Break-up fee

A break-up fee (or termination fee) is a contractual penalty payable by one party to the other upon failure to complete a transaction for reasons attributable to the defaulting party — board rejection of the deal, acceptance of a superior competing offer, or failure to obtain regulatory clearance due to endogenous factors. It serves simultaneously as an incentive to close and a deterrent against opportunistic behaviour or abusive withdrawal. In significant M&A transactions, break-up fees typically represent 1–3% of transaction value. A symmetric reverse break-up fee (payable by the buyer if financing fails) is standard in LBO-financed acquisitions.

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Example: in a CHF 45.0 million acquisition of a Swiss group, the SPA provides for a break-up fee of CHF 1.35 million (3%) payable by the seller if its board accepts a superior competing offer within 6 months of signing, and a reverse break-up fee of CHF 1.35 million payable by the buyer if its LBO financing is not secured within the contractual timeframe.

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Hectelion advises on the calibration and drafting of break-up fee provisions to protect clients' interests in M&A transactions.