Regulatory termination fee insurance: An emerging transactional insurance product that may impact M&A deal dynamics

Authors: Thomas W. Christopher, Dilara Erik¹

Introduction

Regulatory clearance is one of the most consequential variables in many M&A transactions. The increasing complexity of many regulatory regimes and M&A transactions, the evolving (and often more aggressive) positions of regulators, and the growing politicization of some approval processes have all contributed to greater uncertainty in obtaining regulatory approval for many deals.

Regulatory termination fees (“RTFs”), i.e., the obligation of one party – almost always the buyer – to pay the other party a fee if certain specified regulatory approvals are not obtained, have long been a common feature of many M&A transactions subject to regulatory review. An RTF can serve multiple purposes. First, it can operate to incentivize a buyer to accept a required regulatory remedy or other action beyond what it is contractually obligated to accept. Second, an RTF may operate to deter the buyer from failing to satisfy its contractual obligations to obtain required regulatory approvals. Regulatory efforts covenants often employ inherently ambiguous legal concepts, such as reasonable best efforts, commercially reasonable efforts, material adverse effect, and burdensome condition (among other materiality qualifiers), that are open to varying interpretation. As discussed in greater detail below, an RTF can provide a meaningful financial deterrent for non-compliance beyond the threat of breach of contract damages and specific performance. Third, an RTF can play a role in allocating regulatory risk by compensating the seller or target for the time and resources it committed to a transaction that ultimately does not proceed, as well as for lost opportunity costs it may incur as a consequence of foregoing other transactions. RTFs should be sized with these multiple purposes in mind. While the amount of RTFs varies widely, they are usually between 2% and 10% of the equity value of the transaction.²

In the last few years, a new insurance product, which we refer to as “RTF insurance,” has emerged to address the possibility that a buyer may be obligated to pay the seller or target an RTF. RTF insurance allows a buyer to shift all or a portion of its RTF exposure to an insurance carrier and can also provide the seller or target with greater certainty that the RTF will be paid.

However, RTF insurance may do more than just reallocate regulatory risk. It can potentially alter the parties’ relative negotiating leverage as well as their incentives to take actions required to obtain required regulatory approvals. Specifically, if a buyer has shifted to an insurance carrier all or a material portion of its obligation to pay an RTF, this may change the contractual risk it is willing to assume to obtain required regulatory approvals as well as its incentive to obtain those approvals, particularly where the obligations of the buyer in this regard are open to interpretation.

The Mechanics of RTF Insurance

RTF insurance operates within the broader framework of transactional insurance products. At its core, the product allows a buyer to transfer to an insurance carrier all or a portion of its obligation to pay an RTF to a seller or a target. The insurer, in exchange for a premium paid at signing or shortly thereafter, agrees to pay the RTF to the seller or target if the transaction is terminated due to the failure to obtain one or more specified regulatory approvals, such as a material antitrust approval, a national security (e.g., CFIUS) clearance, or other governmental consents.

Premium costs for RTF insurance vary considerably depending on the nature and complexity of the regulatory exposure, but are typically calculated as a percentage of the negotiated RTF. For transactions with RTFs in the range of approximately 3–8% of the target’s enterprise value, this pricing structure generally translates into a one-time premium equal to approximately 0.15% to 1.6% of the enterprise value of the target company. The triggering events for payment under the policy closely track the circumstances under which the transaction can be terminated for regulatory reasons.

Insurers usually play an active role in the negotiation of the regulatory provisions of the transaction document and may review and comment on those provisions. In addition, they may indicate to the buyer that they intend to impose specific requirements, exclusions, or cooperation obligations on the buyer in the insurance policy itself, which will likely lead the buyer to address those terms in the transaction document. These conditions can influence the negotiation of efforts covenants and the scope of covered regulatory risks and may also affect the parties’ behavior during the regulatory review period. Furthermore, insurers will typically not underwrite the full amount of the RTF, but will instead require the buyer to retain a portion of the RTF exposure through a retention or deductible so it retains at least some financial incentive to obtain the required regulatory approvals.

