There are always a lot of issues to keep in mind when negotiating termination fees, including most prominently the size of the fee, whether it is calculated by reference to enterprise or equity value, and the circumstances that will give rise to an obligation to pay the fee. This Debevoise article reviews current market practice surrounding termination fees and reverse termination fees. This excerpt addresses some things to keep in mind when negotiating the size of the fee:
Equity value is the typical metric, though there may be circumstances that warrant looking at enterprise value too. Relating the size of the break-up fee to equity value is the most common approach. However, the Delaware Court of Chancery in Lear and later in Cogent acknowledged that relating the fee to enterprise value could also be appropriate for transactions with highly leveraged targets, because most such acquisitions require the buyer to pay for the company’s equity and refinance all of its debt.
The typical size of termination fees is in the 2.0% – 3.5% range. Generally speaking, the most common range for termination fees is between 2.0% and 3.5% of equity value though negotiations may result in a termination fee outside of this range. In Houlihan Lokey’s most recent termination fee study, the smallest termination fee observed was 0.2% and the largest was 6.0%.6 The Delaware Court of Chancery has mentioned, while declining to decide the issue of whether a termination fee was coercive, that a 6.3% termination fee “seems to stretch the definition of range of reasonableness.” The average termination fee for deals announced in 2024 was 2.4% of equity value, slightly down from 2.5%, 2.7% and 2.9% in 2023, 2022 and 2021, respectively.
But, there is no bright-line test for reasonableness. Delaware courts have been clear that a purely formal, mechanical view based on percentage is not sufficient and there is no percentage that is per se acceptable. The reasonableness of the size of the termination fee will necessarily be informed by the specific deal dynamics. A target company board should take the same approach when assessing a termination fee proposal from a buyer.
The article notes that the reasonableness of a particular fee needs to be assessed holistically based on the facts and circumstances surrounding the deal, including the negotiating history, the parties’ relative negotiating strength, and the economic effect of other deal protection features, such as expense reimbursement obligations.
With the new HSR form imposing greater burdens on filers, companies may want to consider the advice in this Akerman memo, which outlines steps that companies can take in the ordinary course of business to ease the compliance burden. This excerpt offers some suggestions on managing and generating information about competitors, customers, and suppliers:
It is recommended that any list or comparison of competitors should include at least four competitors or should include a disclaimer that makes it clear that the competitors are examples and are not intended to be a comprehensive list of competitors.
When preparing an HSR filing for a transaction that involves competitors, the filing parties will be required to provide their top 10 customers. It is helpful to have an updated list of complete names and contact information for these top 10 customers.
Similarly, when preparing an HSR filing for a transaction that involves entities at different points of the same supply chain, the filing parties will be required to provide their top 10 customers and/or top 10 suppliers. It is helpful to have an updated list of complete names and contact information for these top 10 customers and customers.
The memo also has recommendations on data gathering and management practices for information about officers and directors, minority shareholders, prior acquisitions, revenue allocations based on NAICS codes, and plans or reports that analyze market shares, competition, competitors, or markets.
We’ve posted the transcript for our “2025 DGCL Amendments: Implications & Unanswered Questions” webcast. Our panelists – Gibson Dunn’s Julia Lapitskaya, Morris Nichols’ Eric Klinger-Wilensky, and Hunton Andrews Kurth’s Johnathon Schronce – provided their insights into this year’s controversial DGCL amendments. Topics addressed included an overview of the amendments, their implications for transactions with insiders, their impact on the books and records demand process, and some of the unanswered questions raised by the amendments.
Here’s a snippet from Eric Klinger-Wilensky’s comments on how these changes may influence the approach to preparing board and committee minutes addressing a potential transaction covered by the safe harbors:
I think you’re going to see more focus on, have there been sufficient allegations that the board or committee did not act in good faith or without gross negligence? I will tell you, we as a firm, I think, have a bunch of committees going on now, and I’m erring on the side of putting more in the minutes to really demonstrate everything the committee did. Probably would’ve been in the minutes anyhow but maybe a little bit more detail to talk about what the committee looked at.
