break up fee clause in corporate law
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This article is written by Chandana pursuing B.Com.LLB(Hons) from the Tamil Nadu Dr Ambedkar Law University (SOEL). This is an article which deals with the analysis of break up fee clauses in Corporate Law.


The two most important factors for the steady growth of merger and acquisition in India are favourable government policies and economic stability. Merger and acquisition promote industry rationalisation which benefits the economy as a whole and enhances the wealth of the shareholder. There is no explicit mention of the term “Break-up free” under the Companies Act, 2013 or any of the regulations as mentioned to govern the Companies. It is a contractual arrangement between the parties that either one of the parties to indemnify the other parties for the expenses incurred if the merger transaction results in failure.

Analysis of Break-up fee clauses in Indian Perspective

Break-up fees – Meaning in a different context

Break- up fee is also called termination fee or break fee. Break-up fee is paid to either one of the parties to the transaction as compensation when there is a contract failure. In the case of merger or acquisition, a target company pays a certain percentage of the aggregate transaction to the prospective bidder when the transaction fails because of the target company(seller). In case of reverse break-up fees where the prospective bidder(buyer) is in the position to pay a certain percentage of the aggregate transaction to the target company when the transactions fail because of the prospective bidder and not because of the target company.

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Circumstances where the break-up fee is paid by the target company

  • The board of directors of the company changes their mind, this happens when they get the superior bid than the initial offer.
  • Shareholders of the target company fail to approve the deal for whatever the reasons.
  • When the seller chooses the competing bid.

Types of break-up fees

  1. Fees which is paid by the target company.
  2. Fees which is paid by the prospective bidder.
  3. Fees which is paid by both the parties at the reciprocal basis. 

Reasons behind drafting the break-up fee clause in the agreement

There are few reasons behind drafting the break-up fee clause in the agreement and they are:

  • When the prospective bidder wishes to acquire the target company there are a lot of procedures which needs to be complied by the prospective bidder for the successful acquisition of the merger.
  • Meanwhile, the target company may get better offers than offered by the prospective bidder.
  • The directors of the target company may change their decisions when such circumstances arise. 
  • The occurrence of such circumstances may jeopardise the interest of the initial prospective bidder.
  • A huge amount of cost would be incurred by the prospective bidder like:
  1. The initial cost incurred by the prospective bidder for searching for a merger partner and the initial offer.
  2. Cost of investigation.
  3. Costs incurred while estimating the value of the target company.
  4. The cost incurred for obtaining approval from government regulations.
  5. The cost incurred while preparing the necessary documents.
  6. Missing out the other alternative valuable merger.
  • All the costs incurred by the prospective bidder will be a huge loss to him if the target company does not complete the merger transaction.
  • To avoid such a loss the prospective bidder drafts a break-up fee clause prior to the merger transaction in the agreement, stating that the target company will be liable to reimburse the expenses which had been incurred by the bidder in case of incompletion of the merger transaction. 
  • The importance of this clause is that the target company will be forbidden from taking up the higher bids than the one which had been offered by the initial bidder.
  • The agreement may also contain the fiduciary out clause which requires that directors have to put their best efforts in the successful completion of the merger.
  • The target company in addition to paying the expenses cost incurred by the prospective bidder the target company has an obligation to pay the break-up fee cost which may be 1 to 3%(not standard percentage, may extend) of the aggregate value of the transaction.

Restrictions to break-up fee clause

There are three restrictions to a break-up fee clause:

  1. After drafting the letter of offer which contains the break-up fees it must be sent to the SEBI. SEBI shall make any necessary changes in break-up fees if it considers necessary.
  2. When either of the parties fails to complete the transaction the other party is to indemnify the expenses which are incurred by the party.
  3. If a transaction is to be between a foreign entity and Indian entity and if foreign entity happens to be a non-breaching entity then the prior approval of the reserved bank is required to pay the break-up fee to the foreign entity.

Particulars to be included while drafting the breakup fee clause

A break-up fee clause may be either included in the agreement or the letter of the intent. The following are the particulars that are to be there while drafting the break-up fee clause:

No shop clause

By adding a “No shop clause” in the agreement it prevents the seller from soliciting bids from the third parties while the target company is still negotiating a deal from the original prospective bidder.

Fiduciary clause

A “fiduciary clause” is inserted by the target company mainly to protect the target company’s interest. Such a clause is added to prevent from paying the break-up fee when the target company does anything that is explicitly stated in the agreement.