It is worth noting that, unlike representation and warranty insurance, which is largely limited to private transactions as it operates as a substitute for post-closing indemnification by the seller, RTF insurance is equally functional in public M&A deals as it is in private transactions.

Principal Benefits of RTF Insurance to Buyers and Sellers or Targets

RTF insurance can provide benefits to buyers and sellers or targets in M&A transactions.

From a buyer’s perspective, the obvious and most important benefit of RTF insurance is the ability to shift the obligation to pay the RTF to an insurer, thus relieving itself of this contractual obligation and balance sheet liability. RTF insurance can also provide buyers with a competitive advantage in competitive bidding situations. Specifically, RTF insurance may allow buyers that present greater regulatory risk than other bidders to enhance their competitive position by accepting a greater portion of that risk and/or committing to a greater RTF than they would have otherwise been able or willing to do without the insurance. For this reason, strategic buyers that present meaningful antitrust or national security/CFIUS risk may find RTF insurance to be particularly helpful in competitive bidding situations. Financial buyers, including private equity firms, may also find RTF insurance particularly attractive as a means to minimize their direct and indirect financial transaction commitments, as well as their need to call capital from their investors for a failed transaction. In addition, RTF insurance may allow cash-strapped buyers with leveraged balance sheets to eliminate their weak credit profile as a consideration on the part of the seller or target as to whether it will actually collect the RTF if and when it becomes payable.

From a seller’s or target’s perspective, RTF insurance may enhance a competitive sale process by (as suggested above) allowing some bidders to accept more regulatory risk and/or agree to greater RTFs than they otherwise would. In addition, as suggested above, RTF insurance can also reduce the seller’s or target’s counterparty credit risk by substituting a financially strong, highly rated insurer in the place of a buyer with a poor or uncertain credit profile as the obligor on the RTF. While a cash-strapped acquiror or a special purpose vehicle with limited assets may offer an equity commitment letter or limited guarantee to support its reverse termination fee obligations, these instruments still rely on the financial strength and willingness of the sponsor or guarantor to perform.

Customary Role of RTFs in M&A Transactions

To understand how RTF insurance might impact deal dynamics, it is useful to first examine where regulatory risk customarily resides in M&A transactions.

While the allocation of regulatory risk in an M&A transaction can take a multitude of forms, the risk is generally either:

• imposed entirely on the buyer pursuant to a “hell or high water” regulatory efforts covenant that requires the buyer to take any action, and accept any remedy imposed by any regulator, necessary to obtain regulatory approval of the transaction; or
• shared by the buyer and the seller or target pursuant to a regulatory efforts covenant that requires the buyer to accept any regulatory remedy unless it would (a) impose on the buyer a burden that exceeds a specified threshold (often phrased in terms of a remedy that would have a material adverse effect or impose a burdensome condition on the buyer and/or the target on a combined basis), or (b) require the buyer to take certain actions or agree to certain remedies that it is unwilling to accept.

When regulatory risk is imposed entirely on a buyer pursuant to a “hell or high water” provision, an RTF will be triggered only if a regulator refuses to approve the transaction regardless of what remedy or other action the buyer is contractually obligated to accept. For this reason, an RTF is often not provided for where the buyer agrees to a “hell or high water” provision. An RTF is much more common when the buyer and the seller or target agree to share the regulatory risk and there are circumstances in which the buyer is contractually relieved of its obligation to take actions or accept remedies to obtain required regulatory approvals. As discussed above, in those instances an RTF may serve the multiple purposes of (a) incentivizing the buyer to accept regulatory remedies beyond those it is contractually obligated to accept, (b) deterring the buyer from failing to satisfy its contractual obligations to obtain required regulatory approvals (beyond the threat of breach of contract damages and specific performance), and (c) compensating the seller or target for its commitment of time and other resources to the failed transaction as well as lost opportunity costs. These multiple purposes may be particularly important for a public company target for which a failed transaction can give rise to an impression that the company is “damaged goods” and can present retention issues and customer uncertainty.

