What is a breakup fee?
A breakup fee (also called a termination fee) is a sum payable by one party to another if a defined termination event occurs in an M&A deal. The standard breakup fee is paid by the target to the buyer if the target accepts a superior proposal or board changes its recommendation. The reverse termination fee (RTF) is paid by the buyer to the target if the buyer cannot or will not close (financing failure, regulatory failure, walk).
Typical fee sizes
- Standard breakup fee: typically 2-4% of enterprise value or equity value. Delaware courts (e.g., Phelps Dodge) generally tolerate up to about 3-4%; higher fees may face challenge as deterring superior bids.
- Reverse termination fee: commonly 4-8% of equity value; higher for deals with significant antitrust or financing risk.
Triggers — standard breakup fee
- Board accepts superior proposal.
- Board change of recommendation followed by deal failure.
- Stockholder vote failure following an intervening proposal.
Triggers — reverse termination fee
- Failure to obtain antitrust/regulatory approval.
- Buyer’s financing failure (in some deals, especially leveraged transactions).
- Buyer’s specific termination right exercise (walk).
- Specific performance unavailability mismatch (e.g., financing-fail walk-away with capped RTF).
Who pays, and when, if the deal dies
Break fees allocate the risk that a signed deal does not close. A breakup fee is paid by the target — classically if it walks away to accept a better offer — and compensates the buyer for wasted cost and lost opportunity. A reverse termination fee runs the other way: the buyer pays if the deal fails for reasons on its side, such as not securing financing or failing to clear antitrust or regulatory approval. Sizing is a negotiation, typically a small single-digit percentage of deal value, calibrated so it deters walk-away without being an unenforceable penalty. Because some jurisdictions scrutinise fees that look punitive rather than compensatory, the clause should be framed as a genuine pre-estimate of loss, and coordinated with the conditions and the long-stop date that govern when either side may exit.