Breakup Fees — Picking Your Number — The Harvard Law School Forum on Corporate Governance

Small business M&A need-to-know, of-interest and news-to-watch.

Excerpt:  During the course of negotiations of every public company deal, inevitably the conversation will turn to the amount of the breakup fee payable by a target company to a buyer if the deal is terminated under certain circumstances. Because U.S. corporate law generally requires a target company to retain the ability to consider post-signing superior proposals, a breakup fee is an important element of the suite of deal protection devices (including “no-shop” restrictions, matching rights, etc.) that an initial buyer implements to seek to protect its position as the favored suitor. Speaking broadly, a breakup fee will increase the cost to a topping bidder as it will also need to cover the expense of the fee payable to the first buyer. However, with respect to deal protection terms in general, as well as the amount of breakup fees in particular, courts have indicated that they cannot be so tight or so large as to be preclusive of a true superior proposal. Starting from this somewhat ambiguous principle, the negotiations therefore turn to the appropriate amount for the breakup fee given the particular circumstances of the deal at hand.

Unquestionably, precedent often informs the discussion, and there is a significant amount of statistical data to back up a general proposition that fees “usually” fall in the 3% to 4% range

Read full article via Breakup Fees — Picking Your Number — The Harvard Law School Forum on Corporate Governance and Financial Regulation.

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