It's fairly common in acquisitions for one or both sides to agree to a "break-up" fee to protect against one side getting cold feet, regulatory risks, financing risks, and more. http://blogs.wsj.com/deals/2012/04/25/facebook-ipo-whats-wit...

I imagine it's not US corporate law per se, but rather that as part of the agreement, even if the merger isn't cleared, FB still has to pay the $200m although at roughly 20% of the fee it seems a little steep to compensate Instagram for the cost of having to reverse the transaction (not that I'm particularly familiar with the deal terms and associated costs!)

Its essentially a retainer. What if they go through the motions, and then Facebook backs out at the last second? It could have thrown Instagram for a loop, and sometimes an acquisition takes enough resources that it could cost the company money or disrupt their growth or operation. It essentially could prevent frivolous offers from "attacking" competitors by pretending to buy them out, and then not.

I guess you could call it "attempted merger".

It's not a matter of law. It's a "breakup fee" negotiated by Instagram in the event that the acquisition falls through.

The purpose of a breakup fee is to compensate the target for costs associated with the failed acquisition and various other losses or expenses. Mostly however, a breakup fee compensates the target for business oppportunities not pursued while the acquisition was being attempted because of the acquisition.

In cases where the acquirer is a direct competitor to the target, the breakup fee guarantees that the acquirer can't simply look at the target's books and assets, walk away, and use that knowledge to clone the target's business, without paying for it.