Termination Fees Research Articles

National Development: (Too) High Termination Fees? (Denmark)

National Development: (Too) High Termination Fees? (Denmark)

Optimal Sequential Selling Mechanism and Deal Protections in Mergers and Acquisitions

ABSTRACTWe study the dynamic profit‐maximizing selling mechanism in a merger and acquisitions (M&A) environment with costly bidder entry and without entry fees. Depending on the parameters, the optimal mechanism is implemented by a standard auction or by a two‐stage procedure with exclusive offers to one bidder followed by an auction potentially favoring that bidder. The optimal mechanism may involve common deal protections like termination fees, asset lockups, or stock option lockups. Our proposed procedures resemble sales of targets filing Chapter 11 bankruptcy or M&A involving public targets, and they shed light on how to use deal protections in practice.

Punitive switching costs and behavioral responses in the context of contractual services

PurposeContractual services are characterized by features such as termination fees, long-term commitment, and complex terms. When customers find better deals from other providers, they may want to switch, but contractual obligations prevent them from doing so. Thus, this study aims to draw upon the stimulus-organism-response paradigm and theories of emotion regulation to examine how punitive switching costs (PSCs) can evoke negative emotions (NEs) from customers and, consequently, lead to negative behavioral responses in contractual service settings.Design/methodology/approachThis study collected data from 395 customers of telecommunications companies, fitness centers, tutoring firms/centers, and house leasing companies in Taiwan. We tested the hypotheses using partial least squares structural equation modeling via SmartPLS 3.0.FindingsThe results show that NEs partially mediate the relationship between PSC and customers’ switching intention and negative word-of-mouth. This study also finds alternative attractiveness (AA) and service recovery (SR) do not moderate the PSCs–NEs relationship, but AA does directly influence NEs.Originality/valueFirst, this study contributes to the literature on switching costs by exploring how PSC exerts a detrimental impact on behavioral responses. Second, this study adds to the literature on service failures by identifying the mediating role of NEs in such a relationship.

Extraordinary and Unavoidable Circumstances in Tourism under COVID-19 and Post Pandemic Times—Casus Poland as Example of Sustainability Management

The views expressed in this paper are those of the authors and should not be taken as reflecting the position of any authority, entity or institution. This article presents the legal status as of 25 June 2022. In accordance with the Directive (EU) 2015/2302 of the European Parliament and of the Council of 25 November 2015 on package travel and linked travel arrangements, amending Regulation (EC) No 2006/2004 and Directive 2011/83/EU of the European Parliament and of the Council and repealing Council Directive 90/314/EEC, tour operators registered in Poland are required to refund payments to travelers in the case of cancellation of their travel package due to extraordinary and unavoidable circumstances within 14 days of its termination. The traveler has the right to terminate the package travel contract before the start of the trip without paying any termination fee in the event of unavoidable and extraordinary circumstances occurring at the destination or its immediate vicinity and which significantly affect the implementation of the package or the transport of passengers to their final destination. In the case of termination of the package travel contract due to unavoidable and extraordinary circumstances, the traveler is entitled to a full refund of any payments made for the package travel but is not entitled to any additional compensation. The tour operator makes the return within 14 days from the effective termination of the travel contract. In the article we will describe the situation during the COVID-19 pandemic and post-COVID times. The significance and implications of our findings and arguments show how important this is in designing a state’s tourism policy. Targeted aid can be designed well in advance of extraordinary and unavoidable circumstances. In our opinion and the opinions of business practitioners, extraordinary and unavoidable circumstances in tourism occur on average every ten years, e.g., the1992 Yugoslavia war, 2001 attack on the World Trade Center, 2010 Eyjafjallajökull volcanic eruption, and the 2020 COVID-19 pandemic. The results of the research show the effectiveness of legal instruments enacted by the Polish government during the COVID 19 crisis and the war in Ukraine. In the article we use two methods—empirical, related to the authors’ own experience, and dogmatic–exegetical. The empirical research was based on the authors’ experience as those responsible for the implementation of statutory regulations (director in the Ministry of Sport and Tourism and Ministry’s advisor) and on the concept of law as one of the normative systems in society—the operation of law in the sphere of social and economic life, which is tourism. A dogmatic–exegetical method was also used, which allowed for the study of the literature on the subject and the review of legal regulations. In our research, we also used the method of the economic analysis of law (law and economics method). Graphical presentation of the research results and the impact of the introduced support mechanisms on supply and demand indicate the desirability of solutions in this area.

