Break fees are not common in private M&A transactions in South Africa, occasionally appearing in Term Sheets preceding the conclusion of formal legally binding agreements.
Break fees protect a party against the risk of a failed deal and losing substantial costs in an M&A Transaction if the deal ultimately fails due to some act or omission by the other party. There are generally two types of break fees: standard break fees imposed by a purchaser and payable by the seller, and reverse break fees aimed at incentivising purchasers to commit and implement a deal (rare in South Africa).
The triggers for payment of a break fee must be clearly defined in order to be enforceable. Common triggers include the target accepting a competing offer, or failure to accept any conditions imposed in a regulatory approval.
Break fees are usually a fixed amount or a percentage of the overall deal value. The Takeover Regulation Panel (TRP) has published a guideline advising that it will allow for payment of a break fee not exceeding 1% of the offer.
Break fees offer comfort by allowing a party to recover some invested costs if the deal fails due to specified events.