Undressing the No-Vote Fee

A break-up fee payable by a public target company associated with a competing proposal is a near universal feature of public company sales. The fee is typically payable if the target exercises a fiduciary termination right to accept a superior proposal or in a “tail” situation where a competing proposal is completed during a set period after a termination of the current deal as a result of a no-vote of the target shareholders where a competing proposal had been made public prior to that vote. While the size of the fee varies based on deal-specific circumstances, recent studies show an average in the range of 3% of deal value.

M&A parties also often discuss the consequences of a straight no-vote by the target company shareholders in the absence of a competing bid — a so-called “naked” no-vote. These conversations have taken on more practical relevance with the increase in activists seeking to disrupt M&A transactions — a recent study showed 18 different U.S. deals challenged in the first half of 2019.

Increased activist opposition to deals has sharpened the focus on fees and expense reimbursements payable in the event of a “naked” no-vote by target shareholders.

Here the prevalence of a set break-up fee payable by the target is more limited. Deal studies show such a fee being used in a relatively small number of deals; instead, it is more common (roughly one-third of deals) to have a capped expense reimbursement in favor of the jilted suitor ranging anywhere from a few million dollars to tens of millions depending on deal size. The set fee and expense reimbursement constructs produce some interesting contrasts. The pending Google/Fitbit transaction includes a fee of 1% of deal value payable on a no-vote ($20 million). By comparison, the recently closed Celgene acquisition had a capped expense reimbursement of nearly double that amount — $40 million — but representing only about 1/20 of 1% of the deal value.

The hesitation to mandate a significant termination fee in this circumstance is usually attributed to sensitivity about the fiduciary implications and coercive impression of incurring a significant fee obligation arising from the target’s shareholders simply exercising their right to vote against the proposed sale.

While there is a long line of cases on the acceptable amount of traditional superior proposal break-up fees, the case-law on naked no-vote fees or expense reimbursements is much more limited. The primary Delaware case on the issue is the 2008 Lear decision where then-Vice Chancellor Strine approved a naked no-vote fee of 0.9% of deal value. Notably, the fee in the Lear case was added to the deal in the context of a post-announcement price bump, which may have influenced the court’s views on the propriety of the fee. And in a bit of trivia, the fee was actually paid by Lear when its shareholders voted down the Icahn acquisition in a rare naked no-vote.

It is worth noting that the no-vote fee discussion and the associated fiduciary questions also are relevant when a buyer vote is required because of the size of the acquirer’s share issuance. While buyer shareholder approval historically was viewed as almost a foregone conclusion, recent activist-driven challenges to buyer shareholder votes have resulted in more focus on the vote risk and the consequences of a failure.