DuPont terminates Rogers purchase

DuPont is calling off its $5.2 billion purchase of electronic materials maker Rogers Corporation, originally unveiled about a year ago, noting that it was “unable to obtain timely clearance” from regulators. In September, DuPont said it had all the country approvals that it needed except for one from the Chinese government. DuPont must now pay Rogers a $162.5 million termination fee for canceling the deal. Separately, DuPont has completed the $11 billion sale of its engineering polymer business to Celanese.

Net Neutrality in the Content Provision and Internet Service Provision Markets

Relaxing net neutrality in the form of introducing termination fees and its welfare effects are considered in a model of imperfect complements. The equilibrium of the game between the internet service provider (ISP) and the content provider (CP) yields welfare-maximizing termination fees that depend on the relative size of the ISP’s and the CP’s own-price effects and the cross-price effects. Only when the ISP’s own price effect is relatively high compared to that of the CP’s, along with high cross price effects, such a fee should be allowed. On the other hand, when the CP’s own price effect is relatively high compared to that of the ISP’s, along with high cross price effects, mergers are expected and are likely not harmful to social welfare. Telecommunication regulators may find the results useful in their net neutrality decisions.

Fitness switching costs scale (FSCS): development and assessment of higher-order reflective-formative scale

ABSTRACT Research question Scholars have recognized the critical role of switching costs in predicting consumption behavior. However, a scale measuring fitness consumers’ switching costs was unavailable. The purpose of the study is to develop and validate a fitness switching costs scale (FSCS). Research methods A three-step study was conducted. Step 1 generated a pool of items, which were then content validated by expert judges (N = 6). Step 2 (n = 455) examined the reliability and validity of the FSCS. Finally, Step 3 (n = 441) cross-validated the FSCS. Results and Findings The results provided support for the reliability and validity of the FSCS composed of the third-order formative construct (i.e. switching costs) with the four second-order formative constructs (i.e. procedural costs, relationship costs, financial costs, and convenience costs) and the 11 first-order reflective constructs (i.e. adjustment to a new fitness center, lack of other attractive fitness centers, information search costs, fitness center relationship loss, employee relationship loss, other consumer relationship loss, termination fee, loss of price benefit, loss of location benefit, loss of service-hour benefit, and loss of equipment availability benefit). Implications The FSCS allows researchers to obtain reliable results and advances theory development in fitness switching costs. Fitness practitioners can also use the FSCS and survey their current consumers to determine factors that prevent consumer defection.

Credit rating downgrade risk and acquisition decisions

AbstractThis study examines the impact of credit rating downgrade risk on acquisition decisions. I find that firms at risk of a rating downgrade conduct fewer acquisitions. This result is robust to different measures of downgrade risk, instrumental variable analyses and matched sample tests. The correlation between downgrade risk and acquisition propensity is likely driven by the concern that risks associated with acquisitions lead to downgrades as evidenced by the more cautious approach of acquirers facing downgrade risk. These firms take more time to complete deals, hire more and higher‐quality financial advisors, issue less debt to finance merger consideration, adopt target termination fee clauses and select targets with lower information asymmetry and higher ratings. This more cautious approach is associated with better long‐term post‐merger performance and reduced future‐downgrade risk. Subgroup analyses reveal credit rating downgrade risk is negatively associated with acquisition decisions and positively associated with performance for investment‐grade firms, especially BBB‐ firms, which are on the brink of being downgraded to non‐investment grade. Such associations are not significant for non–investment‐grade firms. Overall, the results suggest that firms at risk of a rating downgrade conduct acquisitions more cautiously, leading to fewer but more value‐creating deals.

