Reverse termination fees and specific performance have become must-face topics in M&A and PE deals. This is particularly true when the buyer is a private equity sponsor raising debt financing to fund a portion of the purchase price. In these circumstances, the parties need a way to allocate risk if the debt financing fails to materialize. For a full appreciation of the topic, watch the companion Dealology video on equity commitment letters and guarantees.
- Reverse termination fees are post-termination fees that a buyer may be obligated to pay a seller if a deal fails to close because, among other things, debt financing fails to materialize. In this video, we discuss triggers for when the fee becomes payable, the amount of and purpose behind the fee, whether the fee serves as an ultimate cap vs. damages being available on top of the fee and whether the fee provides the buyer with an option on closing the deal.
- Specific performance is a pre-closing termination remedy pursuant to which a seller can force a buyer to close. We touch on the flavors and types of specific performance and address the widely accepted construct where a seller can force a buyer to draw down on its equity commitment letter from the PE sponsor and close the deal if 1) the buyer’s closing conditions have been satisfied, 2) the seller and target company are ready, willing and able to close and 3) the debt financing is available.
This video brings clarity to these cumbersome topics and lays out the constructs to appreciate when facing these issues in deal negotiations.