Matt Levine had another great column the other day in which he discussed the recent renegotiation of Thoma Bravo’s proposed acquisition of Anaplan & bemoaned the fact that regular players in M&A are frequently able to leverage concessions from targets even if their arguments that the target breached its obligations under the merger agreement are fairly tenuous. That led him to muse about a possible renegotiation of the terms of the Twitter deal in case the board caves to Musk.
Matt suggested that, in exchange for the price reduction that Musk is obviously looking for, Twitter could tighten up the deal and dramatically increase the pain Musk would feel if he tried to retrade yet again. Specifically, Matt referenced the following changes:
1. Give Elon a lower price. (Preferably not $42: Anaplan agreed to a 3.4% discount, big enough for the buyer to feel like it got something, but small enough not to be a disaster for the board.)
2. More or less waive all other closing conditions — you get one renegotiation, but then you have to close no matter what.
3. Increase the breakup fee to, like, $20 billion
The idea of requiring a buyer to waive all closing conditions in response to price concessions isn’t a novel idea – in fact, the Simon/Taubman & LVMH/Tiffany renegotiations contained similar provisions. The size of the reverse breakup fee is pretty novel though, and Prof. Dave Hoffman tweeted that a court might conclude that it’s an unenforceable penalty clause. Some other pretty distinguished academics weighed in with their views on the penalty issue and, because what I lack in knowledge I make up for in self-confidence, I did too.
I suggested that there are arguments supporting the conclusion that even a reverse breakup fee that gigantic shouldn’t be regarded as a penalty. First, the way the Delaware Supreme Court approached the penalty issue in Brazen v. Bell Atlantic, (Del. 5/97), left open the possibility that if the parties in that case hadn’t characterized their breakup fee as liquidated damages, the Court might have avoided the penalty issue entirely and simply deferred to the board’s business judgment in agreeing to it.
Admittedly, a lot of water has gone under the bridge about deal protections since that decision, and it’s pretty clear that a target board granting a breakup fee would have to jump through the Unocal hoops before a Court would defer to its business judgment. That might be pretty tough with a breakup fee of this size – but this isn’t a breakup fee, it’s a reverse breakup fee.
That matters, because Unocal isn’t implicated when the pound of flesh comes out of a financial buyer’s skin, and as a result reverse breakup fees have on occasion been much larger than the 1%-3% of deal value range typical in the breakup fee context. On Twitter, I mistakenly said that the Kraft-Heinz deal had a 14% breakup fee, but Daniel Rubin bailed me out with a laundry list of major deals that had reverse breakup fees well north of that percentage.
Finally, as Prof. Albert Choi recently pointed out, there’s potentially another reason why a reverse termination fee like this shouldn’t be viewed as involving a penalty – and it comes straight from the hornbook:
According to the Restatement (Second) of Contracts, “damages for breach by either party may be liquidated in the agreement….” But, an important condition here is that the liquidated damages must be for “breach” of contract. If the contract expressly allows one party to terminate the contract and also collect a termination fee, it is not entirely whether a “breach” has occurred.
A true breach happens presumably when one party does not abide by the terms of the agreement, for instance, when one party attempts to terminate a contract even in violation of the express terms of the contract. Since the primary goal of a merger agreement is to execute a merger, a termination fee could be thought of as setting up an alternative performance obligation for the target.
Prof. Choi suggests that if the fee isn’t liquidated damages, then the penalty restriction wouldn’t apply. In that case, “unless other problems, such as conflicts of interest by the directors and the managers, are present, a termination fee would only be subject to a deferential business judgment review under corporate law.”
– John Jenkins