Latest in reverse break fees in Australia

We have been watching closely as Australian market practice in reverse break fees catches up with US practice. The reverse break fees recently agreed by Alcoa and Alumina, and Altium and Renesas in each of their recently announced transactions shows this trend is continuing.

In brief

• A bidder may be required to pay a reverse break fee to compensate the target if the transaction does not proceed due to action or inaction by the bidder.
• The amount of reverse break fees in Australia have historically often mimicked that of company break fees (that is, 1% of the target’s equity value), but recent transactions show that the Australian market is becoming more in line with the US practice and larger amounts are being agreed (a sensible outcome in our view).
• Renesas’ proposed acquisition of Altium and Alcoa’s proposed acquisition of Alumina shows the latest examples of this trend with reverse break fees of equivalent to 4.5% and 2% of the target’s equity value being agreed.

Background

In an M&A transaction, a bidder may be required to pay the target a reverse break fee if the transaction does not proceed in certain events, such as material breach by the bidder, failure by the bidder to obtain a regulatory approval or, where a bidder shareholder vote is required, the bidder’s board not recommending shareholders support the transaction. The payment is meant to compensate the target for time and resources spent on a deal that did not proceed, whilst also increasing deal certainty by incentivising the bidder to comply with its obligations.

Reverse break fees are not a new phenomenon. However, their use has increased over the past 5-10 years. According to the HSF M&A Report for FY23, 76% of public company transactions provided for a reverse break fee. This is compared to 65% in FY22.

Amount

The first trend evident in recent transactions is larger reverse break fees. Historically, a reverse break fee has often been the same as the company break fee, that is 1% of the equity value (due to the Takeovers’ Panel guidance). Even though the Panel guidance does not apply to reverse break fees, in the interests of mutuality, it is often agreed by the target.

But, in certain circumstances, a 1% reverse break fee can leave the target in a weak position if the transaction goes awry or the bidder becomes less enthusiastic. If the reverse break fee is the exclusive remedy for breach, it is akin to an option fee for the bidder if they choose to breach the transaction agreement and walk away.

The larger amounts accepted in recent transactions, such as Newcrest/Newmont, Alumina/Alcoa and Renesas/Altium show that the market is changing. In those transactions, the standard reverse break fees were 2.2x, 2.3x and 4.5x the company break fees. This is more in line with the US market where a standard reverse break fee is usually twice the company break fee (which itself is usually 3-4% of equity value).

The Renesas/Altium deal is particularly noteworthy. In that transaction, there was a 1% company break fee of $91,300,000 and a 4.5% reverse break fee of $410,800,000.

The difference in quantum between a break fee and a reverse break fee makes sense. The fees serve different purposes. While both seek to compensate for a failed deal, a larger reverse break fee recognises that the impact on the target for a failed deal is generally much worse as the target’s business is greatly affected by the existence of a takeover proposal, particularly if it goes on for many months, and recognises that forcing the bidder to proceed by seeking a court order for specific performance may be extremely difficult.

Triggers

The second trend evident in recent transactions is regulatory approval triggers. Two of the large reverse break fees announced recently (OZ Minerals/BHP and Altium/Renesas) had triggers for failure to secure overseas regulatory approvals.

In BHP’s acquisition of OZ Minerals, BHP agreed to pay a reverse break fee to OZ Minerals if it failed to obtain Brazilian and Vietnamese competition approval. In Renesas/Altium, a similar provision was included covering regulatory failure.¹

It is unsurprising that we have seen triggers tied to regulatory approvals, as the regulatory landscape evolves and transactions are under greater scrutiny. This is occurring around the globe. 

The requirement for a regulatory approval adds transaction risk. It can be the reason why a transaction does not proceed. This is exactly what the reverse break fee is intended to address, particularly where there is a risk that the bidder may fail in obtaining the requisite regulatory approval.

One other trigger seems to be now accepted. Where the bidder itself needs a shareholder approval, the bidder may be liable to pay a reverse break fee if shareholders vote down the deal. That is separate from the fee payable if the bidder’s board eventually recommends a ‘no’ vote. This was accepted in Newcrest/Newmont and in Alumina/Alcoa. The amount payable in those instances were, however, smaller than the standard reverse break fee. In the Newcrest example, it was limited to cost recovery and in Alumina it was US$20 million.

Conclusion

The recent Altium/Renesas and Alcoa/Alumina transactions continue the trend for larger reverse break fees and broader circumstances where they may be payable. We predict this trend will continue.

1. These regulatory approvals include CFIUS Approval (US foreign investment), HSR Act (US competition), German Ministry FDI Approval (German foreign investment), German Federal Cartel Office Clearance (German competition) and Turkish Competition Authority Approval.