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• Failed mergers, like the one between Netflix and Warner Bros, lead the way for others to swoop in.
• A break fee clause should be tightly drafted to make sure it’s enforceable.
• The initial document will often have a clause stopping the target party engaging with other buyers once a deal is agreed.
• Regulatory approval is a condition of many deals. Parties will need to negotiate the extent of their respective obligations to secure approval, which often falls on the buyer being required to take all necessary or reasonable steps to obtain clearance.

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Earlier this year, Netflix pulled out of the proposed purchase of Warner Bros, opening the doors for Paramount Skydance (Paramount) to acquire Warner Bros in a ‘megamerger’ reportedly worth up to $111 billion (£82.4 billion)

Whilst a prospective ‘megamerger’ will inevitably capture headlines, there are many elements that should be explored by business owners with a future exit in mind, no matter what the proposed deal size.

Termination fees

When news of Netflix making an offer for Warner Bros was making headlines, it was highlighted that Netflix had, as part of the overall deal, offered to pay a $2.8 billion (£2.08 billion) ‘break-up fee’ if it walked away from the deal. These termination fees are designed to compensate one party, where the counterparty exits the transaction in specified circumstances. For such reasons, a break fee clause should be tightly drafted, otherwise the theoretical fee can quickly crystalise into a real liability.

The lesson is not simply that break fees can be large, but that their enforceability relies on the detail. In practice, obligations are often intertwined with exclusivity, financing commitments, and delivery milestones. Where a party exits, liability will depend on how clearly the contract defines:

• The circumstances in which termination is permitted;
• Whether payment is triggered automatically or subject to fault or failure to use reasonable endeavours; and
• How the clause interacts with broader risk allocation provisions (e.g. regulatory approval, material adverse change and force majeure).

In the Netflix/Warner Bros context, the size of the payment reflects a contract that effectively priced in the cost of withdrawal at the outset. From a drafting perspective, that is both the strength and the risk of such provisions. For the recipient, it provides certainty and a clean remedy. For the paying party, it creates a potentially significant fixed liability, regardless of the underlying commercial rationale for exiting the deal.

There is also an important distinction between a genuine pre-estimate of loss and a provision that may be characterised as a penalty. Under English law, a clause will generally be enforceable if it protects a legitimate commercial interest and is not out of all proportion to that interest. In deals involving billions in projected revenue, a multi-billion-dollar payment may well be justifiable but only if it is properly framed. Termination payments must, alongside the considerations given above, be:

• Precisely triggered, with minimal scope for dispute; and
• Commercially justifiable, to withstand scrutiny.

Exclusivity provisions

Initial transactional documents will often include provisions restricting the target’s ability to engage with competing prospective buyers once a deal is agreed. Such a clause would often be justified on the buyer needing the security so that it can invest time and resources into the transaction, without being used as a stalking horse.

With regards to the ‘megamerger’ and now that Paramount’s offer is treated as the ‘winning bid’, it is likely that some form of exclusivity has been agreed. Whilst such period isn’t public knowledge, the parties will have, most likely, taken other key factors affecting the deal into account (e.g. anticipated timetable for regulatory and/or shareholder approval).

If the period is too short, a buyer may be exposed to the risk of being outbid after it has incurred significant costs and time on due diligence, financing and, if required, regulatory preparation. However, an overly long exclusivity period may unduly restrict the target’s ability to respond to changing market conditions or superior proposals, creating tension with target’s directors’ duties and potentially depressing value. The sweet spot is, therefore, a carefully calibrated timeframe with, if necessary, conditional milestones or break clauses. This provides the buyer with sufficient protection to progress the transaction while preserving a degree of flexibility for the sellers.

Conditionality

This ‘megamerger’ will likely proceed with various conditions. One that will be applicable to many deals, no matter the size of consideration, is regulatory approval.

In the context of Paramount/Warner Bros and given the scale of the parties and their influence over content and distribution, there is a clear risk of increased market concentration (which could, amongst other matters, potentially lead to higher consumer prices). Therefore, the ‘megamerger’ is likely to require clearance from US authorities, as well as potentially other jurisdictions – which is far from guaranteed.

To address this, parties will need to negotiate the extent of their respective obligations to secure approval, which often falls on the buyer being required to take all necessary or reasonable steps to obtain clearance.

Financing is often covered by the conditions. In leveraged transactions, the seller will seek certainty that the transaction will complete, and the funds will be available at completion whereas the lender will typically require sight of an executed agreement (which has been pre-approved by them). This interplay must be carefully managed to avoid gaps in execution risk.

The proposed Paramount/Warner Bros ‘megamerger’ highlights a fundamental truth in corporate transactions: deal certainty is engineered, not assumed.

Break fees, exclusivity provisions and conditionality are not mere boilerplate, they are some of the many mechanisms through which risk is allocated and managed. For businesses considering an exit, value is determined by the strength and precision of the underlying legal framework, as well as the headline price.

Toby Walker is an associate solicitor at Taylor Walton Solicitors.

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