M&A Series Part 5: Earnest money & break-up fees

Top 10 negotiated points in a bank transaction: Earnest money & break-up fees

Editor’s note: This month, BankBeat takes a magnifying glass to the merger and acquisition activity underway in the community banking industry. Anton J Moch and Erik J. Didrikson, attorneys working in the community banking group of Winthrop & Weinstine P.A., Minneapolis, have created a 10-part series for BankBeat, to unpack the considerations bankers must take into account when negotiating a bank deal. In our first four days, we covered purchase price, payment terms, the financial condition of the bank, and post-closing liability. Here is the fifth installment. 

Day 5. Earnest money and break-up fees. Continuing on the allocation of risk theme from day four (post-closing liability), the parties each insert protections into a definitive agreement to protect them against losses from a deal-gone bad. Negotiations often include whether or not seller will require buyer to make an earnest money payment when the deal is signed; how and when the earnest money is applied to the purchase price, paid to seller or returned to buyer; and break-up fees for either buyer or seller if the agreement is terminated prior to consummation.

The amount of earnest money fluctuates with the size of the transaction, the confidence the parties have that regulatory approval will be obtained, and whether the earnest money constitutes “liquidated damages.” If a buyer insists that earnest money constitutes liquidated damages (recompense for the buyer’s failure to complete the transaction) the seller may insist on more earnest money.  

In transactions where directors want to fully ensure they can exercise their fiduciary duties as part of the deal, seller may be required to pay break-up fees in the event the transaction does not close for one of a number negotiated reasons.  Further, a seller may insist that Buyer pay a reverse break-up fee to compensate Seller for any harm to Seller’s business if there is little to no earnest money and buyer refuses or fails to close.

Break-up fees are designed to “lock in” the parties to complete the transaction, even when a better deal comes along. These fees are generally higher than an earnest money payment —  between 1 percent to 5 percent of total purchase price.

Anton J Moch
Erik J. Didrikson

Anton Moch and Erik Didrikson are members of the Winthrop & Weinstine, P.A., community banking group, and are some of the most active and experienced bank transaction legal advisors in the nation. Since 2014, Winthrop has served as chief legal counsel to parties completing the purchase, sale or merger of over 30 banks, bank holding companies and bank branches. Winthrop’s dedicated team of transaction attorneys is annually recognized as tier-one legal advisors to banks on bank transactions as well as corporate governance issues, capital issues, regulatory issues and a wide range of senior management legal issues. Contact Tony at [email protected] or 612-604-6671, or Erik at [email protected] or 612-604-6536.

Attend Anton’s upcoming presentation titled, “Soft” Factors to Consider When Selecting an Acquisition Candidateon Mon., Oct. 1 at the Bank Holding Company Association Fall Seminar, “Buy, Sell or Hold: More Strategies for Success,” in Minneapolis. Winthrop & Weinstine, P.A., is also proud to be a Diamond Level Sponsor at this event. To learn more or to register, visit theBHCA.org.