The Symmetry and Asymmetry of Bidder and Target Termination Fees in Acquisitions

Abstract Termination fees have become a frequently employed non-price term in acquisition contracts. They allow the breaking party to walk-away from the transaction after paying a fee to the remaining party. While the inclusion of termination fees has been shown to increase contracting efficiency, the fee size has received only scant academic interest. This is surprising as termination fees are often asymmetric, i.e., of unequal magnitude for the bidder and the target. Based on an international dataset of 25,026 global acquisitions between 2012 and 2015, we find that bidder and target characteristics influence the structure of termination fees. More precisely, we show that target termination fees are higher if the target is insolvent. Bidder termination fees are higher, in contrast, if the bidder is an institutional investor. Our study thus contributes to understanding the influence of bargaining power on non-price terms by examining the structure of termination fees.

Why Are Bidder Termination Provisions Included in Takeovers?

AbstractWe present a rationale for bidder termination provisions that considers their effect on bidders’ and targets’ joint takeover gains. The provision’s inclusion can create value by enabling termination when the target becomes less valuable to the bidder than on its own, but creates a trade-off because termination may also occur when the target is more valuable to the bidder than on its own. This trade-off explains why the provision is included in only some deals, and explains variation in termination fees. Inclusion of the provision is associated with larger combined announcement returns, provided that the termination fee is priced appropriately.

Why do takeover targets protect acquirers? Evidence from force‐the‐vote provisions

AbstractWe conduct the first comprehensive study of force‐the‐vote (FTV) provisions in mergers and acquisitions transactions and test competing agency and efficient contracting explanations for their usage. Target FTV provisions are observed more frequently when bidding is costly and are associated with higher target returns, a lower likelihood of competing bids, and a higher likelihood of deal completion. By providing greater deal protection to acquirers, target FTV provisions appear to improve bidding incentives resulting in higher target returns consistent with efficient contracting. Our results are robust to controlling for other merger provisions, such as termination fee provisions, stock voting agreements, and endogeneity concerns.

Contractual Evolution

Conventional wisdom portrays contracts as static distillations of parties’ shared intent at some discrete point in time. In reality, however, contract terms evolve in response to their environments, including new laws, legal interpretations, and economic shocks. While several legal scholars have offered stylized accounts of this evolutionary process, we still lack a coherent, general theory that broadly captures the dynamics of real-world contracting practice. This paper advances such a theory, in which the evolution of contract terms is a byproduct of several key features, including efficiency concerns, information, and sequential learning by attorneys who negotiate several deals over time. Each of these factors contributes to the underlying evolutionary process, and their relative prominence bears directly on the speed, direction, and desirability of how contractual innovations diffuse. Using a formal model of bargaining in a sequence of similar transactions, we demonstrate how different evolutionary patterns can manifest over time, in both desirable and undesirable directions. We then take these insights to real-world dataset of over 2,000 merger agreements negotiated over the last two decades, tracking the adoption of several contractual clauses, including pandemic-related terms, #MeToo provisions, CFIUS conditions, and reverse termination fees. Our analysis suggests that there is not a “one size fits all” paradigm for contractual evolution; rather, the constituent forces affecting term evolution appear manifest in varying strengths across differing circumstances. We highlight several constructive applications of our framework, including the study of contract negotiation unfolds when price cannot easily be adjusted, and how to incorporate other forms of cognitive and behavioral biases into our general framework.

