Reverse Termination Fees in M&A

46 Pages Posted: 14 Aug 2017 Last revised: 28 Jan 2018

See all articles by John C. Coates, IV

John C. Coates, IV

Harvard Law School; European Corporate Governance Institute (ECGI)

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics; Columbia University - Law School

Ge Wu

University of Richmond

Date Written: January 26, 2018


Reverse termination fees (RTFs) are required payments by bidders when they “walk away” from a merger or acquisition, and vary significantly in size and design. In a large sample of manually collected U.S. deal contracts involving publicly traded bidders and targets, we examine the relationship between announcement returns and different types of RTFs, including those with features theorized by others to reflect inefficient design, and also RTFs that we theorize may send a negative value signal from managers seeking to “eat” rather than “be eaten” in consolidating industries. We find inefficient RTFs correlate with lower bidder returns, even in a subsample where disclosure of RTF terms lags deal announcements by more than two days. We also find inclusion of certain RTFs in consolidating industries reveals private information to the market, resulting in negative abnormal returns. Our results are robust to alternative event windows and control groups, and carry over to combined bidder and target abnormal returns, inconsistent with inefficient RTFs reflecting transfers from buyers to targets. Finally, we find an insignificant relationship between the probability of deal completion and inefficient RTFs, and a negative significant relationship between the probability of deal completion and negative signal RTFs, consistent with the fact that deals with such RTFs are adopted in consolidating industries where both deal competition and antitrust issues are higher than in other deal settings.

Keywords: Merger, Acquisition, Break Fee, Reverse Break Fee, Reverse Termination Fee, Contract

JEL Classification: D23, D82, G34, K12, K22

Suggested Citation

Coates, John C. and Palia, Darius and Wu, Ge, Reverse Termination Fees in M&A (January 26, 2018). Available at SSRN: or

John C. Coates (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email )

111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Columbia University - Law School ( email )

435 W 116th St.
New York, NY 10027
United States

Ge Wu

University of Richmond ( email )

102 UR Drive
Richmond, VA 23173
United States

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