DealLawyers.com Blog

Whatever you may think of the merits of RWI and other transaction insurance products, you can’t accuse the industry of being lacking when it comes to innovation. The emergence of Regulatory Termination Fee, or RTF, insurance is a great example of that. This product is designed to shift the risk of paying a reverse termination fee based on the failure to obtain regulatory approvals away from a buyer and onto the underwriters of an RTF policy.

While an RTF policy’s benefits to a buyer are significant, this White & Case memo notes that its use may significantly change the buyer’s incentives when it comes to the regulatory approval process:

If a buyer’s obligation to pay an RTF is eliminated from the equation or substantially reduced because the obligation is shifted to an insurer, the buyer’s incentive to obtain required regulatory approvals may be meaningfully reduced. This is particularly true because in most transactions (particularly those in which the buyer is a private equity firm or other financial buyer), in circumstances where the buyer is obligated to pay the seller or the target an RTF, the recovery of that RTF by the seller or target is usually the sole and exclusive remedy for the buyer’s breach of the transaction agreement.

Accordingly, if a buyer can obtain RTF insurance for the cost of the premium, and its only exposure in the event all required regulatory approvals cannot be obtained is the amount of the retention or deductible under the insurance policy, the buyer may be more likely to conclude that the economic and other costs of any required regulatory remedy or other action exceed the transaction’s economic and other benefits to the buyer.

While a retention or deductible under an RTF insurance policy will leave a portion of the RTF exposure with the buyer, this portion will usually be relatively small as a percentage of the amount of the RTF, and a competitive RTF insurance market will likely work in favor of buyers in this regard.

Although the memo notes that specific performance provisions may help keep the buyer’s feet to the fire, it says that because regulatory efforts clauses are often open to broad interpretation, it may be difficult to obtain an order that would allow a seller to obtain specific enforcement of such a clause.

– John Jenkins