[Arjim Jain and Shruti Asati are 5th Year B.A., LL.B. (Hons.) students at National Law University, Odisha]
On May 5, 2025, Singapore’s Securities Industry Council (“SIC”) released a consultation paper proposing significant amendments to the Singapore Code on Takeovers and Mergers, with a sharp focus on regulating deal protection measures—especially break fees. The proposal seeks to generally prohibit break fees unless approved by the SIC, removing the existing 1% cap. While break fees can secure initial bids, they may also deter competing offers and harm shareholder interests. This post examines break and reverse break fees in mergers and acquisitions (“M&A”) deals, their treatment under Indian law, and compares global regulatory approaches, with a critical lens on the SIC’s proposed reforms.
Break Fee and Reverse Break Fee
A break fee (or breakup fee or termination fee) is a pre-agreed sum a target company agrees to pay to a potential buyer if a deal falls through due to mutually agreed events—typically when a more favourable (usually competing) offer is accepted by the target company. It compensates the buyer for efforts, costs, and lost opportunities, and usually ranges from 0.01% to 7% of the deal value, averaging around 3%.
In contrast, a reverse break fee is paid by the buyer to the target if the deal fails due to reasons agreed by both the parties like financing or regulatory issues. Popularized by private equity, reverse break fees are now standard in M&A and tend to be higher—averaging around 4%—as failed deals often harm the target’s reputation and future prospects more severely. Unlike at the start of the process, the target may no longer attract the same interest from other buyers, and a broken deal can signal weakness to consumers, suppliers, and prospective partners, reducing the likelihood of securing similar terms again.
Break Fees in the Indian Legal and Regulatory Framework
In India, neither the Companies Act, 2013 nor the regulations promulgated by the Securities and Exchange Board of India (“SEBI”) specifically mention break fees or reverse break fees. Their enforceability is governed by general contract law under the Indian Contract Act, 1872. Courts require such fees to be reasonable and not punitive; if considered a penalty, they may not be enforceable as discussed below.
Public Companies
Transactions involving listed companies face several regulatory hurdles. SEBI reviews these clauses during regulatory filings, such as the Draft Letter of Offer (“DLOF”), under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and may reject break fee provisions if they are deemed unreasonable or irrational.
Section 67(2) of the Companies Act, 2013 prohibits public companies from giving, directly or indirectly, any financial assistance – such as loans, guarantees, or security – for the purchase or subscription of their own shares or those of their holding company. An excessively high break fee may indirectly facilitate the transaction by acting as a deterrent for the company to accept a better deal as then the company walking away from the deal has to pay break fee.
In Paros Plc v. Worldlink Group Plc, a court in the United Kingdom (“UK”) held that break fees can constitute “financial assistance” if they “smooth the path” to a share acquisition and significantly reduce the company’s net assets. However, such fees are not always financial assistance; it depends on their actual effect.
Private Companies
In private M&A deals, break fee clauses are usually easier to enforce because they are contractual in nature and mainly governed by the Indian Contract Act. Section 55 deals with situations where contractual obligations are not fulfilled on time, allowing the non-breaching party to either cancel the contract or claim compensation—this can trigger a break fee.
Section 74 of the Contract Act is especially relevant, as it permits compensation for breach when a penalty is stipulated in the contract, thus supporting the inclusion of break fees. However, Indian courts have repeatedly emphasized that such fees must be reasonable and not punitive; only reasonable compensation will be enforced, and any amount deemed penal in nature will not be upheld.
The judicial interpretation of enforceability of liquidated damages in India, as seen in cases like ONGC v. Saw Pipes, Construction and Design Services v. DDA, and Desh Raj v. Rohtash Singh, has taken the view that if the amount is a genuine pre-estimate of loss made at the time of the contract, it can be enforced. The party in breach must prove that the amount is excessive or that no actual loss was likely.
Courts generally do not insist on proof of actual loss where calculating damages is difficult—such as in large commercial or infrastructure contracts. However, if the fee looks like a penalty, only a fair amount of compensation will be awarded. Since there are no strict statutory guidelines, the enforceability of break fees ultimately depends on the courts’ interpretation of the specific facts of each deal. Section 75 further supports the right to compensation when a contract is rightfully terminated due to non-performance.
