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.

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