A buyer’s motivation to satisfy its regulatory efforts covenants and obtain required regulatory approvals is driven by three factors: (i) its desire to consummate the transaction for commercial and other reasons; (ii) the threat of breach of contract damages or specific performance; and (iii) its obligation to pay an RTF if the transaction is terminated for failure of specified regulatory consents to be obtained. If the combination of these three factors exceeds the commercial and other costs of any remedy or other action the buyer may be required to agree to or take to obtain required regulatory approvals, then the buyer should be sufficiently incentivized to satisfy its contractual obligations.

Put formulaically, a buyer should theoretically satisfy its contractual regulatory obligations if:

A + B + C > D

Where:

• A = The transaction’s economic, strategic and other benefits to the buyer
• B = The threat of breach of contract damages or specific performance
• C = Buyer’s obligation to pay an RTF if the transaction is terminated for regulatory reasons
• D = The economic and other costs to the buyer of any required regulatory remedy or other action

Impact of RTF Insurance on Deal Dynamics

If a buyer’s obligation to pay an RTF is eliminated from the equation or substantially reduced because the obligation is shifted to an insurer, the buyer’s incentive to obtain required regulatory approvals may be meaningfully reduced. This is particularly true because in most transactions (particularly those in which the buyer is a private equity firm or other financial buyer), in circumstances where the buyer is obligated to pay the seller or the target an RTF, the recovery of that RTF by the seller or target is usually the sole and exclusive remedy for the buyer’s breach of the transaction agreement.³ Accordingly, if a buyer can obtain RTF insurance for the cost of the premium, and its only exposure in the event all required regulatory approvals cannot be obtained is the amount of the retention or deductible under the insurance policy, the buyer may be more likely to conclude that the economic and other costs of any required regulatory remedy or other action exceed the transaction’s economic and other benefits to the buyer. While a retention or deductible under an RTF insurance policy will leave a portion of the RTF exposure with the buyer, this portion will usually be relatively small as a percentage of the amount of the RTF, and a competitive RTF insurance market will likely work in favor of buyers in this regard.

This analysis, however, is subject to a significant caveat in most transactions: the right of the seller or target to specifically enforce the buyer’s obligations under the regulatory efforts covenant and, more generally, to close the transaction if all closing conditions are satisfied (subject, in the case of most transactions involving a financial buyer, to the availability of any debt financing). However, because regulatory efforts covenants are often open to broad interpretation due to concepts such as reasonable best efforts or commercially reasonable efforts, materiality, material adverse effect and/or burdensome condition, it may be difficult for a court to fashion an order that would be sufficiently precise to allow a seller or target to obtain specific enforcement.

There are other considerations that may incentivize a buyer to obtain the regulatory approval required to close a transaction, such as the fees and expenses it incurs in connection with the transaction, the investment of management time and effort in executing the deal, and reputational harm arising from its failure to successfully close the transaction. But in most deals these will be secondary factors. If the buyer concludes the economic and other costs of a required regulatory remedy or other action are greater than the economic, strategic and other benefits of the transaction, and both the obligation to pay the RTF and any threat of breach of contract damages are largely or entirely eliminated, then the buyer would be economically incentivized to walk away from the transaction and force the seller or target to specifically enforce the buyer’s obligation to obtain the regulatory consents and close the deal.

