Break Fee
A break fee is a sum one party to a signed acquisition agreement pays the other if the deal fails for a reason the agreement assigns to it — the target accepting a higher offer, or the buyer failing to obtain financing or regulatory approval. A reverse break fee is the same mechanism pointed at the buyer.
- Also known as
- Termination fee, Break-up fee, Reverse break fee
- Used at
- written into the sale or merger agreement at signing, paid only if the deal breaks
- Binding
- yes, subject to rules that cap it in some jurisdictions (1% of equity value under the UK Takeover Code, where permitted at all)
- Typical size
- 1–4% of deal value; reverse fees for regulatory risk often larger, 4–8%
- Triggers
- a competing bid accepted, a board changing its recommendation, a failed financing, a blocked approval
- Parties
- buyer and target (public deals) or buyer and sellers (private deals)
How a break fee works in practice
Between signing and completion a deal is exposed. The buyer has spent months and millions on diligence and may have raised financing; the target has told its staff, its customers and its regulator that it is being sold. If either walks away, the other has lost something real. The break fee prices that loss in advance, so neither side has to prove damages in court.
In public deals the fee runs from target to buyer and compensates a bidder whose offer is used to draw a better one. Its size is capped by regulation in most European markets, on the principle that a fee large enough to deter a better offer harms the shareholders it is meant to protect. In private fintech deals the more important fee usually runs the other way: a reverse break fee that the buyer pays if it cannot complete because the regulator refuses the change of control, or because the financing it promised does not arrive. A seller that has taken its business off the market for four months while a buyer waits for an approval it never gets has lost more than its legal fees, and the reverse fee is what it gets instead.
The fee is also a signal. A buyer that accepts a large reverse fee for regulatory failure is saying it has done its own work on whether the regulator will approve it; one that refuses is telling the seller something.
Example
A European bank agrees to buy a payments company for €120m. The agreement carries a break fee of €2.4m (2%) payable by the sellers if they accept a competing offer before completion, and a reverse break fee of €7.2m (6%) payable by the bank if the competition authority or the payments regulator blocks the deal. Four months after signing the regulator refuses the change of control because of an unresolved finding at the bank itself; the bank pays €7.2m, and the sellers, who have lost a year of growth, start a new process.
Common mistakes
- A fee so large that it is challenged as a penalty and not enforced. - No reverse fee in a deal whose only real risk is on the buyer's side. - Triggers drafted so narrowly that the deal fails in a way nobody named. - Sellers who forget that a break fee is compensation, not a windfall: the deal they wanted is still gone. - Public-company boards agreeing a fee without checking what the takeover rules in that market allow.