The cost of indecision: M&A deals see rise in reverse break clauses

With increased M&A taking place in financial services, law firm Ashurst has said they are witnessing an increase in expensive reverse break clauses as companies seek to ensure deals proceed successfully.

Reverse break fees are fees payable by the bidder to the target company if certain trigger events occur that prevent the deal from proceeding. 

The option is typically enacted to provide certainty on the amount payable to compensate the target for the costs incurred and opportunities lost if the deal fails due to the bidder’s action or to incentivise the bidder to complete the acquisition.

There have already been two instances of M&A deals failing to proceed since the start of the year involving Selfwealth and Perpetual, while Regal Partners opted to not proceed with an acquisition of Platinum Asset Management following a two-month due diligence phase last December.

In the case of Selfwealth, the firm entered a scheme implementation deed with Bell Financial Group which had a break fee of $577,000 or a reverse break fee of $1.1 million. When Selfwealth opted to go with Svava instead, the break fee was payable to Bell.

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A significant deal for Insignia is also currently going through due diligence with two private equity players Bain Capital and CC Capital and it has said any scheme implementation deed enacted will include a reverse break fee.

In its M&A Deal Report 2025, law firm Ashurst said break fees were present in 79 per cent of deals in 2024 and reverse break fees were present in 63 per cent. While the number of break fees was consistent with previous years, the number of reverse break fees was up by 12.5 per cent. 

In 2024, it said, four deals failed due to a competing offer and one due to failure to obtain shareholder approval.

“[Reverse break fees] were initially popularised in the US by private equity firms to manage the risk of financing failures in leveraged buyouts with the reverse break fee being subject to a cap. Reverse break fees were therefore viewed mostly as a bidder-friendly tool to cap their liability in these circumstances and were sometimes referred to as an option fee. 

“In Australia, they are often viewed more as a deal protection measure for the target, and have become more prevalent due to the volatile economic environment and risks associated with obtaining regulatory approvals.

“This indicates that the Australian market is progressively aligning with US practices, particularly in cases where the market capitalisation of the bidder and/or a bidder shareholder approval requirement justify a higher reverse break fee.”

Why have deals failed?

Last December, Regal opted to not proceed with a potential acquisition of Platinum following a period of extended due diligence. Regal chief executive Brendan O’Connor said its concerns stemmed from the firm’s declining funds under management which has fallen from $15.5 billion a year ago to $10.7 billion.

“We walked away from Platinum because we couldn’t agree on a price. Our great concern was that funds under management were eroding faster than we could get our head around. We couldn’t build sufficient conviction in the price that we were looking to pay, so we walked away.”

In January, Perpetual opted to end a deal with KKR due to the higher-than-expected tax costs associated with the deal. The Australian Taxation Office had ascertained Perpetual’s primary tax liability could be as much as $488 million if the deal proceeded. Further additional penalties and interest could also cause this sum to rise by as much as a further 50 per cent, it said.

While the two parties enacted discussions, they were unable to reach an alternative transaction and terminated the deal. No break fee was payable on this, but KKR had reserved the right to seek further damages.

Perpetual said it had spent $42.6 million in transaction and separation costs before pulling the plug on the deal. 

Meanwhile, Selfwealth announced it received bids from both Bell Financial Group and Svava, and opted to enter a scheme implementation deed with Bell. However, it subsequently received a higher bid from Svava. 

As this was a “superior proposal” and Bell declined to make a revised bid, Selfwealth dropped the deed with Bell and entered one with Svava instead. 

“Accordingly, under the Bell scheme implementation deed, Selfwealth is now permitted to further progress the Svava proposal. Selfwealth intends to enter into a scheme implementation deed with Svava to implement the Svava proposal as soon as practicable,” it said.