In late 2025, when Warner Brothers Discovery (WBD) was actively considering sale of the company, Netflix and Paramount emerged as likely purchasers. Knowing that a merger with either itself or Netflix would raise antitrust concerns, Paramount included in its offer a “reverse breakup fee” of $7 billion that it would pay to WBD in case the merger were blocked by the antitrust authority. Paramount’s persistence paid off, and, ultimately, the WBD board of directors determined that its offer was “superior” to Netflix’s. After Netflix declined to match the offer, in February 2026, WBD agreed to be acquired by Paramount.
While traditionally less common than target termination fees, which the target promises to pay in case the deal falls apart, reverse breakup (termination) fees, which the buyer pays if the deal does not close, have become important in many recent mergers. In addition to the Paramount-WBD merger, there are a number of recent deals where concerns over antitrust challenges and the promise of a large reverse termination fee played a prominent role. They include the merger between JetBlue and Spirit Airlines (with a $470 million reverse breakup fee) and the merger between Disney and Fox (with a $2.5 billion reverse breakup fee). According to professor Ed Rock, close to two-thirds of all mergers that received a second request from the DOJ or FTC contained an antitrust reverse termination fee. The median size of these deals was between 4-5% of the transaction value.
As the Paramount-WBD story indicates, and the Rock data show, reverse breakup fees can play an important role in both assuaging target’s concerns and securing antitrust approval. What has not been studied, however, is the effect of reverse breakup fees on the ability of antitrust authorities to distinguish between pro-competitive deals and anti-competitive ones and to block anti-competitive deals. In a new paper, we address that topic, using a game-theoretic model to analyze the antitrust implications of reverse termination fees in mergers.
We argue that a reverse breakup fee can have two conflicting effects on antitrust regulators. First, the promise to pay the fee, as long as it is not excessive (defined below), can be beneficial to the regulator by signaling that the acquirer believes the deal promotes competition. Of course, ae regulator cannot rely on a reverse breakup fee alone to determine a deal’s pro-competitive value; otherwise, even acquirers proposing anti-competitive deals would offer them. But, as long as the regulator challenges enough deals with reverse breakup fees (those that its independent investigation reveals are most likely anti-competitive), offering a reverse breakup fee will cost more for anti-competitive deals than for pro-competitive ones. This extra information will enable the regulator to more accurately distinguish between anti-competitive and pro-competitive deals.
On the other hand, a large reverse termination fee will also give the acquirer more incentive to fight and defeat any merger challenge by the regulator. This is harmful to the regulator both because it will increase its cost of enforcement and because when an anti-competitive acquirer spends more in litigation, it is more likely to win. It’s even possible, depending on how effective the additional spending is, the antitrust authority will decide it isn’t worth challenging anti-competitive deals with sufficiently reverse breakup fees (this is what we mean by an “excessive” reverse termination fee).
Our paper shows that reverse termination fees have a welfare-enhancing signaling effect and a welfare-reducing commitment to litigation effect. We analyze the net impact of these two effects on the regulator. Our analysis finds that regulator welfare is maximized either when reverse breakup fees are banned entirely (if the commitment effect is too strong) or when they are just large enough to generate a desirable signal for the regulator. This is the size at which anti-competitive deals will sometimes forego the reverse breakup fee because the possibility of losing the fee makes it no longer worth pretending a deal is pro-competitive. Any larger reverse breakup fee degrades the signaling benefit to the regulator and exacerbates the commitment harm.
The paper also extends the analysis in two ways. First, we look at stock deals in addition to cash deals and find that the signaling function of reverse breakup fees is more effective with stock consideration. This means the range of situations in which reverse breakup fees are socially desirable is greater for stock acquisitions than cash acquisitions, making any benefit from banning these fees in stock deals less likely. Second, we show that most of our main findings are similar when we allow for settlements (e.g., agreeing to divest certain assets) between the regulator and the merging parties. There are, however, two adjustments. First, if the regulator can commit to litigate whenever the acquirer rejects its divestiture offer, then there is no longer any possibility that it is optimal to completely ban reverse breakup fees, although we still will want to make sure they are not too large. On the other hand, if the regulator cannot commit to litigate after its settlement offer is rejected, then the possibility of settlement increases the rationale for regulating reverse breakup fees.
Albert H. Choi is a professor at the University of Michigan Law School, and Abraham L. Wickelgren is a professor at the University of Texas Law School. This post is based on their recent paper, “Reverse Breakup Fees and Antitrust Approval,” available here.