Break-Up Fee

Quick Facts

Also called: Termination fee, deal protection

Typical size: 2-4% of deal value

Who pays: Target company (if it walks away)

Reverse break-up fee: Acquirer pays if it fails to close

A break-up fee (also called a termination fee) is a contractual payment that the target company must pay to the acquirer if the deal falls through under certain conditions—typically if the target accepts a better offer from another bidder.

In Plain English

A break-up fee is like a deposit on a house. If you back out of the deal to accept a better offer, you forfeit the deposit. It compensates the buyer for the time, money, and opportunity cost of pursuing the acquisition—and discourages the seller from shopping for better deals after signing.

How It Works

Merger agreement signed with break-up fee provision
Triggering event occurs (e.g., superior offer accepted)
Target terminates the original deal
Target pays fee to original acquirer

Common Triggers

Break-up fees are typically triggered when:

Superior proposal: Target accepts a better offer from another bidder
Board recommendation change: Board withdraws support for the deal
Shareholder rejection: Shareholders vote down the merger
Material adverse change: Sometimes (though contested)

Typical Fee Ranges

Deal Size	Typical Break-Up Fee
Under $1B	3-4% of deal value
$1B - $10B	2.5-3.5%
Over $10B	2-3%

Delaware courts have scrutinized fees exceeding 4-5% as potentially coercive.

Reverse Break-Up Fees

A reverse break-up fee (or reverse termination fee) is paid by the acquirer if it fails to close. Common triggers:

Financing failure: Acquirer can't secure funding
Regulatory rejection: Antitrust authorities block the deal
Acquirer breach: Acquirer walks away without justification

Reverse break-up fees are often larger than regular break-up fees (3-6% or higher), especially in private equity deals where financing risk is significant.

Famous Examples

Pfizer-Allergan (2016)

When the $160 billion Pfizer-Allergan merger collapsed due to U.S. tax inversion rules, Pfizer paid a $150 million reverse break-up fee—relatively small given deal size, because the termination was due to regulatory changes.

Broadcom-Qualcomm (2018)

Broadcom's $117 billion hostile bid for Qualcomm was blocked by President Trump on national security grounds. No break-up fee was paid because there was no signed agreement.

Microsoft-Activision Blizzard (2023)

The $69 billion deal included a $3 billion reverse break-up fee if Microsoft failed to obtain regulatory approval—significant given the extensive antitrust review.

Elon Musk-Twitter (2022)

The Twitter deal included a $1 billion break-up fee for either party. When Musk tried to terminate, Twitter sued to enforce the agreement rather than accept the fee—ultimately forcing Musk to complete the purchase at $54.20/share.

Deal Protection Devices

Break-up fees often work alongside other deal protections:

No-shop clause: Target can't actively solicit other bids
Go-shop clause: Target has a window to seek better offers (fee may be lower during this period)
Matching rights: Original acquirer can match any superior proposal
Force-the-vote: Target must submit deal to shareholders even if board changes recommendation

Legal Considerations

Delaware Standards

Delaware courts evaluate break-up fees under the Revlon and Unocal standards:

Fees must be reasonable relative to deal size
Must not be "preclusive" (prevent other bidders)
Must not be "coercive" (force shareholders to accept)
3-4% generally upheld; over 5% faces scrutiny

Business Judgment Rule

Boards have discretion to agree to reasonable break-up fees as part of their negotiating strategy.

Strategic Considerations

For sellers:

Lower break-up fees attract more competing bidders
Higher fees show commitment and may get better initial price
Go-shop provisions can offset higher fees

For buyers:

Higher fees deter competition and lock in the deal
Reverse fees signal serious intent
Financing contingencies affect fee negotiability

Practical Takeaways

For founders: Break-up fees are negotiable. If you're selling, push for lower fees and go-shop provisions to preserve your ability to get the best price. Understand the triggers—you don't want to accidentally owe millions.

For investors: Break-up fees in merger proxies tell you how likely the deal is to close. High fees with no go-shop suggests a locked-up deal. Low fees or long go-shop periods mean competing bids are more likely.

Tender Offer — The mechanism for completing many acquisitions
White Knight — What triggers break-up fees (a better offer)
Hostile Takeover — Deals without agreed break-up fees
Golden Parachute — Another cost in M&A transactions