Jurisdiction

Are break fees payable by the target common?

Restrictions on break fees

Brazil

No, as a recommended bid is normally accompanied by the agreement of the major shareholder.

Not applicable.

Canada

Yes.

There is no statutory or regulatory limit on the size of break fees but courts and securities commissions may make findings in contentious proceedings on the enforceability and reasonableness of break fee arrangements.  Shareholders may object if a break fee is viewed as too high or as discouraging competing offers.

There are generally accepted ranges of commercially reasonable break fees that depend, in part, on the size of the transaction.

Germany

No, but they are increasing in frequency.

The target's ability to agree a break fee is restricted by statute. It must be in the target's best interest to agree to a break fee. This means it must be proportionate to the benefits expected from the takeover and not jeopardise the target's financial soundness. Generally, a fee not exceeding 1% to 2% of the transaction value is considered proportionate.  If the break fee is in the target's best interest, it must obey capital maintenance and financial assistance rules.

Japan

No, although there has been an increase in the number of cases in which the target agrees with the bidder to express its approval of the offer and not to solicit or recommend other offers. The agreement can provide that if the target breaches this requirement, it must pay a break fee.

There are no restrictions on the size of the break fee.

The Netherlands

Yes.

There is no case law setting out the requirements for break fees. However, it is thought that the rules for anti-takeover measures apply by analogy. This means that the break fee is unlawful if it is disproportionate for a potential bidder.  Directors can be liable for mismanagement if they harm the interest of the company by agreeing excessive break fees, as these may be considered contrary to the corporate interest.

Russian Federation

They are not common in a public takeover. However, they are established practice in a share acquisition.

To be enforceable, a break fee must have some form of binding obligation.  

Russian courts are likely to treat break fees as penalties. Russian law does not set restrictions on the amount of a penalty, but the court has discretion to reduce the amount of the penalty, as it deems appropriate.

UK (England and Wales)

Yes.

Care must be taken not to express a break fee as a penalty for terminating the agreement.

The Takeover Panel has set limits on break fees. A break fee agreed by a target is generally restricted to a maximum of 1% of the value of the target calculated by reference to the offer price. The target's directors and its financial adviser must both confirm to the Panel in writing that they believe the fee to be in the best interests of the target's shareholders and the fee must be fully disclosed in the Rule 2.5 announcement and the offer document.

The target board cannot authorise the fee if it could be considered to amount to unlawful financial assistance for the acquisition of shares.

United States

Yes.

The fee amount must be reasonable and not preclude an alternative transaction. Typically, termination fees range from 2% to 4% of the equity value of the transaction, with larger transactions mostly at the lower end of this range and smaller transactions at the higher end.