breakfee

Break fee, also known as a break-up fee, is a provision in a merger or acquisition agreement that requires one party to pay a specified sum if the deal fails to close or is terminated under defined circumstances. The most common structure is a payment from the target company to the acquiring party if the target terminates the agreement to pursue a superior proposal or another transaction. The purpose is to compensate the other party for diligence, time, and deal-related costs, and to deter opportunistic changes in the deal.

Mechanics and structuring vary. Break fees are typically fixed amounts or calculated as a percentage of the transaction value (either equity or enterprise value). They are usually triggered only when certain conditions occur, such as termination by the target in favor of another proposal, or, in some cases, termination by the acquirer for specific reasons. Some deals also contemplate a reverse break fee, where the bidder would owe the target if the bidder backs out or breaches certain conditions.

Regulation and governance: break fees are subject to contract law and fiduciary duties governing the deal. They are scrutinized by regulators and stock exchanges for reasonableness and to ensure they do not unduly impede competition or entrench management. In practice, the size and structure of break fees reflect negotiations between parties and the perceived likelihood of a deal’s completion.

Criticism and impact: break fees can facilitate negotiated transactions by reducing the risk of sunk costs, but they may discourage competing bids or be perceived as tolls on competition. The appropriateness of a break fee depends on the specifics of the deal, market norms, and regulatory constraints.