No Limit on Reverse Termination Fees: Pfizer to pay out $4.5 billion to Wyeth if Financing Fails

This post discusses whether Delaware courts would uphold the $4.5 billion, 6.6% reverse termination fee in Pfizer's proposed acquisition of Wyeth if shareholders were to challenge the fee. The WSJ reported that Pfizer will pay Wyeth the break-up fee if “Pfizer’s ratings are cut and the banks don’t lend.” According to a Pfizer press release it must, “maintain credit ratings of A2/A long-term stable/stable and A1/P1 short term affirmed,” or the banks financing the deal can walk away, triggering the reverse termination fee.

Unlike a normal termination fee, the acquirer pays a reverse termination fee to the target if the deal is not completed for specified reasons. Such reasons can include failure to obtain regulatory clearance for antitrust concerns, failure to obtain financing, or any other breach by the acquirer indentified in the agreement. Delaware courts have addressed the reasonableness of termination fees, but not reverse termination fees. In re Topps Co. S'holders Litig., 926 A.2d 58, 86 (Del. Ch. 2007).

The Delaware Chancery Court’s silence leads some to speculate that there is no limit on the size of reverse termination fees. Darren Tucker and Kevin Yingling made exactly this point in their article Keeping the Engagement Ring: Apportioning Antitrust Risk with Reverse Breakup Fees by stating:

• "Unlike breakup fees, there are no fiduciary duty-related legal restrictions on the size of reverse breakup fees. Courts have not limited the size of reverse breakup fees because they do not  affect the bidding process to the detriment of shareholders."

Consistent with this point of view, there appears to be no case law invalidating reverse termination fees or even indicating that there is a permissible limit to such a fee. It follows then that Pfizer’s shareholders would have little ground to challenge the $4.5 billion, 6.6% reverse termination fee.

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