Termination and Effect of Termination
What is the Termination and Effect of Termination section? These two clauses describe when either party (or both) can terminate the Agreement without breaching it and the effect termination would have on their respective covenants and obligations contained in the Agreement.
The Middle Ground: The Termination section allows for termination of the Agreement based on: (1) mutual consent of the parties; (2) only one party being in breach of the Agreement, if the other party sends written notice of the breach and it is not cured within ten days; (3) if one party will not be able to fulfill their Conditions to Closing, and such failure is not the fault of the other party; or (4) the existence or issuance of a Law or Governmental Order prohibiting the transaction. The Effect of Termination section makes clear that, once termination occurs, the Agreement is void and no party is liable to the other except that the Termination and Miscellaneous Articles survive termination, as does the Confidentiality provision, and the parties remain on the hook for any willful violation of any provision of the Agreement.
Purpose: In conjunction with other clauses throughout the Agreement, the Termination provision provides both parties with the opportunity to walk away from the deal without penalty under certain circumstances. By making it easier to walk away, the provision encourages the parties to be on their best behavior. The result is that the transaction is actually more likely to be completed.
Without the Effect of Termination clause, the prospect of abandoning the transaction prior to the Closing would be a difficult decision given concerns regarding confidentiality and the information provided to the other side during due diligence. Furthermore, if claims for willful breach of the Agreement died along with the Agreement, the mere proposal of mutual termination would be grounds for suspicion of bad behavior, and termination by mutual consent would likely only occur when the relationship between the parties is broken beyond repair.
In other words, the termination provisions set the bar for walking away from the transaction at just the right height; the bar is not so high that the parties are forced into completing a bad deal, and not so low that committing significant time and money to the due diligence process simply isn’t worth the risk of the other party walking away on a whim.
Buyer Preference: If there are any specific facts or circumstances that are not encompassed by the middle ground term and would make the Buyer want to terminate the Agreement, the Buyer can include them as grounds for termination. Also, if the Buyer must obtain financing for the transaction and there is no “financing out” in the Agreement, the Buyer may want to include a provision allowing it to pay a reasonable “reverse break-up fee” to walk away from the transaction. If a reverse break-up fee is included, the Buyer may seek to include a traditional break-up fee to be paid by the Seller if it is the one who walks away from the deal. The Buyer may also want to expand the claims that would survive termination to include any breaches of the Agreement whatsoever and any fraud or intentional misrepresentations.
Seller Preference: Because the Seller’s representations and warranties are so much more expansive than those of the Buyer, the Seller does not want to extend the Effect of Termination provision to cover any breach of the Agreement. However, it does want to be able to recover for any willful breaches by the Buyer, so the Seller will typically be content with the grounds for termination provided by the middle ground term. Additionally, while the Buyer prefers a financing out and, in its absence, a nominal reverse break-up fee, the Seller prefers no financing out and a significant reverse break-up fee to compensate it for the time and expense associated with the due diligence process. However, if the Seller insists on a reverse break-up fee it can expect the Buyer to demand a similar fee to be applied if the Seller refuses to close the transaction.
Differences in a Stock Sale Transaction Structure: None.
