called “naked” no-vote. These conversations have taken on more practical relevance with the increase in activists seeking to disrupt M&A transactions — a recent study showed 18 different U.S. deals challenged in the first half of 2019.

Here the prevalence of a set break-up fee payable by the target is more limited. Deal studies show such a fee being used in a relatively small number of deals; instead, it is more common (roughly one-third of deals) to have a capped expense reimbursement in favor of the jilted suitor ranging anywhere from a few million dollars to tens of millions depending on deal size. The set fee and expense reimbursement constructs produce some interesting contrasts. The pending Google/Fitbit transaction includes a fee of 1% of deal value payable on a no-vote ($20 million). By comparison, the recently closed Celgene acquisition had a capped expense reimbursement of nearly double that amount — $40 million — but representing only about 1/20 of 1% of the deal value.

The hesitation to mandate a significant termination fee in this circumstance is usually attributed to sensitivity about the fiduciary implications and coercive impression of incurring a significant fee obligation arising from the target’s shareholders simply exercising their right to vote against the proposed sale.

The memo also points out that it isn’t just buyers that should consider the need for some sort of protection against a negative shareholder vote – with the rise of M&A activism, this is an issue that also should be considered by a seller in any transaction that’s subject to approval from buyer’s shareholders.

John Jenkins