M&A transactions typically involve costly and time-intensive processes, and for this reason parties often seek to limit completion risk by negotiating a termination fee. Indeed, the recent 2018 SRS Acquiom Deal Terms Study reveals that the use of termination fees in private M&A transactions doubled in 2017.

From 2012 to 2016, the use of termination fees remained relatively stable, with approximately 10% of private M&A deals including termination fees.[1] In 2017, however, the use of termination fees increased dramatically, with 21% of private M&A deals reportedly incorporating termination fees.[2]

Interestingly, the overall increase in the use of termination fees is attributable primarily to increased use of sell-side termination fees (fees a buyer agrees to pay in the event it terminates the deal). While use of buy-side termination fees increased from 2% of all deals in 2016 to 5% in 2017, this is less notable given that these particular fees has fluctuated between 2% and 5% since 2012.[3] The use of sell-side termination fees was similarly stable from 2012 to 2016, ranging from 4% to 7% of private M&A deals.[4] However, in 2017 the use of sell-side termination fees skyrocketed, with 14% of deals including such fees.[5]

The relatively stable use of buy-side termination fees indicates that acquirers continue to rely on termination fees to deter competing bids, but it appears this practice is not increasing to the same extent as the use of sell-side termination fees. Given this trend, acquirers should not be surprised to see more sell-side termination fees being implemented in private M&A deals.

The author would like to thank Brandon Schupp, summer student, for his assistance in preparing this legal update.

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[1] 2014 M&A Deal Terms Study, SRS Acquiom; 2016 M&A Deal Terms Study, SRS Acquiom; 2017 Deal Terms Study, SRS Acquiom.

[2] 2018 M&A Deal Terms Study, SRS Acquiom.

[3] 2014 M&A Deal Terms Study, SRS Acquiom; 2016 M&A Deal Terms Study, SRS Acquiom; 2017 Deal Terms Study, SRS Acquiom.

[4] 2014 M&A Deal Terms Study, SRS Acquiom; 2016 M&A Deal Terms Study, SRS Acquiom; 2017 Deal Terms Study, SRS Acquiom.

[5] 2018 M&A Deal Terms Study, SRS Acquiom.