Members of this site can access the transcript of this program. If you are not a member of DealLawyers.com, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
The Department of the Treasury’s Outbound Investment Security Program (OISP) — which became effective in January and requires notifications for or prohibits certain U.S. investments in Chinese companies — is now being actively enforced. Treasury inquiries have begun despite suggestions of reform in the America First Trade Policy memorandum and Bloomberg’s recent report that Treasury Secretary Scott Bessent spoke with Congress about developing clear outbound investment rules for China. Here’s more from this Cooley alert:
Treasury has been actively monitoring transactions for potential OISP violations and has begun reaching out to US investors that may have participated in a prohibited or notifiable transaction in violation of the OISP’s complex regulations. In just the first week of May, we have seen early OISP enforcement outreach, with Treasury sending multiple enforcement inquiries to US investor clients suspected of involvement in transactions implicating the OISP regime. […]
For those acquainted with the CFIUS post-closing (i.e., “non-notified”) inquiry regime, the OISP enforcement outreach regime will seem familiar. Indeed, the three-person team at Treasury administering the OISP enforcement regime are former CFIUS officials with deep experience in cross-border transaction dynamics. Additionally, the OISP team operates under the same management umbrella as CFIUS within Treasury’s Office of Investment Security.
The alert says that transacting parties need to consider OISP — even when an investment target doesn’t have obvious connections to China — and despite expectations that the OISP will change in the future. The memo says changes “are likely to broaden the scope of the OISP to cover additional technologies and industries (i.e., beyond the currently covered semiconductor, quantum computing and AI sectors)” but will hopefully also include more explicit “definitions and guardrails for transaction parties.”
Last week, the Office of the Comptroller of the Currency (OCC) issued an interim final rule governing the OCC’s review of business combinations involving national banks and federal savings associations under the Bank Merger Act that will be effective immediately upon publication in the Federal Register. The interim final rule both amends the changes to the review process finalized last September and rescinds the policy statement released simultaneously.
This Davis Polk alert explains in detail why the result of the interim final rule is that “what’s old is new again,” including the availability of streamlined application and expedited processing:
The OCC’s streamlined BMA application and expedited processing will now be available again in four limited situations:
─ Transactions between (1) an eligible bank or eligible savings association and (2) one or more eligible banks, eligible savings associations, or eligible depository institutions, where the target’s assets are no more than 50% of the acquirer’s total assets;
─ Transactions where (1) the acquirer is an eligible bank or eligible savings association, (2) the target bank or savings association is not an eligible bank, eligible savings association, or an eligible depository institution, and (3) the filers obtain prior OCC approval to use the streamlined form;
─ Transactions where (1) the acquirer is an eligible bank or eligible savings association, (2) the target bank or savings association is not an eligible bank, eligible savings association, or an eligible depository institution, and (3) the total assets to be acquired are no more than 10% of the acquirer’s total assets; and
─ Certain mergers of a national bank with one or more of its nonbank affiliates, where the filers obtain prior OCC approval to use the streamlined form and the total assets acquired are no more than 10% of the acquirer’s total assets.
In each case, the resulting bank or savings association must be well capitalized.
Last week, the Department of the Treasury announced that it intends to launch a pilot program for a fast-track CFIUS process. Here’s more from the short announcement:
This process will include the launch of a Known Investor portal where the Committee on Foreign Investment in the United States (CFIUS), chaired by Treasury, can collect information from foreign investors in advance of a filing. Initially, Treasury will conduct a pilot of this process and build from it over time.
Pursuant to the President’s directive in the America First Investment Policy, Treasury is focused on increasing efficiencies in the CFIUS process to facilitate greater investment from allies and partners where there is verifiable distance and independence from foreign adversaries or threat actors.
I haven’t seen any indication of when the pilot program will kick off. Stay tuned!
As I shared in late April, the recent Delaware Supreme Court decision in Thompson Street Capital Partners, IV v. Sonova (Del. Sup.; 4/25) serves as an important reminder that failing to comply with indemnification claim notice requirements could potentially result in forfeiture of indemnification if the merger agreement so provides. This Fried Frank briefing suggests some drafting changes to standard indemnification notice provisions that parties may want to consider after Thompson. Here are a few:
A party who seeks to ensure its ability to enforce indemnification claim notice requirements (typically a priority for sellers) should consider negotiating for the parties to set forth in their agreement that:
noncompliance with the notice requirements will result in forfeiture of the indemnification right;
the notice requirements are a material part of the agreement; and
forfeiture of the indemnification right due to noncompliance with the notice requirements will not cause a “disproportionate forfeiture” excusing the noncompliance.
Buyers in particular should seek to ensure that the drafting provides sufficient flexibility in the event it lacks sufficient information by the deadline for notice to include details with respect to the claim.
Drafters should make clear the relationship between the indemnification claim notice provisions in the merger agreement and any escrow agreement. Where, as is typical, the merger agreement incorporates an escrow agreement, the agreements will be read as one unitary contractual scheme, requiring compliance with the provisions in both agreements. Drafters therefore should seek to ensure that the provisions are not inconsistent, or should make clear that certain requirements apply only for the escrow agreement notice and others apply only for the merger agreement notice. A seller should consider including an express statement that the requirements in both agreements will be applicable.
