Series 79 practice questionmediumDeal Protections
TargetCo has signed a merger agreement with BuyerCo that includes a break-up fee of 3% of equity value. Under what circumstance would TargetCo most likely be required to pay this fee?
- ABuyerCo fails to obtain regulatory approval for the transaction
- BTargetCo's stock price declines below the offer price
- CTargetCo's board terminates the agreement to accept a superior proposal from a competing bidder✓ Correct answer
- DBuyerCo decides to withdraw its offer for strategic reasons
Explanation
Why C — TargetCo's board terminates the agreement to accept a superior proposal from a competing bidder
A break-up fee (also called a termination fee) is typically payable by the target to the acquirer when the target terminates the merger agreement to accept a superior competing proposal. The fee compensates the original bidder for the time, expense, and opportunity cost of pursuing the transaction. Break-up fees typically range from 2-4% of the target's equity value, and courts have generally upheld fees in this range as reasonable.
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