OPTIONALITY IN MERGER AGREEMENTS

The credit crisis of 2008 and the subsequent collapse of a number of high-profile acquisition transactions put a spotlight on contracting practices that embedded optionality into merger agreements by way of the reverse termination fee and its attendant triggers. This article examines whether reverse termination fees are a symmetrical response to the seller's judicially-mandated fiduciary termination right and whether such fees represent an efficient transactional term. Where courts require seller termination rights, it is possible that buyers might attempt to negotiate symmetrical "optionality" for buyers elsewhere in the merger agreement. Using a sample of 644 acquisitions from 2003 through 2008, which includes 105 transactions where strategic buyers negotiated a reverse termination fee, this article provides an empirical account of the use of reverse termination fees by strategic buyers. The results of this study provide some guidance to courts as they are asked to assess the viability of reverse termination fees and the degree of optionality embedded in the modern merger agreement.