The speed of economic change in the energy sector has created
legitimate concerns about volatility in the marketplace. This
has caused both vendors and purchasers to be more cautious in deal
making. One way to help the situation is to give more
certainty that each party is committed to the deal despite any
heightened deal risk. Break Fees can be used as an effective
deal protection measure that gives parties certainty and protection
against wasted time and resources.
Break fees are routinely used in public M&A deals. They
incentivize targets to work with purchasers and provide a monetary
fee to the purchaser if the target elects to walk away. Recent
deal point surveys put the number of public M&A transactions
using break fees at 95 percent and higher. In private M&A
on the other hand, break fees are very uncommon, only appearing, we
estimate, in between two and three percent of
transactions. We feel this number may go up based on the shifting
economic circumstances brought on by the collapse in oil
There are two basic forms of break fees: the standard
"target pays" break fee and the reverse "purchaser
pays" break fee.
Standard Break Fee
The standard approach involves a fee that the target pays to a
prospective purchaser if it breaks off the deal prior to closing
(routinely in order to stop targets from accepting an offer from
another suitor). They are negotiated in advance and the fee usually
attempts to provide a measure of the damages the prospective
purchaser incurs if the target backs out. These sunk expenditures
could include internal and external due diligence costs including
legal, accounting and banking fees.
Reverse Break Fee
There have also been a number of deals in which reverse break
fees have appeared, which reflects a concern by the target that a
given purchaser may prove unwilling or unable to complete the
deal. Recent deal point studies have shown that nearly 40
percent of public M&A transactions use reverse break fees.
The reverse break fee (sometimes called a reciprocal break fee
when used alongside a standard break fee) covers risk to the target
that a deal may not close. Initially reverse break fees matched
standard break fees in size, but have risen with the greater
recognition in the marketplace that if a transaction fails, the
target potentially suffers greater consequences than the purchaser.
For a target, there are reputational issues, employee morale, and
similar legal and due diligence costs as outlaid by the
Further, a broken deal can result from more than a purchaser
losing interest. Even if it wants to complete the transaction,
there are financing and regulatory hurdles that can scupper the
transaction. Fortunately for targets, reverse break fees can step
in to compensate.
Public & Private M&A
While break fees are and will continue to be ubiquitous in
public M&A deals, they are rare in private M&A
transactions. And while they may not be 'market' in
private deals, we anticipate seeing more use of all deal protection
measures, and break fees in particular, to give comfort to parties
in the energy marketplace.
While there is protection built into private M&A
documentation with letters of intent providing exclusivity,
standstills and no shop provisions, they do not provide a method to
recover lost expenses. Reduced visibility means private M&A
break fees are less targeted at a subsequent bid for the target,
and more related to either party cooling on the deal in this
volatile and depressed market.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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After several months of consultation and deliberations, the Organisation for Economic Co-operation and Development rendered public a revised draft Guidance on Due Diligence for Responsible Business Conduct.
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