Structuring M&A Deals Around Regulatory Uncertainty and Delay in Washington, DC: A Practical Legal Guide

Introduction

Mergers and acquisitions have always been complex undertakings, requiring careful co-ordination across legal, financial, operational and strategic domains. But in an era defined by heightened antitrust scrutiny, evolving foreign investment review frameworks, sector-specific regulatory regimes and geopolitical volatility, regulatory uncertainty has emerged as one of the most consequential variables in deal structuring. What was once a relatively predictable closing condition has transformed into an existential deal risk capable of unravelling years of negotiation, destroying billions in value, and exposing parties to protracted and expensive litigation.

The regulatory environment facing deal makers today is structurally more complex than it was even a decade ago, caused most recently in part due to changes triggered by federal agencies in Washington, DC. The United States, the Federal Trade Commission (FTC) and Department of Justice Antitrust Division have pursued increasingly aggressive merger enforcement strategies. The Committee on Foreign Investment in the United States (CFIUS) has expanded its jurisdictional reach following the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). The European Commission continues to refine its framework under the EU Merger Regulation, including its new tools under the Foreign Subsidies Regulation. Sector-specific regulators – from the Federal Communications Commission to the Federal Energy Regulatory Commission to banking supervisors – layer additional review timelines and substantive requirements atop general competition review. Meanwhile, multi-jurisdictional deals increasingly face parallel reviews across dozens of antitrust regimes worldwide, each with its own substantive standards, procedural timelines and political dynamics.

Against this backdrop, sophisticated M&A counsel must approach deal structuring not merely as a legal exercise in documentation, but as a strategic exercise in risk allocation. This chapter of the guide explores the principal tools and techniques available to deal lawyers navigating regulatory uncertainty and delay, including:

• the design of regulatory conditions and outside dates;
• reverse termination fees and specific performance provisions;
• hell-or-high-water commitments;
• interim operating covenants;
• deal structure modifications to reduce regulatory exposure; and
• the emerging use of regulatory escrows and deferred closing mechanisms.

Throughout, the discussion is grounded in practical considerations informed by recent high-profile transactions and enforcement trends.

Understanding the sources of regulatory uncertainty

Before examining how deals can be structured around regulatory uncertainty, it is essential to understand the principal sources of that uncertainty and why they have intensified.

Antitrust review

The past several years have witnessed a fundamental shift in antitrust enforcement philosophy in the United States. The Biden-era FTC and DOJ challenged a remarkable number of transactions, including several that would historically have been cleared with modest remedies or not challenged at all. While the current administration has signalled some recalibration, the underlying analytical frameworks that support broad theories of competitive harm – including potential competition theories, labour market theories and nascent competitor theories – remain embedded in agency practice and litigation strategy. More fundamentally, the HSR Act’s Second Request process can delay transactions by months, and the agencies retain the ability to seek preliminary injunctions that effectively block transactions even when ultimate litigation outcomes are uncertain.

Foreign investment review

CFIUS review has become a near-universal feature of inbound investment transactions involving US businesses with any connection to technology, data, critical infrastructure or defence supply chains. Timelines are unpredictable, mitigation negotiations can be protracted, and Presidential divestiture orders remain a live risk for the most sensitive transactions. Similar regimes have proliferated globally, with the United Kingdom’s National Security and Investment Act, Germany’s Foreign Trade and Payments Act, and Canada’s Investment Canada Act all representing increasingly active gatekeeping mechanisms.

Sector-specific regulation

In industries including telecommunications, banking, insurance, healthcare, energy and aviation, transactions require approvals from sector-specific regulators that operate on their own timelines and apply substantive standards that go well beyond competition analysis. State-level regulatory approvals – including state public utility commissions and state banking regulators – add further complexity and unpredictability. A single transaction may require a dozen or more regulatory approvals before it can close.

Geopolitical and political risk

Beyond purely legal regulatory frameworks, deals increasingly face political headwinds that do not fit neatly into standard regulatory categories. Legislative or executive interventions, national security concerns articulated outside formal CFIUS processes, and foreign government actions all represent sources of delay and uncertainty that can fundamentally alter deal economics and timetables.

Cumulative effect

The cumulative effect of these forces is a regulatory landscape where deal timelines are longer, outcomes are less predictable, and the cost of regulatory failure – in terms of both legal exposure and strategic opportunity cost – is higher than ever.

