As the number of M&A deals has increased over the last several months, so it seems has the amount buyers are agreeing to pay for the right to walk away from those deals. Before the recent economic downturn, reverse termination fees were generally around three percent of the purchase price. Now, the trend is for buyers and sellers to agree to reverse termination fees of five to twelve percent of the deal’s value. For example, in May, Silver Lake Technology Management, L.L.C. and Warburg Pincus LLC agreed to a reverse termination fee of 6.7% of the purchase price in their acquisition of Interactive Data Corporation, and Thomas H. Lee Partners, L.P. has agreed recently to reverse termination fees of 5.0% and 6.0%, respectively, of target’s equity value in its deals to acquire CKE Restaurants, Inc. and inVentiv Health, Inc. Last month, Irving Place Capital agreed to a reverse termination fee of 12.5% of the purchase price in its acquisition agreement for Thermadyne Holdings Corporation.

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The United Kingdom’s Panel on Takeovers and Mergers has recently proposed amendments to its Takeover Code that would change the rules regarding hostile offers in order to correct what it called a “tactical advantage” for bidders. The Panel opined that it has “become too easy for ‘hostile’ [bidders] to succeed” and that “short-term” investors (i.e., those investors who buy shares of a target company during the offer period) have unduly influenced the outcome of these hostile offers.

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At a special meeting held on September 30, the shareholders of Dollar Thrifty voted against the proposed merger with Hertz, by a margin of approximately 8%. Hertz immediately announced that it had “started taking the necessary steps to cease activities related to the acquisition of Dollar Thrifty.” Avis, which has been in a bidding war with Hertz over the course of the summer for control of Dollar Thrifty, had most recently increased its offer to approximately $53 per share of Dollar Thrifty stock. Avis announced yesterday an intention to “diligently pursue antitrust clearance,” while commencing an exchange offer for Dollar Thrifty’s shares at the most recent offer price. Avis also offered publicly to include a $20 million reverse termination fee in a negotiated acquisition agreement with Dollar Thrifty, even though Avis had steadfastly refused to agree to such a fee in previous negotiations with the target. The merger agreement between Hertz and Dollar Thrifty included a reverse termination fee of $44.6 million. Dollar Thrifty announced its intention to continue evaluating other options while operating business as usual.

On September 23, Avis announced that it has again raised its offer for Dollar Thrifty, this time by raising the cash portion per common share by 12%. The new Avis bid price is valued at about $53 per share, for approximately $1.5 billion in aggregate. The current merger agreement between Dollar Thrifty and Hertz provides the Dollar Thrifty stockholders with about $50.25 per share. Hertz issued a press release on September 24 stating that its current price is its “best and final offer.”

In its press release, Avis was critical of the Dollar Thrifty board of directors, stating: “Dollar Thrifty’s Board continues to disappoint. Not only have they once again failed to engage in any discussions with Avis Budget prior to entering into the new binding agreement with Hertz, but they have also failed to use the renegotiation with Hertz as an opportunity to create a level playing field for all potential bidders.” Will the increased bid bring Dollar Thrifty back to the negotiating table, or perhaps back into the Delaware courts? Avis wrote in its press release that it “would be willing to offer an even higher price in the absence of the break-up fee that Dollar Thrifty’s Board has provided for in its agreement with Hertz.” Dollar Thrifty stockholders are currently scheduled to vote on the proposed merger with Hertz on September 30.

Deal termination fees have become increasingly common, particularly in negotiated private equity transactions. Both targets and acquirers should be aware of the federal income tax treatment of these payments.

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