The Agency Costs of Sellside Deal Protection: An Empirical Analysis of Reverse Termination Fees

This paper empirically examines what corporate governance, financial and transaction variables lead target companies to negotiate for reverse termination fees (RTFs) in mergers and acquisitions. RTFs, which must be paid by buyers if they walk away from a merger, are used by target companies to reduce transaction uncertainty. We examine 1518 merger agreements for the period from 2010 to 2019, and find that 44.86 percent of these transactions included RTFs. First, we find that larger and more mature target companies with higher market capitalizations and lower cash ratios are more likely to successfully negotiate for RTFs. Second, the presence of a controlling shareholder increases the size of an RTF and ensures it is “efficiently” priced, suggesting that these actors play a monitoring role. Third, targets with dual class stock are less likely to efficiently price RTFs. Finally, deals with private equity acquirers are more likely to feature RTFs, and these RTFs are larger and more efficiently priced. These findings have implications for practitioners involved in crafting deal protection mechanisms, as well as Delaware courts considering how to view RTF provisions in merger litigation.