Reverse Breakup Fees: When Buyers Pay to Walk Away
What Is a Reverse Breakup Fee?
A reverse breakup fee is a payment the buyer must make to the target company if the buyer fails to close the transaction under specified circumstances. It is the mirror image of a standard breakup fee, which the target pays to the buyer.
Reverse breakup fees became especially prominent after the 2007-2008 financial crisis, when several high-profile leveraged buyouts collapsed because buyers could not secure financing.
When Reverse Breakup Fees Are Triggered
- Financing failure — The buyer cannot obtain the debt financing needed to complete the acquisition
- Regulatory block — The buyer fails to obtain required antitrust or regulatory approvals
- Buyer breach — The buyer materially breaches the agreement and is unable or unwilling to cure
- Buyer board change — In some deals, the buyer's own board withdraws its approval
Typical Fee Amounts
- Private equity deals: 5-8% of equity value is common, reflecting the higher closing risk associated with leveraged transactions
- Strategic buyer deals: Usually smaller (2-4%) because strategic buyers typically have certainty of financing
- Regulatory risk deals: May be higher when significant antitrust risk exists
Reverse breakup fees are often larger than standard breakup fees because the target bears greater closing risk.
Key Considerations
- Sole remedy vs. additional remedies — Determine whether the fee is the target's exclusive remedy or if specific performance (forcing the buyer to close) is also available
- Financing condition interactions — How the reverse breakup fee works in conjunction with financing commitments and conditions
- Ticking fees — Additional daily payments if closing is delayed beyond a specified date
When to Consult a Lawyer
Reverse breakup fee negotiations are among the most consequential in deal-making. Consider consulting M&A counsel to structure the fee amount, triggers, and remedies appropriately for your position.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.