Designing regulatory closing conditions

The foundation of any approach to regulatory risk allocation begins with the drafting of regulatory closing conditions. The gap between a loosely drafted “all approvals” condition and a carefully negotiated set of conditions can mean the difference between a party being able to walk from a deal in the face of regulatory adversity and being trapped in a transaction that has become commercially untenable.

Scope of required approvals

Deal lawyers must carefully define which regulatory approvals are required as conditions to closing, balancing certainty of identification against the risk of omitting approvals that subsequently emerge as necessary. A common approach is to identify required approvals on a schedule negotiated at signing, with appropriate representations and covenants governing the comprehensiveness of that schedule. In complex multi-jurisdictional transactions, this exercise requires early engagement with regulatory counsel across relevant jurisdictions to develop a comprehensive filing map.

Standard of condition satisfaction

For competition approvals, closing conditions must specify not merely that an approval has been obtained, but the terms on which it may be obtained. The critical negotiating point is whether the condition is satisfied by an approval obtained subject to any conditions or remedies, or whether the condition requires that remedies not exceed a defined threshold – often referred to as a “material adverse regulatory condition” or a “burdensome condition” standard. The buyer will typically seek the broadest possible standard – an approval subject to whatever conditions the agencies require. The seller will seek a narrower standard, either requiring clean clearance or permitting the buyer to terminate only if the required remedies exceed a defined threshold (such as divestiture of a specific business unit or assets representing a specified percentage of revenues).

Burdensome condition definitions

Defining what constitutes a “burdensome condition” sufficient to trigger a buyer termination right requires both legal sophistication and commercial judgement. Broadly written carve-outs that permit buyer termination for any behavioural remedy may give buyers easy exits from transactions they no longer find attractive for unrelated commercial reasons. Narrowly written carve-outs limited to structural divestitures of specific businesses may leave sellers exposed to buyers who negotiate away most of the transaction’s commercial rationale in regulatory settlements. The appropriate balance depends on the transaction’s specific regulatory risk profile, the commercial leverage of the parties and an honest assessment of likely regulatory outcomes.

Outside dates and extension mechanisms

The outside date – the date after which either party may terminate the merger agreement if closing has not occurred – is the primary clock mechanism by which the parties allocate the risk of regulatory delay.

Setting the initial outside date

Setting the initial outside date requires a realistic assessment of the anticipated regulatory timeline, including the following:

• time for HSR filing and waiting periods;
• potential Second Request timelines;
• CFIUS review and investigation timelines;
• sector-specific approval timelines; and
• foreign competition filing timelines.

In straightforward transactions, an outside date of 12 months from signing may be adequate. In complex transactions with significant antitrust risk or CFIUS exposure, initial outside dates of 18 months or longer have become increasingly common.

Extension rights

Most merger agreements today include one or more automatic or elective extension provisions that extend the outside date if specified regulatory conditions have not yet been satisfied. The structure of these extensions is a heavily negotiated point. Automatic extensions typically trigger if certain regulatory approvals are still pending as of the initial outside date, without requiring any party election. Elective extensions may require the buyer to affirmatively elect to extend and may be conditioned on the buyer’s compliance with its regulatory efforts covenant as of the election date. Some agreements provide that elective extensions require the payment of an extension fee by the buyer – effectively a partial payment of the reverse termination fee as consideration for additional time.

Asymmetric extension rights

In transactions with significant regulatory risk, sellers sometimes negotiate for asymmetric extension rights – for example, the right to extend the outside date only if specified regulatory milestones (such as the completion of a CFIUS review or the receipt of a Second Request response) have been achieved by specified dates. This asymmetric structure creates interim checkpoints that provide sellers with meaningful opportunities to assess deal progress and, if warranted, to negotiate enhanced deal protection.

Regulatory efforts covenants and hell-or-high-water commitments

Perhaps the most consequential and heavily litigated provision in deals with significant regulatory risk is the regulatory efforts covenant – the buyer’s affirmative obligation to pursue regulatory approvals with specified levels of diligence and commitment.

