Key Takeaways

  • A breakup fee (termination fee) compensates the buyer if the seller backs out of a merger or acquisition agreement.
  • It typically ranges between 1–4% of the deal’s value, depending on industry norms and deal size.
  • These fees protect buyers’ investments in due diligence, negotiation, and opportunity costs if the transaction fails.
  • Reverse breakup fees protect sellers when buyers fail to complete financing or regulatory conditions.
  • Delaware courts often uphold breakup fees if they are reasonable and serve to protect deal certainty rather than penalize parties.
  • The fee structure must clearly identify triggering events, fee calculation methods, and exclusive remedies to avoid disputes.
  • Internationally, jurisdictions like the UK and France impose additional limits on acceptable breakup fee percentages.

What Is a Breakup Fee?

A breakup fee, also known as a termination fee, is a cost that happens if the seller backs out of a deal during a takeover or merger and acquisition agreements. It gives compensation to the potential purchaser for the time and resources they used to create the deal.

Breakup fees are usually between 1 and 3 percent of the deal's total value. In Delaware, courts regularly find breakup fees between 3 and 4 percent acceptable.

Where Do You Include a Breakup Fee?

Breakup fee talks are an important part of the letter of intent (LOI) negotiation, and there are cases where merger deals have not happened because both parties could not agree on a breakup fee.

Why Is a Breakup Fee Important?

Mergers and acquisitions don't always include breakup fees — especially smaller deals — but as the value of the deal increases and the possible disruption to the seller's business grows, you'll want to make sure the exchange includes a breakup fee.

If a company ends up not selling to the original purchaser and sells to someone with a better offer, the original purchaser needs to make sure they have their time and resources protected. Sometimes a breakup fee will keep other companies from bidding because they know they'll have to bid a price that covers the breakup fee.

Common Triggers for a Breakup Fee

A breakup fee is only paid when certain triggering events occur, as defined in the acquisition agreement or letter of intent. These events often include:

  • The seller accepts a superior offer from another bidder after signing the agreement.
  • The seller’s board withdraws support for the transaction due to fiduciary obligations.
  • The seller fails to meet material obligations (such as shareholder approval or regulatory filings).
  • The buyer terminates the agreement due to inaccurate representations or breaches of warranties.

Courts, particularly in Delaware, evaluate whether the triggering conditions were clearly defined and reasonable to prevent excessive penalties. Overly broad or ambiguous triggers can make the fee unenforceable

Reasons to Consider Using a Breakup Fee

Breakup fees help the buyer cover any of the expenses that added up during planning, negotiating, and investigating the deal if it falls apart. It also protects the buyer if the seller receives a higher offer.

Sometimes, breakup fees keep the seller from seeking other offers, because they know that if the deal falls apart, then they'll need to pay the seller.

How Breakup Fees Are Calculated

Breakup fees are often calculated as a percentage of the equity value or enterprise value of the transaction, usually falling between 1–3%, though larger deals might justify higher percentages.

When determining the amount, parties consider:

  • Transaction size and complexity. Larger, riskier deals may require higher fees.
  • Due diligence costs and professional fees incurred by the buyer.
  • Market norms for similar transactions within the industry.
  • Likelihood of competing bids. A higher fee may discourage rival offers, which can raise antitrust or fiduciary issues.

It’s critical that the fee reflects actual anticipated losses, not punitive damages, as courts may strike down excessive fees.

Breaking Down Breakup Value

If a company is not performing well, or the stock hasn't reached the level of full value that investors believed that it would, those investors may ask for the company to be split apart. Once this is done the proceeds are returned to investors either as cash, stock in spun-off companies, or a combination of the two.

Investors can also ask for the breakup value of a well-performing company to either determine the floor of the stock or a potential entry point for prospective buyers. To calculate this accurately, detailed information on the revenue, earnings, and cash flows for each distinct operating unit of the company is required. With this information, a relative valuation can be derived for the different segments as a spun off stock.

Reverse Breakup Fees

Reverse breakup fees are payments from the buyer to the seller if a deal is not completed as a result of actions by the buyer. The upsides of including this type of fee in the purchase agreement or LOI are that it reduces and quantifies the buyer's liability, eliminates the need for litigation, and limits the seller's options of seeking other forms of repayment at a future date.

Reverse breakup fees are a good way to make sure that the buyer is serious about the deal. Merger deals are distracting for sellers and their management teams. If the deal doesn't close, the seller's business may be negatively affected. The breakup fee is a way to protect yourself from negative effects.