Practical Implications of the Rise of RTF Insurance

In addition to its impact on deal dynamics as discussed above, the advent of RTF insurance may have a number of practical implications for M&A transactions, including the following:

1. Greater clarity of regulatory efforts covenants: Both RTF insurers and sellers or targets will likely seek to negotiate greater clarity with respect to a buyer’s obligations under regulatory efforts covenants to reduce the ambiguity of these provisions that may give buyers the flexibility to argue that they satisfied their contractual obligations to seek to obtain required regulatory approvals but were nevertheless unable to do so. Specifically, insurers and sellers or targets are likely to seek greater specificity with respect to the remedies and other actions buyers are required to accept or take to obtain required regulatory approvals, including seeking to provide clearer parameters around what assets must be disposed of to satisfy antitrust regulators.
2. Where ambiguity persists, more busted deals: Because buyers that are substantially or entirely relieved of the obligation to pay an RTF may have less incentive to comply with their regulatory efforts covenants, and sellers and targets may find it difficult to specifically enforce a buyer’s obligation to obtain those approvals where ambiguous language remains in the covenants, it is possible that more deals will be terminated due to the failure to obtain required regulatory approvals. Insurers will likely seek to offset an increased risk of busted deals by forcing buyers to retain a portion of the RTF through a retention or deductible, but as noted earlier the buyer’s retained exposure will usually be relatively small, and a competitive RTF insurance market will likely work in favor of buyers in this regard.
3. Willingness of buyers to accept larger RTFs: A natural likely consequence of RTF insurance is the willingness of buyers to accept larger RTFs, even if that means they must pay commensurately higher premiums for the insurance policy.
4. Impact on remedies: The absence of an RTF to serve as a deterrent to a buyer’s breach of its regulatory efforts covenants may lead sellers or targets to more carefully assess the remedies available in the event of such a breach.

Conclusion

RTF insurance is an emerging transactional insurance product that has the potential to alter M&A dealmaking in the future. By allowing a buyer to substantially or entirely relieve itself of the obligation to pay an RTF by shifting that obligation to an insurer, RTF insurance may reduce the incentive of buyers to (a) accept regulatory remedies beyond those they are contractually obligated to, and (b) comply with their regulatory efforts covenants, particularly in circumstances where the wording of those covenants is open to judicial interpretation, as is often the case. From the seller’s or target’s perspective, the problem may be exacerbated where the contractual and other remedies for a breach by the buyer are limited because the RTF is the sole and exclusive remedy for such a breach and/or it may be difficult to specifically enforce the buyer’s regulatory efforts obligations due to ambiguous language in the covenants.

These shifting deal dynamics, and the possible reduction in buyers’ incentive to accept any regulatory remedies unless contractually required to do so, or to comply with their regulatory efforts obligations, may impact transactions in a number of ways, including tighter regulatory efforts covenants, more busted deals, larger RTFs, and a greater focus on remedies for breaches of regulatory covenants.

Lastly, while this article focuses on RTF insurance, it is worth noting that there has been nascent discussion in the transactional insurance market regarding insurance products for other types of reverse termination fees in M&A transactions, but a market for these other products has not yet developed.

^{1 Tom Christopher is a partner and Dilara Erik is an associate in the Global M&A Group of White & Case LLP, resident in the New York office. The authors would like to thank Vince Novelli, Executive Director of Howden Private Capital, one of the leading insurance brokers of RTF insurance, for his very helpful comments regarding this article. They would also like to thank their White & Case colleagues Keith Hallam, Stephen Fraidin and Andrew Hammond for their review of, and keen insights regarding, the article, and their colleague Chloe He for her research assistance.
2 By way of comparison, RTFs are often substantially greater than the “direct” termination fee a public target is usually required to pay a buyer if it terminates a pending transaction to accept a higher bid.
3 According to multiple deal studies, including (a) the ABA M&A Market Trends Subcommittee’s Private Target Study (December 2025) and (b) the Thomson Reuters Practical Law Reverse Break-Up Fees and Specific Performance: A Survey of Remedies in Leveraged Public Deals (2018 Edition), in a substantial majority of M&A transactions involving RTFs, the payment of the RTF is seller’s or target’s sole and exclusive remedy in all cases or absent fraud or intentional breach of contract by the buyer.}

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