Termination Fees

By Tom Taulli

In an uncertain economic environment, it should not be a surprise that M&A deals fall apart. In fact, this can be a virtual disaster, especially for the seller.

The seller spent lots of resources ñ in terms of time and money ñ in order to move the deal forward. Then again, the buyer has lost resources, as well as an opportunity for profit.

As a result, dealmakers will often negotiate termination fees in a merger agreement. There are many variations, of course.

Typically, a termination fee clause favors the buyer. It is meant to keep the deal on track and prevent the seller from being tempted to seek other offers.

The Offer Comes...

But what if a new buyer comes in with an offer? The sellerís board has a fiduciary responsibility to get the best value to its shareholders. To reject the bid could mean significant liability. However, by paying the termination fee, the seller can escape the liability and also provide value to shareholders.

For Delaware companies, a termination fee is really treated like liquidated damages. The damages must be difficult to ascertain and the fee must also be a reasonable estimate. What's more, the fee must not be a penalty.

The amount? It varies. But the range is usually between 1% to 5% of the total value of the transaction. So long as the fee appears to be compensation for out-of-pocket expenses, the courts are likely to uphold it.

MergerPlace is pleased to have the esteemed Mr. Tom Taulli as the managing editor of our MergerPlace M & A Advisor™ E-zine.

Tom Taulli is an expert in the M&A process. He is the author of the critically acclaimed The Complete M&A Handbook (Random House) as well as six other books written for publishers such as Bloomberg and McGraw-Hill. Tom also teaches M&A at the USC School of Business.

Tom has been quoted extensively in the press, including the Wall Street Journal, USA Today, Barron's, and The Los Angeles Times, and has provided commentary on CNBC, CNN, and Bloomberg TV, as well as appeared on a variety of top radio stations across the country.

Tom's books are available for purchase in our bookstore.

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