Break Fee
A penalty payment agreed in advance, payable if one party withdraws from or fails to complete a transaction.
Full Definition
A break fee (also called a termination fee) is a contractual provision requiring one party to pay a specified sum to the other if the transaction fails to complete due to certain triggering events.
In UK M&A transactions, break fees serve several purposes:
- Compensate the non-defaulting party for transaction costs
- Deter parties from walking away or accepting competing bids
- Provide deal certainty
Common triggers for break fees include:
- Failure to obtain shareholder approval
- Accepting a higher competing offer
- Regulatory intervention blocking the deal
- Breach of exclusivity provisions
UK Takeover Code considerations: For public company takeovers, the Takeover Code limits break fees to 1% of the offer value to prevent them from being used as deal protection mechanisms that might deter competing offers.
Typical break fee amounts:
- Private transactions: 1-3% of deal value
- Public company deals: Maximum 1% (per Takeover Code)
Related Terms
Exclusivity
An agreement where the seller commits not to negotiate with other potential buyers for a specified period.
Heads of Terms
A preliminary document outlining the key terms of a proposed transaction before detailed legal agreements are drafted.
Completion
The legal transfer of ownership when all conditions are satisfied and the transaction formally closes.