Breakup Fees in M&A Contracts Explained

What Is a Breakup Fee?

A breakup fee (also called a termination fee) is a payment that the target company must make to the buyer if the merger or acquisition agreement is terminated under certain specified circumstances. It compensates the buyer for the time, expense, and opportunity cost of pursuing the deal.

Breakup fees are a standard feature of M&A transactions and play a critical role in deal dynamics.

When Breakup Fees Are Triggered

Common triggering events include:

• The target's board withdraws or changes its recommendation in favor of a superior proposal
• The target terminates the agreement to accept a competing offer
• Shareholders vote against the deal after the board changes its recommendation
• The target materially breaches the agreement, leading to termination

Typical Fee Amounts

• Public company deals: 2-4% of the equity value of the transaction is the accepted range
• Private company deals: Fees may be higher, sometimes reaching 5-6%
• Go-shop terminations: Reduced fees of 1-2% during the go-shop window

Fees significantly above the market range may be challenged in court as preclusive — meaning they effectively deter competing offers.

Delaware Court Scrutiny

Delaware courts evaluate breakup fees under the Revlon and Unocal standards when applicable:

• Fees within the 2-4% range are generally considered reasonable
• Fees above 4% face greater scrutiny for potentially deterring competition
• Courts consider the fee in combination with other deal protections (matching rights, no-shop provisions)

What to Watch For

• Broad triggers — Ensure the fee is only payable in circumstances that are well-defined and reasonable
• Expense reimbursement on top of the fee — Some agreements require the target to reimburse buyer expenses in addition to the breakup fee
• Tail provisions — Fees that remain payable if the target enters a competing transaction within months after the deal terminates

When to Consult a Lawyer

Breakup fees affect the practical likelihood of competing offers and board flexibility. Consider consulting corporate counsel to evaluate whether the fee amount and triggers are market-standard and appropriate.

This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.