Break Fee
AdvancedA break fee is a payment one party to an agreed merger or acquisition must make to the other if the deal fails to complete for specified reasons, such as the target's board accepting a rival offer.
Buyers spend significant time and money pursuing an acquisition. A break fee, also called a termination fee, compensates them if the target walks away, and discourages competing bids. A reverse break fee is paid by the buyer to the target if the buyer fails to complete, for example because it cannot obtain financing or regulatory approval.
Break fees are typically a small percentage of the deal value. For example, in a 1,000,000,000 acquisition, a target might agree to pay a break fee of 30,000,000 if its board recommends a superior offer from another buyer.
Rules and practice differ between countries. In the United States, break fees payable by targets are common, often a few percent of deal value. Courts review whether they are reasonable, since excessively large fees could deter rival bids and harm shareholders. In the United Kingdom, the Takeover Code generally prohibits targets of public takeovers from agreeing to pay break fees, with limited exceptions.
Reverse break fees have become more common in deals facing significant regulatory risk.
For worked examples and full lessons, visit notesbysara.org.