Definition
A break-up fee (or termination fee) is a fee payable by the target to the bidder if the deal terminates under defined “trigger” circumstances — most commonly because the target board accepts a superior competing bid.
Typical size
- 2–4% of equity deal value in U.S. transactions
- Higher in some sponsor-buyout contexts (occasionally 5%)
- Lower in go-shop “tier one” windows (sometimes 1–1.5%)
Why it matters
The break-up fee is the bidder’s compensation for time, money, and opportunity cost spent on a deal that doesn’t close because the target switched horses. It also creates a financial deterrent to topping bids.
Delaware scrutiny
Excessive break-up fees can be challenged as unduly preclusive of the board’s fiduciary duties. The 2-4% U.S. range reflects the practical ceiling Delaware courts have generally accepted.
Distinction
A reverse break-up fee is payable by the bidder to the target — typically when the bidder’s financing fails or regulatory clearance is denied.