What is a 'Drop Dead Fee'

A drop dead fee is a fee paid by a borrower to a lender when an acquisition deal falls through. It's applied to compensate the loaning institution for lost interest if a loan is secured and then becomes unnecessary because of a failed deal. The funds must have been borrowed for acquisition purposes.

BREAKING DOWN 'Drop Dead Fee'

A drop dead fee relates to loans made toward the acquisition of another company, and is primarily used in the United Kingdom. If a company wishes to fund an acquisition and the acquisition deal falls through, the borrowing company must return the borrowed money and pay a drop dead fee penalty.

Drop Dead Fee Examples

As an example of a drop dead fee, six banks that underwrote a failed $750 million refinancing for Dr. Pepper/Seven-Up Cos. in 1992 received a modest drop dead fee of about $300,000 each. However, 13 other banks that had smaller but still significant commitments of about $50 million apiece as lead managers did not collect drop dead fees because they failed to include the fee when negotiating the deal's terms.

In 2001, the Indian government introduced a law that entitled investment banks 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 was proposed as a way to maintain investment bankers' interest in these deals. As a result, 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 had recommended giving investment bankers three percent of gross sale proceeds from asset sales in 1996. The recommendation was made after consultation with investment banks such as Goldman Sachs, Merrill Lynch and Jardine Fleming. The fees that Indian investment bankers receive on divestment deals can vary 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.

RELATED TERMS
  1. Drop Dead Date

    A drop dead date is a provision in a contract that sets out a ...
  2. Loan Application Fee

    A loan application fee is a fee charged to a potential borrower ...
  3. Stock Loan Fee

    A stock loan fee, or borrow fee, is a fee charged by a brokerage ...
  4. Impose

    The term "impose" refers to the act of placing a fee, levy, tax ...
  5. Performance Fee

    A performance fee is a payment made to an investment manager ...
  6. Dead Cat Bounce

    A dead cat bounce is a temporary recovery from a prolonged decline ...
Related Articles
  1. Investing

    Everything You Know About Investor Fees

    Investment fees are one of the main determinants of investment returns, and over time, minimizing fees tends to maximize performance. Use this guide today.
  2. Investing

    8 Investing Fees That You Should Never Pay

    In investment management and financial planning there are a plethora of fees that are unnecessary.
  3. Investing

    Are Fees Depleting Your Retirement Savings?  

    Each retirement account will have a fee associated with it. The key is to lower these fees as much as possible to maximize your return.
  4. Financial Advisor

    How to Talk Fees with Clients

    Talking about fees with clients is not always a fun discussion. Here's the best way to go about it.
  5. Investing

    Are Hidden Fees Eroding Your Participants’ Return?

    Plan sponsors need to know the fees associated with their plan to determine if they are reasonable.
  6. Retirement

    How a 1% Annual Fee Can Ruin Your Nest Egg

    What kind of impact does an annual 1% fee have on your portfolio? The answer may surprise you.
  7. Retirement

    Hidden Fees in 401(k)s

    Fees, regardless of how conspicuously they're disclosed, are an important criterion for your 401(k) investments.
  8. Investing

    How Fees Impact Your Investment Results

    You might be surprised by how much investment fees impact a portfolio's performance.
  9. Managing Wealth

    Changes To Your Checking Account

    Checking accounts have evolved a lot over the years. Here are the five biggest changes that can affect your wallet.
  10. Insights

    What's a Dead Cat Bounce? InvestoTrivia

    Quiz: What does the financial phrase "Dead Cat Bounce" mean?
RELATED FAQS
  1. What is dead money?

    Dead money is a common term used on Wall Street to describe money that does not earn a return for an investor. It could be ... Read Answer >>
  2. What kinds of fees are involved in futures trading?

    Learn what the various costs are that are charged by brokerage firms and trading exchanges to individual futures trading ... Read Answer >>
Trading Center