Breakup Fee
Definition
A breakup fee (termination fee) is a cash payment the target owes the buyer if the target terminates a signed merger agreement under specified circumstances — most commonly to accept a superior proposal from another bidder, or after a board change of recommendation.
Typical target breakup fees in US public deals cluster around roughly 2–4% of equity value (conventions vary and courts scrutinize outliers). The fee compensates the jilted buyer for its costs and deters frivolous topping bids without completely blocking a genuinely superior offer.
A reverse breakup fee runs the other way: the buyer pays the target if the buyer fails to close — commonly for financing failure or antitrust non-approval. Reverse fees are often larger (frequently around 4–8% of equity value, and higher in deals with significant regulatory risk) because they can be the target's primary remedy.
Why interviewers ask
Deal-protection questions test whether you follow real transactions. Interviewers may ask why breakup fees exist, what a typical size is, or the difference between a breakup fee and a reverse breakup fee — especially timely in any discussion of a busted or contested deal.
Related terms
Interviews don't test definitions — they test recall under pressure.
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