Court Denies Claims of Both Cigna and Anthem in Bitter Settlement Suit Over Failed Merger

Court Denies Claims of Both Cigna and Anthem in Bitter Settlement Suit Over Failed Merger

Intellectual Property Protection in M&A Negotiations

In this paper, I show that a major share of the value of target firm’s intellectual property can be protected from expropriation by the acquirer through negotiating a compensating bidder termination fee (BTF), which is paid to the target in case the acquirer abandons the deal. I apply a capitalization model for intangible capital stocks to proxy for the component of intellectual property in target firm’s market value. The results suggest that, on average, for every dollar of target firm’s R&D capital stock, roughly 16 cents of protective share is incorporated in the BTF. I strengthen my causal interpretation with an instrument variables approach that exploits exogenous industry-level variation in R&D worker quota. The relation between target firm’s innovation activity and BTF size is more pronounced, if the target is a pioneer in its technology sector, if the target operates in an industry that sells unique products, if the target is assigned to the high-tech or healthcare industry, and if the target mentions “trade secrets” in its 10-K report filed with the SEC prior to deal announcement. The effect is further increasing in the degree of technological proximity as well as product market rivalry between acquirer and target. Extending prior research at the intersection of innovation, law, and M&A, this paper concludes that BTFs serve as a contract mechanism that provide target firms compensation for revelation of sensitive information in M&A negotiations if acquirers terminate deals. The option to include BTFs in M&A contracts thereby increases acquirers’ incentives to close the deal and increases targets’ ex-ante incentives to reveal innovative secret information.

The Role of Target Termination Fees in REIT Mergers

Target termination fee provisions are widely used in merger agreements and require the target firm to pay the bidder a fixed cash fee in the event the target firm backs out of the agreement. We examine the determinants and consequences of target termination fee provisions in REIT mergers and test the competing agency and efficient contracting hypothesis. We find that target termination fee provisions are more likely in hard to value targets, that is, in deals involving large targets, targets with high leverage, and firms that were not targets of a takeover attempt in the recent past. Our results also suggest that target termination fee provisions are associated with higher offer premiums, announcement period returns, and higher deal completion rates. Collectively, our results indicate that termination fee provisions are used as effective contractual devices in REIT mergers to further target shareholder interests.

Deal Protection Devices

In mergers and acquisitions transactions, a buyer and a seller will often agree to contractual mechanisms (deal protection devices) to deter third parties from jumping the deal and to compensate a disappointed buyer. This paper analyzes various deal protection devices, with a focus on two most commonly used mechanisms: target termination fees and match rights. A match right gives the buyer a right to “match” a third party’s offer so as to prevent the third party from snatching the target away, while a termination fee compensates the buyer when a third party acquires the target. Such mechanisms raise a number of important corporate and contract law questions. How effective are they in preventing third parties from competing for the target? Do they steer the target to be sold to the buyer who values the target less? Are the devices harmful to the target shareholders? To what extent can the negotiated deal price represent the target’s “fair value” when such devices reduce or eliminate the competition? The paper attempts to answer these questions with the help of auction theory. The paper shows, foremost, that these devices can actually increase the target and the buyer’s joint return and possibly the target’s stand-alone return. Termination fees and match rights function quite differently, however. While a larger termination fee reduces the target’s stand-alone return and can lead to allocative inefficiency, unlimited match right increases the target’s stand-alone return and promotes allocative efficiency. The paper argues that answering the corporate law questions ultimately turns on the question of how and why the target directors are utilizing the devices. If the devices are being deployed with the objective of maximizing the target shareholders’ return, not only can they be beneficial for the target shareholders, but their presence can also make the deal price a more reliable indicator of target’s fair value. With an improper objective, not only do the devices undermine target shareholders’ return, but the court also should not use the deal price as evidence of fair value. The paper also analyzes stock and asset lockups and examines deal protection devices through the lens of contract law.

