Reverse Break-up Fee

A reverse break-up fee is compensation paid by the buyer if the buyer causes an agreed deal to fail. It is the counterpart to the classic break-up fee owed by the seller. This also binds the buyer to fulfilling its part of the agreement. Typical triggers are a failure of financing, the absence of merger control or foreign investment clearance, the buyer's own boards withholding approval, or withdrawal without a contractually provided reason.

Economically the clause shifts completion risk to the buyer, which is particularly valuable for the seller, who is tied up between signing and closing, cannot pursue an alternative and is left with a damaged process if the deal fails. The amount reflects the risk and, for clearance risks, regularly sits well above the levels of a classic break-up fee, because it is meant to compensate not only costs but also the lost sale. Legally the arrangement is easier to implement than a break-up fee owed by the target, because capital maintenance rules are not engaged. The boundary with contractual penalties and the question of proportionality nevertheless deserve attention. In auctions, willingness to accept such an obligation is a strong signal of the seriousness of an offer.

Payment is typically triggered if the buyer's financing fails, a required merger control or foreign investment clearance is not granted, or the buyer does not obtain internal approvals. The amount is regularly higher than the payment the seller makes in the reverse case, because the buyer assumes the completion risks allocated to it under the contract. Negotiations also cover how much effort the buyer owes in order to obtain the clearances.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.