Reverse break up fees

Reverse break up fees are paid when the prospective bidder(buyer) is in the position to pay a certain percentage of the aggregate transaction to the target company when the transactions fail because of the prospective bidder and not because of the target company.

Break up fees in Indian Industry

Apollo- Cooper Deal

Facts of the case

Cooper Tire and Rubber Co., an American company in June 2013 terminated its premature merger agreement with Apollo tyres limited Company, an Indian based company which agreed to buy it for $2.5 billion. The reason Cooper Tire terminated its agreement was that it was informed by the Indian company that they did not have enough finance available with them to acquire the company. The Indian company responded to that statement by stating that the Cooper tire company terminated the premature agreement and added they would pursue legal actions. After several months Apollo agreed to buy the company for the price of $35 per share.


Whether either of the companies is liable to pay the break-up fee: It was answered that Cooper was liable to $50 millions and Apollo was to pay $112.5 million a reverse termination fee.

Despite the threat of legal actions, the deal was welcomed by the Apollo investors and they purchased the Cooper company $9 per share. On December 30 Cooper had terminated the offer from Apollo before the expiration of the agreement.

Microsoft acquisition of LinkedIn

In 2016 the negotiations were made between Microsoft and Linkedin where LinkedIn is to be acquired by Microsoft. The agreement of both the parties consisted of “no shop clause”. And in case LinkedIn solicited a third party buyer during the negotiations it is to pay a break-up fee $ 725 million to Microsoft. LinkedIn received an unsolicited bid from salesforce, which is Microsoft’s biggest competitor. If at all LinkedIn accepted the salesforce offer it would be in the position to pay a break-up fee $725 million to Microsoft.

Staples and office depot

In Staples and office depot there was a merger between staples and office depot in 2015 which was of $ 6.3 billion. But the merger was opposed by the Federal Trade commission however it was reinforced by the U.S District Court. Due to this staples were required to pay a break-up fee of $250 million to the office depot.

Jaiprakash Power Venture Limited and Taqa India Power Ventures Limited

Jaiprakash Power Venture Limited is a Subsidiary of Indian Infrastructure conglomerate Jaypee group. There was an agreement between the Jaypee group which owns hydropower plants and Taqa. The agreement was to acquire the Jaypee group by Taqa. The deal of the merger was worth INR 9.689 crores. Taqa is required to pay a break fee to Jaypee group of INR 54 crore.

Analysis of Break fees clause in International Perspective

Break fees

Break fees are in other words known as inducement of termination fees, which is becoming an important feature of corporate transactions. Apart from other transactions, the break fees clause is normally used in Mergers and Acquisitions.

Break fees have taken a variety of forms, few of them are below

  • It is an arrangement between the potential bidder and target company under which a fee is payable to the bidder, which the bidder prevents the transaction from completion in case a specified event happens.
  • It is also entered between shareholders of the target company and bidder where the shareholders agree to pay a break fee under certain circumstances to the bidder.

Reason for the drafting the break fees clause

There are two significant reasons why do Companies add break fee clause in their contract:

  • To discourage either of the parties from leaving the negotiating table.
  • To enter into discussion with the third party.

Legal issues involved in drafting a break fee arrangement clause

The legal issues are flexible in nature which keeps changing from one jurisdiction to another. Some of the legal issues are:

Capacity and duties

  • The reasonable care should be taken by the company and see that the company has every legal capacity to enter into a break free arrangement.
  • The directions also while discharging his duties he should be the one who has been authorised by the company to do it.
  • The concerned directors must act in good faith and in the best interest of the company while carefully considering the break fee arrangement.

Financial assistance

  • A clause can be added while drafting the break fee arrangement that the target company would not give its financial assistance for any unlawful purposes.
  • This clause will be helpful in mitigating the risk of the company.
  • The directors of the company will be liable to imprisonment or fine if they do not comply with the guidelines of the company.

Unenforceable contractual provisions

  • Considerable care should be taken by the companies while drafting the break fee arrangement.
  • It should be mentioned in the clause the penalty will be paid by the other party only if there occur some specified events. As to what amounts to specified events can be mentioned by the company in the clause.


Break fee clause is structured in such a way in the contract that either one of the parties to the contract has to pay to the other party all of the expenses which are incurred by the other party in case the transaction does not become successful. Due diligence should be taken while drafting a break-up fee clause by the parties to avoid unnecessary expenses and parties are also to carefully analyse as to whether a particular transaction is lawfully permitted.



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