Spectrum of efforts standards

Regulatory efforts covenants exist on a spectrum from “reasonable efforts” – the lowest standard, requiring the buyer to take efforts that a reasonable party would undertake – to “best efforts” – a more demanding standard requiring the buyer to take all steps within its power to achieve the required approvals – to “hell-or-high-water” – the most demanding standard, explicitly requiring the buyer to agree to whatever divestitures or other remedies are required to obtain regulatory clearances, regardless of cost or commercial impact.

The choice of standard is not merely semantic. In litigation arising from failed regulatory deals, the scope of the buyer’s efforts covenant has been the central battleground. Courts have generally been reluctant to find that buyers with less than hell-or-high-water commitments were obligated to agree to divestitures that the buyer judged commercially unacceptable. Conversely, buyers that have accepted hell-or-high-water language have been held to that standard even when regulatory outcomes were far more burdensome than anticipated at signing.

Hell-or-high-water provisions: scope and carve-outs

While hell-or-high-water language is increasingly common in large transactions with significant antitrust exposure, parties routinely negotiate carve-outs and limitations on even the broadest efforts commitments. Common carve-outs include:

• exclusions from the obligation to divest specified “crown jewel” assets or businesses;
• limitations on the scope of required behavioural remedies; and
• geographic limitations on the jurisdictions in which aggressive remedies must be pursued.

The negotiation of these carve-outs requires careful analysis of likely regulatory theories and remedies to ensure that carve-outs do not so comprehensively limit the hell-or-high-water commitment as to render it commercially meaningless.

Co-ordination and consent rights

Regulatory efforts covenants also typically address the allocation of control over regulatory strategy between the buyer and the seller, including the extent to which the buyer must consult with and obtain the consent of the seller before making regulatory filings, submitting to interviews, offering remedies, or accepting conditions. In transactions where the seller retains operational responsibility for the target business pending closing, sellers have a strong commercial interest in influencing regulatory strategy, particularly with respect to remedies that may affect the post-closing business. The appropriate scope of seller consent rights – and the standard governing disagreements between the parties over regulatory strategy – is a frequently contested negotiating point.

Reverse termination fees and specific performance

In transactions where regulatory failure is a meaningful risk, the consequences of that failure for the buyer – specifically, whether the seller is limited to a reverse termination fee or can compel the buyer to close – are among the most commercially significant deal terms.

The reverse termination fee mechanism

A reverse termination fee (RTF) is a payment made by the buyer to the seller upon termination of a merger agreement in circumstances where the buyer fails to close for specified reasons, including regulatory failure. In transactions with significant regulatory risk, the RTF serves as the buyer’s effective “walk away” price – the fee represents the buyer’s maximum financial exposure if it is unable or unwilling to obtain regulatory approval and the deal fails to close.

RTF sizing in regulatory failure scenarios has evolved significantly in recent years. In earlier market cycles, regulatory failure RTFs of 3% to 5% of deal equity value were common. In more recent large transactions with meaningful regulatory risk – particularly CFIUS-related risk – RTFs in the range of 6% to 10% of equity value have been observed, reflecting both the increased severity of regulatory risk and sellers’ demands for greater deal certainty. In extreme cases, such as transactions involving critical national security considerations, RTFs above 10% have been negotiated.

Specific performance versus RTF exclusivity

The tension between specific performance rights – the seller’s right to compel the buyer to close or to force the buyer to use its best efforts to obtain regulatory approval – and RTF exclusivity is one of the defining negotiations in large M&A transactions. Sellers generally prefer to retain specific performance rights as long as financing is available and regulatory approvals remain obtainable in principle. Buyers generally prefer RTF exclusivity, which provides a clean exit at a defined cost. The resolution of this tension typically involves tiered structures: the seller may have specific performance rights to compel the buyer to pursue regulatory approvals aggressively up to the outside date, but once the outside date has passed or regulatory approvals have been finally denied, the seller’s remedy is limited to the RTF.

Deal structure modifications to reduce regulatory exposure

Beyond contractual risk allocation, deal lawyers have increasingly focused on upfront transaction structure modifications designed to reduce the regulatory footprint of proposed transactions – effectively building regulatory strategy into deal architecture from the outset.

Pre-signing divestitures and carve-outs

In transactions where antitrust risk is concentrated in specific overlapping businesses, buyers and sellers have structured transactions to include pre-signing commitments to divest specified assets or businesses simultaneously with or prior to closing the primary transaction. By proactively addressing the most obvious competitive concerns before regulatory review commences, parties can reduce review timelines and the risk of more extensive regulatory intervention.

