The original intent of the reverse break up fee, or at least one of   the intents, was to incentivize buyers to stick with the deal.  Break up fees go to the buyer if the seller decides to go with another option. Reverse fees go to the seller if the buyer gets cold feet.

But private equity firms eventually came to interpret the reverse break up fee as an escape hatch, particularly if the fee is not all that big.

Rather than work in the company’s favor in terms of pushing buyers to complete the takeover — all the while, the fee being in the back of their minds — it’s worked against the company in certain cases.

“What am I missing? This is an option” to back out, one private equity investor told Reuters, referring to when he first came upon reverse break up fee clauses.

When the lawyers inserted such a fee in the the Sallie Mae/J.C. Flowers group deal, they probably thought it was straight forward enough. Now the two sides are battling in court over the fee and other terms of the deal. 

With Cerberus and United Rentals, the reverse break up fee is also in dispute. Cerberus believes that its merger agreement allowed it to walk away and pay a $100 million fee if the firm did not want to go ahead with the deal. United Rentals and its advisers say that Cerberus does not have the right to end the deal, and has sued the firm to complete the existing $34.50 per share offer.

All this leads us, and Breakingviews to believe that maybe its time to just get rid of the break up fee, and instead clarify language on what the buyers are, and aren’t, entitled to do during while trying to close the deal.

Breakingviews argues that if the break up fee clause wasn’t in the merger agreement, Cerberus would have to complete the offer as is.