03/7/2024
In M&A (Mergers and Acquisitions) transactions, it is common for the parties to allocate the risks identified during the negotiations and the auditing process in the contracts to be signed.
The break-up fee clause, also known as the failure fee or termination fee clause, is a tool for allocating these risks and aims to stipulate the payment of a certain amount if the planned transaction is not consummated for reasons set out in the contract.
Thus, this clause can be useful for pricing the risk of the seller or buyer withdrawing from the M&A transaction, as well as in the event of the transaction not being approved by public bodies, for example.
It is important to note that the break-up fee clause has the function of establishing a price for the free withdrawal of the parties, unlike the penalty clause, which aims to establish compensation for non-compliance or delay in the contract or fulfillment of an obligation.
Defining the value of the break-up fee depends on attention and caution so that (a) it is sufficient to discourage any voluntary withdrawal, and/or (b) it avoids setting an excessive or minimal value.
Finally, the inclusion of the break-up fee clause in M&A contracts is relevant to try to minimize the risks involved in this type of transaction, discouraging the seller or buyer from withdrawing. To this end, it is essential to understand the function and nature of this tool and to ensure that its value is consistent and within market levels.
Authored by: Gisleine Porto