It's important to consider the following when creating a reverse breakup fee agreement:

  • The trigger event underlying the payment of the reverse breakup fee. What will trigger the fee's payment? The contract should clearly include the trigger event.
  • The interaction between the fee and other solutions. Buyers and sellers should consider what other solutions for payment there are aside from the fee.
  • The fee amount. You will need to decide what the exact amount of a reverse breakup fee will be should a financing failure happen.
  • Guarantees. You may want to ask that either the parent company of the buyer or its sponsor guarantee a reverse breakup fee.

Legal Considerations and Court Review

Courts in leading corporate jurisdictions such as Delaware apply heightened scrutiny to breakup fees in public M&A transactions. The central question is whether the fee promotes deal certainty or improperly deters competing bids.

Under Delaware law, a breakup fee will generally be upheld if:

  1. The fee is reasonable relative to the deal’s value (typically below 4%).
  2. The board acted in good faith when approving the agreement.
  3. The provision does not preclude the board from considering superior offers (fiduciary out).

When courts find a breakup fee coercive—meaning it effectively prevents shareholders from obtaining a better offer—it may be invalidated. In private deals, courts apply less stringent review but still expect clear, mutually negotiated terms

Sample Clauses for Breakup Fees

The following are some clauses about breakup fees that you may want to include in your LOI:

  • No shop or no solicit. This clause protects the fund while negotiating the deal. This clause protects the buyer after both parties have signed the contract. A contract with a public company is at risk because it could need a shareholder vote, there could be a counter bid, or an insider of the company could begin to solicit other bidders to gain a financial advantage.
  • Fiduciary out. The fiduciary out means that if the seller does something specified in the agreement, then they do not need to pay the breakup fee. This means that someone only needs to pay the breakup fee if someone else outbids the first buyer. As a buyer, you want to make sure this is not part of the LOI.

Exclusive Remedy and Enforcement

Parties should determine whether the breakup fee is intended as an exclusive remedy—that is, the sole financial recourse if the transaction fails.

  • Exclusive remedy clauses simplify dispute resolution by capping exposure to the fee amount.
  • If non-exclusive, the injured party may also pursue damages or specific performance.
  • The agreement should also specify timing and method of payment, such as within a set number of days following termination.

Clearly outlining these provisions helps both sides understand their obligations and reduces the likelihood of litigation.

Breakup Fees in European Countries

  • France. Under French law, a breakup fee provisions' classification depends on their classification and how they're qualified.

Breakup fee provisions involving listed companies raise specific issues, especially involving the amount of the fees. It is usually lower than 2 percent.

  • The United Kingdom. Without the panel's consent, the seller may not enter into any other deals with the buyer during an offer period or when considering an offer.

 If a competing buyer announces that they intend to make an offer, this is allowed if the fee is no higher than 1 percent of the value of the first buyer.

International Practices Beyond Europe

In addition to European markets, other global jurisdictions treat breakup fees differently:

  • United States: Delaware remains the leading jurisdiction for M&A oversight, emphasizing reasonableness and fiduciary balance.
  • Canada: Breakup fees are permitted but often subject to review by securities regulators for fairness in public company deals.
  • Asia-Pacific: Countries like Japan and Australia commonly include termination fees but may require board justification and shareholder approval for large transactions.
  • Emerging Markets: Breakup fee enforceability can vary depending on whether local contract law allows for liquidated damages in merger contexts.

These differences highlight the importance of consulting an operating agreements lawyer or M&A attorney familiar with local and cross-border merger rules before finalizing deal terms.

Frequently Asked Questions

1. What is the main purpose of a breakup fee?

A breakup fee compensates the buyer for costs and risks if the seller backs out of a deal, ensuring buyers are protected for their investment in due diligence and negotiation.

2. How large is a typical breakup fee?

Most breakup fees range between 1–4% of the transaction’s total value, with courts generally viewing fees above 4% as excessive unless well justified.

3. Are breakup fees enforceable in all cases?

Not always. Courts may reject fees deemed punitive or coercive, especially if they prevent the seller from considering a superior offer.

4. What’s the difference between a breakup fee and a reverse breakup fee?

A breakup fee is paid by the seller to the buyer, while a reverse breakup fee is paid by the buyer to the seller if the buyer fails to close the deal due to financing or regulatory issues.

5. Do I need a lawyer to draft a breakup fee clause?

Yes. A knowledgeable operating agreements lawyer or M&A attorney can help ensure the fee terms are legally enforceable and appropriately tailored to the transaction. You can find experienced attorneys on UpCounsel’s marketplace, which connects clients with top-rated corporate lawyers from leading law schools.

If you need help with breakup fees, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top-5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.