Break-Up Fee (Termination Fee)

The target pays a break-up fee to the acquirer if the target's board terminates the deal to accept a superior proposal from a competing bidder. Typical fees are 2–4% of the equity value of the transaction. Courts (especially Delaware) scrutinize fees above 4% as potentially coercive because they may discourage competing bids. The fee compensates the acquirer for deal costs and the lost opportunity.

The acquirer pays a reverse break-up fee to the target if the acquirer fails to close — typically due to financing failure, regulatory rejection, or failure to obtain shareholder approval. In PE deals, reverse break-up fees are often 3–6% of equity value because the buyer is more likely to face financing contingencies. The fee provides the target with certainty that the buyer is committed.

Break-up fees influence bidding dynamics. A high target break-up fee deters competing bidders because any rival must factor the fee into their price. Conversely, a low fee invites competition. In auctions, sellers resist high break-up fees to keep the process competitive. In negotiated deals, the initial bidder demands a higher fee for the 'risk' of being a stalking horse.