What Is a Breakup Fee?
A breakup fee isused in takeover agreements as leverage on the seller. It is used to discourage the seller from backing out of thedeal to sell to the purchaser.A breakup fee, or termination fee, is required to compensate the prospective purchaser for the time and resources used to facilitate the deal. Breakup fees are normally 1% to3%of adeal's value.
Key Takeaways
- A breakup fee isused in takeover agreements as leverage to prevent the seller from backing out of thesale or choosing another buyer.
- A breakup fee is required to compensate the prospective purchaser for the time and resources used to facilitate the deal.
- Breakup fees are found in takeover and options agreements for both public and private companies.
- In a public offering, a breakup fee may be added to the agreement during the bidding process.
- Situations that would trigger a breakup fee are agreed on by both parties and outlined in their purchase contract.
Understanding Breakup Fees
Breakup fees are a provision in a sales agreement. They are used to motivate the seller toclose apending acquisition deal.
Breakup fees are meant to discourage sellers from backing out of the sales arrangement. A company might have to pay a breakup fee if it decides not to sell to the original purchaser and instead sells to a competing bidder with a more attractive offer. Sometimes a breakup fee can discourage other companies from bidding on the company because they would have to bid a price that covers the breakup fee.
A breakup feeprovision may also limit theuncertainty associated with legal damages if a deal terminatesduring negotiations.
How BreakupFeeProvisions Are Used
Breakup feeprovisions are often found inletters of intent, preliminary agreements, and option agreements, which are agreements to buy a company at a preset price. Breakup fees first became part of public takeovers,particularly in the agreements where shareholdersof a targeted company get the final word on approving a deal by votingto tender their shares to the buyercompany.
Breakup fee provisions are now applied more widelyand are also found in agreements related to private companies andin industrial agreements or construction projects.The breakup fee provision is generally added to a deal as early as possible. In apublic offering, it maybe added duringthe bidding process.
Withgrowing competition in public offerings, the entity making the offeroccasionally has to pay the breakup fees. The fees are then called reverse breakup fees.Mutual breakup fees are also a possibility,but they arerare.
Parties to an agreement usually need to agree on theevents that can trigger the payment of a breakup fee. Theses events typically include:
- Break-up of the negotiations by one of the parties
- A sellerchoosing a different buyerthan the one namedin the preliminary agreement
- A seller opens the investmentopportunityto the public instead of the private investor named in the agreement
- A defect is discovered in the target company during discovery thathad not been previously disclosed
Breakupfees do not requireparties to close a deal under any circ*mstances.
Real-World Exampleof Breakup Fees
In 2011, AT&T was looking to acquire cellular provider T-Mobile. However, regulators opposed and blocked the $39 billion deal from getting done citing possible antitrust violations. As a result, AT&T had to pay breakup feesthat totaled $4 billion. Specifically,AT&T had topay a reverse breakup fee of $3 billion in cash and $1 billion worth of AT&T's wireless spectrum as reported by CNN/Money.
Wireless spectrum are frequency bands that travel over the airwaves, and each wireless carrier transmits their wireless signals over their own frequency.
Who Pays the Breakup Fee?
A breakup fee is paid by the seller in a merger or acquisition if the seller backs out of the deal.
What Is Another Name for a Breakup Fee?
A breakup fee in the sale of a business is sometimes referred to as a termination fee.
What Is a Break Fee?
A breakup fee is a type of break fee. A break fee is paid by the party that breaks an agreement to the other party in the agreement. It can refer to the breakup fee paid in a failed merger or acquisition. However, break fees can also be found in lease agreements or derivatives like swap contracts.
The Bottom Line
A breakup fee isused in takeover agreements and agreed on by the parties in advance. It is a payment that a seller must make to the buyer if the seller backs out of the sale. A breakup fee serves two purposes: it discourages the seller from backing out of the agreement, and it compensates the buyer for the time and resources they invested in the deal.
Breakup fees are used in both public and private sales; in a public offering, they can be added during the bidding process. The situations that would trigger the breakup fee must be agreed on and outlined in the contract in advance. A breakup fee could be triggered by the break-up of negotiations, by the seller choosing a different buyer, or by the discovery of a defect in the target company that had not previously been disclosed.
