Reverse Break Fees

In public M&A deals, bidding and target companies often agree on payments in the event that the deal cannot close. Payments from the target to the bidder are known as (direct) break fees. Reverse break fees are payments from the bidder to the target. Both types of fee serve to protect the deal and to control parties' behaviour.

Reverse break fees can compensate the target if the deal is not carried out because of issues that are either the bidder's responsibility (such as the lack of approval of its shareholders), or are outside of both parties' control (such as the refusal of regulators to grant merger approval). Conversely, a reverse break fee, particularly if it is designed as a walk-away right, can be seen as the price for the bidder's option not to complete the transaction. Compared to (direct) break fees, reverse break fees are typically significantly higher, and because they do not affect competition between bidders, are generally less heavily regulated.