Legal Definitions - break-up fee

A break-up fee is a type of termination fee that is paid by one party to another in the event that a business deal or merger falls through. This fee is designed to compensate the party that has invested time and resources into the deal, but is left empty-handed due to the other party's decision to back out.

Company A and Company B are in talks to merge. As part of the negotiations, they agree that if the deal falls through, Company A will pay Company B a break-up fee of $10 million. However, if the deal goes through, the break-up fee will not be paid.

In this example, the break-up fee serves as a form of insurance for Company B. If the deal falls through, they will receive compensation for the time and resources they invested in the negotiations.