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Reverse Break-up Fees in Strategic M&A Transactions

By Uri Litvak

Reverse break-up fees, also known as reverse termination fees (RTFs), became more widely adopted as deal risk allocation mechanisms in the M&A context as part of the wave of contractual innovation that took place in the aftermath of the last financial crisis. In light of recent case law in this area and the prospect of another economic downturn in the years ahead, RTFs deserve a fresh look. This article analyzes: 1) the pros and cons of an RTF tied to a breach by a buyer or the inability of a buyer to secure financing; 2) whether RTFs are truly enforceable by a target seller; and 3) what all this means in terms of target and buyer board members' fiduciary obligations.

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