What Is a Drop-Dead Fee?
A drop-dead fee is a fee paid by a borrower to a lender when a transaction, usually an acquisition, financed by the latter falls through. The term is of British origin and is mainly applied in the United Kingdom.
- A drop-dead fee is a fee paid by a borrower to a lender when a transaction, usually an acquisition, that the latter helps to finance ends up falling through.
- If a loan is secured and then becomes unnecessary, the borrower must return the borrowed money and pay a drop-dead fee penalty to compensate the lender for lost interest.
- A drop-dead fee is applicable only if it is negotiated into the terms of the loan no longer needed.
- The term is of British origin and is mainly applied in the United Kingdom.
Understanding a Drop-Dead Fee
Once armed with the loan, the acquirer should be in a position to proceed, table a suitable bid, and get the deal over the line. Or maybe not: On occasion, it is possible that the company, after securing the required financing, fails in its attempt to purchase the target company. In these cases, a drop-dead fee could be necessary.
In the event that a loan is secured and then becomes unnecessary, the borrowing company must return the borrowed money, as well as, perhaps, paying a drop-dead fee penalty to compensate the loaning institution for lost interest.
A drop-dead fee is applicable only if it is negotiated into the terms of the loan no longer needed.
Example of a Drop-Dead Fee
In 1992, a group of banks underwrote a failed $750 million refinancing for Dr. Pepper/Seven-Up Cos. Six of them were eventually rewarded with a modest drop-dead fee of about $300,000 each for the troubles, while another 13 banks—which had smaller but still significant commitments of about $50 million apiece as lead managers—were left empty-handed because they failed to include the fee when negotiating the deal's terms.
In 2001, the government of India introduced a law that entitled investment banks (IB) involved in government divestment deals—the process of selling shares of Indian publicly-owned enterprises—to a drop-dead fee if a deal falls through. This proposal, implemented to maintain IB interest in these types of transactions, meant that Indian investment bankers' fee structures on divestment deals included both a success fee, a fixed percentage of the gross sale proceeds of a government asset sale, and the drop-dead fee if the divestment deal goes awry.
The Indian government recommended giving investment bankers 3% of gross sale proceeds from asset sales in 1996 after consultation with investment banks such as Goldman Sachs, Merrill Lynch, and Jardine Fleming. The fees that Indian investment bankers received on divestment deals varied from case to case, depending on the method of divestment, total value, the amount of work required to complete the transaction, the degree of difficulty, and chances of success.
Drop-Dead Fee vs. Drop-Dead Date
A drop-dead fee should not be confused with a drop-dead date: a provision in a contract that sets out a finite deadline that, if not met, will automatically trigger adverse consequences.
Failing to meet the deadline made explicit in the terms of a written agreement could simply result in the deal being terminated. Alternatively, it may result in a financial penalty.