GOODWIN 23 reimbursement to a termination fee is a negotiated deal point. In approximately 15% of the REIT M&A transactions we reviewed, reimbursement of expenses was required in addition to payment of the termination fee. This may just be a bit of “window dressing” to allow parties to show a lower absolute number for the termination fee but courts are likely to look at the total amount paid, regardless of whether it is broken into components, when evaluating termination fees. Indeed, the nominal termination fee was set at substantially less than 3.0% of equity value in many of these cases. Independent of whether or not a termination fee is payable, expense reimbursement up to the specified cap is commonly required in REIT M&A transactions when the merger agreement is terminated due to the failure of target shareholders to approve the transaction at a meeting duly held for this purpose. Likewise, many merger agreements provide for expense reimbursement to buyer if the agreement is terminated due to target’s uncured breach of its representations and/or obligations under the agreement under circumstances not involving an interloping offer and payment of a termination fee. • Two-Tiered Termination Fees. As noted above under “Go Shops and Window Shops”, a minority of deals have used a two-tiered termination fee structure whereby a substantially lower termination fee is payable if the target board elects to terminate the definitive agreement to accept a “superior” proposal received as a result of third-party discussions initiated during a go-shop or window-shop period. The reduced termination fee in these instances is typically 50% or more less than the full termination fee payable after expiration of the go-shop or window-shop period. In the deals we surveyed over the 2012-2017 period, first-tier termination fees were in the 1.0-to-1.7% of equity value range, jumping up to the 2.4-to-3.25% range as above once the go-shop or window-shop period expired. 9. REMEDIES. Another frequent area of negotiation in M&A contracts revolves around what remedies the parties have if, in a situation where neither party has the contractual right to terminate the agreement, one party nevertheless materially breaches its obligations under the agreement, e.g., one party simply refuses, or otherwise fails, to close despite all relevant conditions having been satisfied. In all of the deals surveyed, the buyer had the right to seek specific performance in court to force the target to comply with its contractual obligations. Targets, on the other hand, had specific performance rights in approximately 85% of the surveyed deals, while in the remaining approximately 15% of transactions, target’s remedies were limited to terminating the agreement and requiring the buyer to pay a “reverse termination fee” as liquidated damages. Included within the deals providing target with specific performance rights were a small number of deals that limited remedies to a reverse termination fee if buyer failed to close due to failure of financing and those in which target also had the option to terminate the agreement and accept a fixed reverse termination fee as liquidated damages. Deals in which target’s remedies are limited solely to a reverse termination fee effectively set an “option price” for the buyer, i.e., the cost to the buyer of walking away from the deal. These generally only appear in cash deals with private buyers (often funds) who may have internal policies requiring a cap on potential liability. In the deals surveyed, reverse termination fees were an average/ median of approximately 2.4 times higher than the target’s termination fee payable in the event of a fiduciary termination right.11 10. LITIGATION. Like other public M&A transactions, REIT M&A transactions frequently generate litigation, typically involving claims for alleged breach of fiduciary duty and/ or material omissions in relevant SEC filings, such as the proxy statement. Of the 50+ transactions announced in the 2012–2017 period, approximately 75% resulted in litigation along these lines12 , the resolution of which varied, but over two thirds of the cases were dismissed and no deals were enjoined by a court: In years prior to 2016, in order to remove any risk to deal certainty and in recognition that paying plaintiffs’ counsel was often less expensive than defending even frivolous cases, many cases were settled. A typical settlement might require defendants to make some additional 11 One outlier was excluded in this calculation. 12 The majority of deals in which no litigation was brought involved non-traded REITs, which may attract fewer shareholder lawsuits due to the lower public profile of the target. Litigation Resolutions 44% were dismissed in conjunction with a negotiated settlement 15% were dismissed by the court pursuant to a motion by defendants 10% were dismissed voluntarily by plaintiffs without a settlement 31% are still pending/unresolved