Break fees—share purchase

The following Corporate practice note provides comprehensive and up to date legal information covering:

  • Break fees—share purchase
  • The nature and purpose of break fees
  • Types of break fees
  • Trigger events
  • Legal considerations in relation to break fees
  • Ultra vires
  • Directors' statutory duties under the CA 2006: promoting the success of the company for the benefit of its members
  • Directors' statutory duties under the CA 2006: Exercising independent judgment
  • Liability for breach of statutory duties
  • Financial assistance
  • More...

Break fees—share purchase

The nature and purpose of break fees

Break fees 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 transaction terminates. They may also encourage the parties to remain at the negotiating table rather than take action that may unreasonably cause the transaction not to proceed.

A break fee agreement will be signed by the parties early on in the sale transaction, usually before the buyer commences its due diligence. Break fee provisions (also known as inducement, termination or broken deal fees) may be contained in a separate agreement or may be included in heads of terms.

Types of break fees

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 (for example, if the seller accepts a higher offer from a third party or any required shareholder approval is not obtained).

A substantial shareholder of the target may also agree to pay the break fee, for example, where a significant majority shareholder is also part of the target’s management, although this is less common than the target agreeing to pay the break fees.

Trigger events

Events that may trigger the payment of a break fee include:

  1. the seller or the

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