The Agency Costs of Sellside Deal Protection: An Empirical Analysis of Reverse Termination Fees

This paper empirically examines what corporate governance, financial and transaction variables lead target companies to negotiate for reverse termination fees (RTFs) in mergers and acquisitions. RTFs, which must be paid by buyers if they walk away from a merger, are used by target companies to reduce transaction uncertainty. We examine 1518 merger agreements for the period from 2010 to 2019, and find that 44.86 percent of these transactions included RTFs. First, we find that larger and more mature target companies with higher market capitalizations and lower cash ratios are more likely to successfully negotiate for RTFs. Second, the presence of a controlling shareholder increases the size of an RTF and ensures it is “efficiently” priced, suggesting that these actors play a monitoring role. Third, targets with dual class stock are less likely to efficiently price RTFs. Finally, deals with private equity acquirers are more likely to feature RTFs, and these RTFs are larger and more efficiently priced. These findings have implications for practitioners involved in crafting deal protection mechanisms, as well as Delaware courts considering how to view RTF provisions in merger litigation.

ANALISIS PEMUTUSAN HUBUNGAN KERJA DENGAN ALASAN DISHARMONI (STUDI KASUS PUTUSAN PENGADILAN HUBUNGAN INDUSTRIAL NOMOR 121/PDT.SUS-PHI/2018/PN.BDG Juncto PUTUSAN MAHKAMAHi AGUNG NOMOR1942 K/PDT.SUS-PHI/2018)

This different opinion of termination sometime causing industrial relation dispute. The increasing reasons of employment termination constantly do harm for the workers without considering the loss that they may experience. How the Judge consider to make decision of termination with disharmony as the reason as stated in Constitution No. 13 Year 2003 about Employment? The research types that being used was a Normative Research. There are various reason in an employment termination. Dispute in Employment termination is a dispute of how employment relation ends. Terminating an employment relation must be accompanied by detailed and described as stated in Constitution No. 13 year 2003 about Employment. The Provision about arrangements for employment termination set out in article 150 until 171 Constitution No. 13 Year 2003 about Employment. Issues in this case is that PT Sari Gemilang didn’t described in detailed their reason why they terminated their workers. In the decisions of the Supreme Court didn’t consider Article 57 paragraph (2), Article 59 Paragraph (4), and Article 59 Paragraph (7) also Article 151 Paragraph (3) and Article 155 Paragraph (1) Constitution No. 13 Year 2003. Judge only considered that the relation between Company and Workers are disharmony. Disharmony is a situation, not a reason for termination. Panel of judges of the supreme court didn’t see there are reason for termination or not. There is uncertainty on the termination fee and the calculation that need to be paid by the employer due to disharmony.

The Role of Target Termination Fees in REIT Mergers

Target termination fee provisions are widely used in merger agreements and require the target firm to pay the bidder a fixed cash fee in the event the target firm backs out of the agreement. We examine the determinants and consequences of target termination fee provisions in REIT mergers and test the competing agency and efficient contracting hypothesis. We find that target termination fee provisions are more likely in hard to value targets, that is, in deals involving large targets, targets with high leverage, and firms that were not targets of a takeover attempt in the recent past. Our results also suggest that target termination fee provisions are associated with higher offer premiums, announcement period returns, and higher deal completion rates. Collectively, our results indicate that termination fee provisions are used as effective contractual devices in REIT mergers to further target shareholder interests.

Termination fees and bilaterally efficient merger contracts

AbstractWe present a simple model of exchange in which mutual gains from trade motivate the use of termination fees in merger contracts. The inclusion of a termination fee permits bilaterally efficient merger contracts that make merger consummation more likely and result in higher merger payoffs for both the bidder and the target compared to contracts without termination fees. Introducing risk aversion for either the bidder or the target has negligible effects upon the preferred contracts, revealing that termination fees are not primarily a form of bidder insurance, although they do increase the probability that a merger is consummated. The model provides a rich collection of predictions, all of which are consistent with the empirical regularities reported to date.