The quickie divorce option in the market is becoming increasingly intricate and expensive.

• In the event that M&A deals fail due to regulatory issues, buyers are typically obligated to pay a reverse termination fee.
• The percentage of deal value that these fees represent has been increasing recently, partly because of increased regulatory oversight from the Department of Justice and Federal Trade Commission.
• The Discover Financial-Capital One deal is noteworthy because it does not include termination fees if regulators put an end to the deal, reflecting a shift in breakup fee negotiations between buyers and sellers.

Companies must pay more attention to risk management when planning mergers and acquisitions due to increased scrutiny from regulators.

A widely used corporate M&A prenup strategy that may become increasingly significant in the future is the implementation of break-up fees, also known as termination fees. These fees, which are paid by the buyer, seller, or both, help compensate either party for a failed deal. Merger agreements specify when these fees are due, who is responsible for paying them, and under what conditions.

Buyers are frequently obligated to pay reverse termination fees when deals fall apart due to regulatory issues. These fees, which aim to compensate sellers for expenses and other risks associated with a failed deal, have been increasing in recent years as a result of a more challenging regulatory environment.

According to Jeane A. Thomas, a partner with Crowell & Moring who specializes in antitrust matters, even companies that are relatively optimistic about securing regulatory approval are taking precautions against the possibility that they won't. In recent years, companies have been granting reverse termination fees, extending timelines, and allowing for more extensions than before, Thomas explained.

Not all deals include break-up fees for regulatory failures. For example, the $35.3 billion all-stock deal between and has a $1.38 billion break-up fee, payable by either party under certain circumstances, such as alternative acquisition proposals or changes in the recommendation of the other party's board of directors. However, the agreement does not include payment for regulatory barriers.

In 2021, Visa's agreement with Plaid fell through due to regulatory issues, resulting in no break-up fees owed by either company.

Over half of deals in recent years have included reverse breakup fees, according to a 2022 study by investment bank Houlihan Lokey. The study found that 57.1% of the 140 transactions reviewed had reverse breakup fees, with median fees of 4.2% as a percentage of transaction value. This is compared to 58.1% of the 179 transactions reviewed in 2021, which had median fees of 3.7% as a percentage of transaction value.

A changed calculus on 'anticompetitive'

The review of mergers in technology, pharmaceuticals, banking, energy, and other sectors by regulators has been intensified, increasing the likelihood of a deal being rejected. Additionally, the Federal Trade Commission and Department of Justice's antitrust division released a draft of merger guidelines last summer, which includes 13 points for the agencies to use when evaluating mergers. This means that the regulators have put up an additional roadblock for greenlighting deals.

The new guidelines lower the thresholds at which mergers would be deemed presumptively anticompetitive, according to Pitchbook's report.

The regulatory regime is expected to remain strict, at least until after the election, if President Biden remains in office, according to industry participants. Laura Born, an adjunct professor of finance at the University of Chicago Booth School of Business, stated that the hostile environment for deal-making is due to the politics and the difficulty in getting deals approved.

Regulators worldwide may have different opinions on a particular issue, as Tom Barkley, a professor of finance practice at the Martin J. Whitman School of Management at Syracuse University, pointed out.

In this regulatory environment, some sellers may have multiple reasons to be cautious, so it's important to ask for a higher break-up fee as protection. As Corey Roush, partner at Akin Gump Strauss Hauer & Feld, who co-leads the firm's antitrust practice, said, "If you're representing the seller, I think you have a good argument to say, 'We can't assume anything here and therefore we want a reverse termination fee.'"

Roush has observed that some buyers who previously refused to negotiate a reverse termination fee are now more open to discussing a small fee. This is because buyers are concerned that the seller may be willing to accept a lower bid in exchange for more deal certainty.

Prenup costs among the market's biggest companies

In recent years, the reverse termination fees as a percentage of deal value for deals that failed regulatory approval have been between 1.5% and 6.5%, according to Mergermarket's M&A data.

In recent years, several large corporations have paid reverse termination fees after encountering regulatory obstacles. For instance, recently abandoned its bid to acquire iRobot, paying a $94 million break-up fee, which was 6.71% of the deal value, according to Mergermarket data. Similarly, called off its deal with Figma and paid the company a $1 billion break-up fee, which was 5% of the deal value, Mergermarket data show. Additionally, 's $24.6 billion acquisition of , which has faced regulatory scrutiny, carries a $600 million reverse break-up fee if the deal fails.

Financial experts suggest that it is unlikely for most sellers to waive fees such as those charged by Capital One-Discover Financial and Visa-Plaid, especially given the uncertain regulatory climate. However, it would be appropriate for a seller to request a small expense reimbursement for costs and time, especially as deals tend to take longer due to regulatory scrutiny, said Chip MacDonald, a financial services attorney with MacDonald Partners.

MacDonald stated that a minimum expense reimbursement is appropriate after their $13.4 billion deal flopped for regulatory reasons, as evidenced by their $225 million payment.

There's no one, good way to break up

It's possible that some future sellers may choose to waive reverse termination fees.

MacDonald stated that the deal is so promising, or the parties are so confident in its success, that they do not require additional safeguards.

Some sellers may be open to paying a higher price without a reverse termination fee, according to Barkley. A buyer might offer $35.3 billion instead of $35 billion. Although it's still a risk for sellers, some companies might be willing to take it, he said.

If a seller lacks the ability to negotiate for a reverse termination fee, it may be due to a major compliance issue. On the other hand, a buyer may not agree to a reverse termination fee if there are formal actions against the seller that could delay the deal.

The regulatory landscape is becoming more uncertain, and both buyers and sellers must prepare for it.

Drew Pascarella, a senior lecturer of finance at the SC Johnson Graduate School of Management at Cornell University, stated that even with the best efforts, a transaction may not be successful. This is because the outcome is beyond the control of both the buyer and seller, which may result in more merger agreements including termination fees for lack of regulatory approval.