A notable example is the failed merger between Zee Entertainment Enterprises and Sony Group Corp., where the merger agreement reportedly included a $100 million (₹800 crore) break fee payable by Zee. After the deal collapsed due to regulatory and governance concerns, Sony sought to enforce the fee, though the matter was eventually resolved through a settlement. This example shows that while Indian law recognizes break fees, their enforceability ultimately depends on their fairness, commercial justification, and compliance with legal and regulatory norms, especially in cross-border deals.
Foreign Jurisprudence
In the United States (“US”), courts initially criticized break fees for undermining shareholder interests, as seen in Revlon Inc. v. MacAndrews and Forbes and Paramount v. QVC. However, the Delaware Supreme Court later upheld them in Brazen v. Bell Atlantic (1997), recognizing break fees as valid compensation that does not breach directors’ fiduciary duties. There is no statutory cap on break or reverse break fees in the US, but a study by Houlihan Lokey found that break fees typically range from 0.2% to 6% of transaction value (averaging 2.4%), while reverse break fees range from 0.2% to 9.2% of transaction value (averaging 4%).
In Australia, break fees are addressed under Rule 48 of Takeover Guidance Note 7. Fees under 1% of the seller’s equity value are generally acceptable, but higher fees may be justified if they reflect a genuine pre-estimate of loss. Even fees below 1% can be rejected if they are coercive or anti-competitive. The law in Australia does not govern reverse break fee. In 2024, break fees appeared in 79% of Australian M&A deals, while reverse break fees featured in 63%, reflecting a growing shift toward US practices. Though not regulated, reverse break fees now range between 2% and 5%, higher than their traditional 1% alignment with break fees.
Singapore regulates break fees under rule 13 of its Takeover Code, capping them at 1% of the target’s value. These must be minimal and justified. Singapore’s cautious approach—favouring limited fees and conditional exclusivity—is shared by Hong Kong. In contrast, the UK takes a stricter line, largely prohibiting break fees except in narrowly defined situations.
Analysis of SIC’s Consultation Paper and its Implications
The SIC has proposed key amendments to the Singapore Code on Takeovers and Mergers, focusing on regulating deal protection measures—particularly break fees. The paper broadly recommends two changes:
- General Ban on Offer-Related Arrangements: Break fees and other financial commitments tied to a takeover will be broadly prohibited during an offer period or when an offer is expected, except for limited exceptions like confidentiality or regulatory support agreements.
- Removal of 1% Cap: The current rule allowing break fees up to 1% of the target’s value will be scrapped. Going forward, break fees will only be allowed with SIC’s express approval.
Rationale Behind the Reforms
The SIC is concerned that large or frequent break fees can distort competition. They may discourage rival bidders, increase entry costs, and limit shareholder access to better offers. High-profile deals like Microsoft–LinkedIn ($725M break fee) and Apollo–Cooper Tire ($50M break fee; $112.5M reverse break fee) show how such clauses can reduce competitive tension. Break fees may also affect directors’ fiduciary duties. While they provide deal certainty for the initial bidder, they could prevent the company from exploring more favourable offers, potentially harming shareholder interests. Directors must balance securing a reliable offer with ensuring openness to better deals.
Despite the risks, break fees play a useful commercial role. For buyers, they provide protection for time and resources spent. For sellers, they can signal deal seriousness and reduce transaction uncertainty. When carefully structured, break fees can support rather than hinder competition. The SIC’s proposed approach aims to discourage anti-competitive behaviour while allowing justified break fees that preserve deal certainty and promote fair bidding.
Conclusion
Despite witnessing a surge in cross-border M&A activity, India still lacks a dedicated legal framework for break and reverse break fees. These clauses are currently governed by general contract law and selectively overseen by regulators like SEBI and the Reserve Bank of India. However, their enforceability often depends on case-specific judicial interpretation, leading to legal uncertainty—especially in cross-border deals where regulatory approvals are crucial.
Jurisdictions like Singapore and Australia have adopted clearer guidelines, which help improve investor confidence and ensure fair competition. Singapore’s recent move to restrict break fees signals a global shift away from entrenched deal protection mechanisms toward greater transparency and market competitiveness.
While break fees are not illegal and can offer deal certainty, their structure—especially when combined with no-shop or exclusivity clauses—can deter rival bidders and reduce shareholder value. To address these concerns, India must consider introducing clearer regulatory norms. Striking the right balance between transactional certainty and fair market dynamics is key to navigating the evolving landscape of global M&A.
– Arjim Jain & Shruti Asati
