These are generally designed to compensate one party
’s legal and professional costs
which it may have incurred in due diligence
and negotiations at the time the share purchase/asset purchase transaction terminates. The most common type of break fee is where the target agrees to pay a fee to the bidder if a specified event occurs, which results in the transaction not completing (eg if the seller accepts a higher offer from a third party or any required shareholder approval is not obtained).
Break fee provisions (also known as inducement, termination or broken deal fees) may be contained in a separate agreement (entered into early on in the sale transaction, usually before the buyer commences due diligence
) or may be included in heads of terms. In the UK, break fees are outlawed by the City Code on Takeovers and Mergers in the case of UK public targets and the Listing Rules in the UK impose limits on such fees in the case of premium listed issuers.
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