Minority investment and phased acquisition structures

In transactions where full merger control filings would trigger comprehensive review, some parties have explored phased structures under which the buyer acquires an initial minority stake – below HSR and foreign investment notification thresholds – before pursuing a subsequent full acquisition. While regulatory authorities have become more attentive to these strategies and have in some cases challenged minority acquisitions that functionally conveyed control, properly structured phased transactions can allow parties to deepen their relationship, validate integration assumptions and develop regulatory strategy before committing to full acquisition.

Structural modifications to reduce CFIUS exposure

In foreign investment transactions, the transaction structure itself can meaningfully affect the scope and intensity of CFIUS review. Structures that limit a foreign acquirer’s access to sensitive technology, personal data or critical infrastructure – for example, through the creation of a proxy board, the exclusion of specified business units from the acquired perimeter, or the negotiation of special security agreements at signing – can facilitate CFIUS clearance or reduce the extent of required mitigation.

Interim operating covenants and long-stop management

When regulatory timelines extend unexpectedly, the interim operating covenants governing the target’s conduct between signing and closing become increasingly consequential. Covenants that were designed for a six-month regulatory timeline may become commercially problematic if closing is delayed by 18 months or more.

Preserving commercial flexibility

Standard interim operating covenants requiring the target to operate in the ordinary course and obtain buyer consent for significant decisions can, over extended periods, meaningfully constrain the target’s ability to respond to competitive dynamics, capital markets conditions and strategic opportunities. Deal lawyers should negotiate carve-outs from ordinary course covenants that preserve the target’s ability to take commercially necessary actions, and should build consent processes that are designed to operate efficiently over potentially extended timelines.

Long-stop renegotiation rights

Some sophisticated deal structures include explicit provisions permitting either party to request renegotiation of deal economics or covenants if the outside date is extended beyond a specified threshold. While these provisions introduce uncertainty, they can provide a commercially rational mechanism for preserving deal viability when extended regulatory timelines have fundamentally changed the economic circumstances of the transaction.

Regulatory escrows and deferred closing structures

An emerging area of deal structuring involves the use of regulatory escrows and deferred closing mechanisms to facilitate partial closings or to ring-fence regulatory risk in specific transaction components.

In transactions involving multiple distinct businesses, geographic markets or transaction segments, parties have increasingly explored structures that permit closing on components of the transaction that have received regulatory clearance while holding other components in escrow pending completion of review. Regulatory escrow arrangements – under which a portion of the consideration is held in escrow pending final regulatory approval – can facilitate partial economic value transfer while regulatory processes are completed. These structures require careful attention to tax treatment, accounting presentation and the allocation of operational responsibility for escrow-held assets.

Practical considerations and conclusion

Structuring M&A deals around regulatory uncertainty requires a mindset that integrates legal risk management with commercial strategy from the earliest stages of transaction planning. The most successful transactions in high-scrutiny environments share several common features:

• they involve early and candid assessment of regulatory exposure, including engagement with antitrust and regulatory counsel before deal terms are finalised;
• they include carefully calibrated risk allocation provisions that reflect realistic assessments of probable regulatory outcomes rather than optimistic assumptions;
• they maintain robust regulatory efforts commitments backed by meaningful financial consequences; and
• they preserve commercial flexibility for both buyer and target during potentially extended interim periods.

As regulatory environments continue to evolve – and there is little reason to expect that the structural forces driving increased scrutiny will abate meaningfully in the near term – the ability to design transactions that can survive regulatory challenge, adapt to regulatory delay and allocate regulatory risk efficiently between counterparties will remain among the most valuable skills in the M&A lawyer’s toolkit. Deals that are structured with regulatory uncertainty baked in from the outset, rather than treated as an afterthought to be managed during the approval process, are better positioned to close successfully, preserve deal value and withstand the increasingly unpredictable regulatory environment that defines contemporary M&A practice.

This chapter of the guide is intended for informational purposes only and does not constitute legal advice. Parties engaged in M&A transactions should consult qualified legal counsel regarding the specific regulatory requirements and deal structuring considerations applicable to their circumstances.