On October 5, 2010, in In re Cogent the Delaware Court of Chancery denied plaintiff stockholders’ motion for a preliminary injunction seeking to halt the proposed friendly two-step acquisition of Cogent, Inc. by 3M Company. The court found that the Cogent board had not violated its Revlon duties, provided clarity on the appropriate calculation of termination fees, and provided comfort that top-ups may be used to accelerate the time required for closing.

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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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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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On June 3, 2010, Prudential plc announced the termination of its agreement to acquire AIG’s subsidiary AIA Group Limited. Prudential had proposed to reduce the purchase price from the original $35.5 billion to $30.375 billion due to the “significant falls in the markets” and management’s agreement “with shareholders that a renegotiation of the terms was necessary.” After AIG rejected that proposal, Prudential negotiated the termination, acknowledging that it would pay the agreed-upon termination fee of approximately £153 million ($224 million) and other costs, the total of which amount to approximately £450 million ($660 million).

Under law applicable to Prudential, approval of its shareholders was required because, among other things, AIA's value exceeded 50% of the value of Prudential. Typically, large public company transactions between U.S. domestic corporations can be structured to avoid requiring shareholder approval on the buy-side, unless the buyer is issuing a sufficient quantity of its equity as acquisition consideration. Nevertheless, it has become more common over the past few years for buyers to negotiate the right to terminate if they pay a so-called “reverse break-up fee.” The practice grew out of private equity deals, in which buyers insisted on the right to terminate if financing was not available, and in exchange for the lack of deal certainty, sellers negotiated for a termination fee. The typical range for reverse break-up fees has been somewhere between 1% and 3% of the deal value.