Buyer blows merger extension deadline, fights $126 million breakup fee


A seller of a business may want the right to terminate a deal if a more attractive offer comes along; especially if the seller is a public company.  The buyer will often agree to this provided that the seller pays a breakup or termination fee to compensate the buyer for its time, expense and lost opportunity.

On the other hand, a buyer, especially a private equity firm, may want a right to terminate a deal, especially if the buyer cannot get financing. The seller might be agreeable but then may want the buyer to pay the seller a “reverse” breakup or termination fee to compensate it for its time, expense, taking the seller off the market, and upsetting the seller’s relationships with its market, vendors and employees.

The breakup fee or reverse breakup fee can be a big number.

The deal

In this case the buyer agreed to buy out the seller for $1.38 billion pursuant to a merger agreement. Both buyer and seller are both large chains of rent to own stores; and so, the closing of the deal was conditioned upon working out antitrust issues with the federal government.

The merger agreement had a closing deadline. However, the deal might not be ready for closing by the deadline considering the complex antitrust issues. So, the buyer had a right to extend the deadline by giving the seller timely notification. If the buyer did not give timely notification, then seller had the right to cancel the deal and claim a $126.5 million reverse breakup fee.

The parties worked with the federal government to resolve the antitrust issues. Nevertheless, the deadline passed while working on the antitrust issues. The buyer did not give the seller timely notice of buyer’s election to extend the deadline. The seller then cancelled the deal and demanded the $126.5 million reverse termination fee.

The lawsuit

The buyer went into a Delaware court to challenge the seller’s cancellation. The buyer did not deny that it had not sent a timely extension notice. However, the evidence was clear that the seller knew that the buyer had not backed out of the deal.

Nevertheless, the court held that the buyer had not given a timely extension notice and that failure had consequences. However, the court left for another day whether the seller was entitled to the $126.5 million reverse breakup fee saying that it questioned “whether the parties considered this scenario in contracting for the reverse break-up fee.”

The court asked the parties to brief the court on whether the fee must be paid considering the unusual fact situation and Delaware’s implied covenant of good faith and fair dealing doctrine.

This case is referred to Manfre v. May, No. 1:18-cv-2184, United States District Court, N.D. Illinois, Eastern Division, (March 12, 2019)


The Delaware Court of Chancery did not like the seller’s behavior or the outcome of the case. The court observed that the buyer was surprised by the seller’s termination of the contract; and pointed out that the buyer had expended six months of effort and considerable funds toward closing. The court was sympathetic to the buyer saying that it was understandable that the buyer was angered by the seller’s “sharp practice.”

Nevertheless, the contract’s requirement to give a timely extension notice was not what the pirate Captain Hector Barbossa in the first “Pirates of the Caribbean” film had in mind when talking about the pirate code: “more what you’d call guidelines than actual rules.”

The court also did not like the size of the reverse breakup fee, calling it “enormous.”

By John McCauley: I help businesses minimize risk when buying or selling a company.



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Posted in extension of closing, implied covenant of good faith and fair dealing, merger, reverse termination or breakup fee, termination of M&A agreement, termination or breakup fee Tagged with: , , , , ,

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