Will Enova owe $5M fee after stall-out of Grasshopper deal?

• Key insight: Following the apparent demise of Enova International's purchase of Grasshopper Bank, it's unclear whether the buyer will owe $5 million to the seller.
• What's at stake: Reverse termination fees may be included in merger agreements in situations where the seller is uncertain about the buyer's ability to secure regulatory approval.
• Expert quote: "Regulatory risk is something obviously that every bank M&A deal has. And whether or not there's going to be a reverse termination fee payable by the buyer is really sort of unique to the circumstances." —Mike Keeley, partner, Norton Rose Fulbright

Though Trump administration regulators have greased the skids for mergers and acquisitions, bank merger deals can still end badly. And when those transactions fall apart, one side is often left holding the bag.

Earlier this week, Enova International's proposed acquisition of Grasshopper Bank went sideways, as the buyer said it was withdrawing its applications with regulators. One question that now looms is whether Enova will have to make a $5 million payment — known as a reverse termination fee — to Grasshopper.

An Enova spokesperson acknowledged Tuesday that its merger agreement outlines the possibility of a $5 million fee paid to Grasshopper, but also noted that Enova did not announce the deal's termination. New York-based Grasshopper declined to comment.

"Regulatory risk is something obviously that every bank M&A deal has," Mike Keeley, a lawyer who heads the bank M&A practice at Norton Rose Fulbright, told American Banker. "And whether or not there's going to be a reverse termination fee payable by the buyer is really sort of unique to the circumstances.

"That would be one of the pre-execution risks evaluated by both the acquirer and the target," added Keeley, who was not involved in the Enova-Grasshopper deal. "In my experience, the transactions that do have a reverse termination fee are the ones where the seller/target thought there was more than an acceptable amount of risk regarding getting the required regulatory approvals."

The payment of such fees from the buyer to the seller can be triggered when a deal doesn't receive regulatory approval.

In May 2023, more than a year after TD Bank Group announced plans to acquire First Horizon Corp., the Canadian banking giant said it was terminating the deal and would pay a total of $225 million to the Memphis, Tennessee-based bank.

TD said at the time that it didn't have a timetable for receiving regulatory approvals for the First Horizon deal. The following year, Toronto-based TD pleaded guilty in the U.S. to money-laundering conspiracy, agreeing to pay more than $3 billion in fines and acceding to a stateside asset cap.

The circumstances surrounding the apparent demise of the Enova-Grasshopper deal are different. Enova is a high-cost nonbank lender with roots in the payday lending business, and its bid to acquire a bank charter drew strong opposition from both consumer advocates and Democratic elected officials.

During the regulators' review of the deal, questions were also raised about Enova's use of fair-value accounting, with a former executive at a rival nonbank lender contending in a comment letter that he'd found evidence that Enova's reported financial condition was materially overstated.

An Enova spokesperson said the comment letter contained "several inaccuracies and misstatements." The company spokesperson also said that Enova's use of fair-value accounting "played no role" in its decision to pull the merger applications with the Federal Reserve and the Office of the Comptroller of the Currency.

Enova CEO Steve Cunningham said in a press release Monday: "Regulators do not have clear standards for nonbanks that want to become banks and that serve customers whose credit needs today are met mostly outside of the banking system. Without clearly articulated standards, the process is susceptible to political pressure and outside advocacy, rather than being guided strictly by the statutory factors that should govern it."

The OCC said in a written statement that its standards and decision criteria are clearly laid out in its publicly available licensing manual.

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The terms of the December 2025 merger agreement between Enova and Grasshopper, combined with specific facts regarding the two companies' interactions with regulators, will likely determine whether the buyer must pay a $5 million fee to the seller.

Cunningham, Enova's CEO, told analysts that neither the OCC nor the Fed took action on Enova's applications.

The Enova-Grasshopper merger agreement states that it may be terminated by either party in the event that any regulatory authority has finalized its denial of a requisite regulatory approval. The same is true in the event that a regulator advises either company in writing — or both companies orally — that it will not grant a requisite regulatory approval.

In the event that Enova terminates the merger agreement pursuant to those provisions, and does so within one year of when the agreement was signed, it's on the hook to pay the $5 million fee to Grasshopper.

John Gorman, a partner at the law firm Luse Gorman who also was not involved with the Enova-Grasshopper deal, said that while there are sometimes disputes over termination fees, those disagreements are somewhat rare.

Keeley made a similar point, explaining that companies don't want failed deals to impact their ability to enter into future transactions.

"So as it relates to disputes," he said, "it certainly sort of behooves both sides to resolve their dispute behind closed doors."