DEAL PROTECTION MEASURES IN TAKEOVERS AND MERGERS: BREAK FEES

Abstract

This article discusses an agreement by directors to pay a break fee during a takeover or a merger and highlight some corporate governance issues that may arise due to such payments. The article further discusses how regulators limit such payments. Takeover and merger agreements contain numerous terms and conditions intended to protect all parties to the transaction. The agreements are also aimed at ensuring that, where there is a breach, the innocent party is able to recoup the costs incurred in undertaking the transaction. Break fees are some of the terms and conditions included in the takeover and merger agreements known as deal protection measures. However, these terms and conditions raise a number of concerns for shareholders, directors and regulators. They have the potential to affect the shareholders’ interests negatively during a takeover or a merger. Accordingly, the Takeover Provisions set parameters within which break fees are monitored and regulated. In terms of the Takeover Provisions, the decision whether or not to agree to payment of a break fee lies with the directors of the target company. Therefore, this article is aimed at raising awareness and promoting corporate governance during takeovers and mergers.