It also provides some suggestions for putting together the required notices:
Merger agreement parties should be careful to avoid technical non-compliance or foot-faults with respect to indemnification claim notice provisions. Buyers and sellers should seek to comply strictly with the timing, content, and process requirements specified in their agreement.
If the agreement requires that the notice include written materials substantiating the claim, written materials should be provided with the notice even if the claimant’s investigation has not been completed.
Where there may be confidentiality concerns about providing certain materials, the claimant should consider providing materials with redactions (even if substantial), rather than not providing them at all. Further, not only should indemnification notice provisions be drafted carefully, but so too should the indemnification claim notices themselves.
It is generally a good practice to track in the notice the precise language of the notice requirements—for example (although not an issue in Thompson), if the agreement requires that the notice state what damages the party will incur, the party should not state in its notice that it may incur the following damages.
An indemnification claimant should consider what evidence exists as to when it became aware of the underlying breach. If the merger agreement requires (as in Thompson) that the buyer provide notice within a timeframe after becoming aware of a breach, the buyer should consider whether contemporaneous emails or other communications may establish or suggest when the buyer first became aware of the breach.
In the final rule, the SEC asserts “that the structured data requirements will enhance the usability of the SPAC disclosures. These structured data requirements will make SPAC disclosures more readily available and easily accessible to investors and other market participants for aggregation, comparison, filtering, and other analysis.” The new disclosures are unique to the SPAC and de-SPAC business structure and will require new XBRL elements (the tagging labels applied to specific disclosures).
The tagging varies from narrative disclosures which require block text tagging to numeric or qualitative data which requires detailed tagging. The SEC will propose and implement a new taxonomy to define these elements. Once final, the SEC will post the new SPAC taxonomy ahead of the June 30, 2025 tagging deadline to ensure filers and their service providers have time to prepare for Inline XBRL tagging.
Tagging of the new prospectus disclosures will be required beginning with a SPAC’s IPO filing (i.e. an S-1 or F-1 filing). This is a significant change in existing tagging requirements. Previously, every corporate IPO was exempt from tagging. Every registration statement in the SPAC process will require tagging, except for any S-4 or F-4 filed by the private target.
The taxonomy update referenced above was released on March 17.
Delaware law has long been the default option when it comes to the law governing acquisition agreements. However, with the Lone Star State making a full court press to replace Delaware as the nation’s preferred jurisdiction of incorporation, parties to acquisition agreements may eventually face calls for their agreements to be governed by Texas law. This Gibson Dunn memo reviews some of the similarities and differences between Delaware and Texas law when it comes to key issues in acquisition agreements. This excerpt points out that one area where the two states may part company is the topic of “sandbagging”:
In Texas, practitioners commonly state that reliance on the seller’s representations is required for a buyer to bring a claim for indemnification. In other words, the buyer’s knowledge does matter if the contract is silent with respect to the buyer’s ability to recover for breaches of which it had pre-closing knowledge.
The policy behind this approach is that the buyer did not rely on the representation to its detriment by closing the transaction if the buyer knew the representation was false prior to closing. However, the case law in Texas addressing sandbagging is less than clear. While there is nothing in the case law suggesting that Texas follows Delaware’s view, there is not a modern case specifically accepting the proposition that the “default” in Texas is that pre-closing knowledge matters in the context of sandbagging.
Parties to agreements governed by either Delaware or Texas law can include contractual provisions specifically allowing or disallowing sandbagging. But if Texas governing law applies, it would be particularly advisable to allow or disallow sandbagging explicitly rather than remaining silent because there is some uncertainty in how Texas courts would address the issue.
Other areas addressed by the memo include non-reliance clauses, MAE provisions, lost premium damages, successor liability, and statutes of limitations.
We’ve recently posted another episode of our “Understanding Activism with John & J.T.” podcast. This time, J.T. Ho and I were joined by FGS Global’s John Christiansen. We spoke with John about a variety of topics, including how investor relations and shareholder engagement are being shaped by the need to prepare for shareholder activism. Topics covered during this 24-minute podcast include:
– How the recent 13D/13G CDIs have changed investor engagement practices.
– The increasing importance of retail investor engagement.
– The challenging M&A market’s impact on activism.
– How current economic uncertainty is affecting operational activism.
– “Break the glass” plans and how to use them effectively
– Using earnings calls and investor days to defend against activism
– Tips on better communicating the company’s story to investors
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We continue to record new podcasts, and they’re full of practical and engaging insights from true experts – so stay tuned!