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. 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. 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. 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 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.
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.
Understanding a Drop-Dead Fee
Buying another company can be expensive. Sometimes it is necessary for a prospective acquirer to ask a lending institution for a loan in order to raise the necessary funds to fulfill its obligations.
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.
Important
A drop-dead fee is applicable only if it is negotiated into the terms of the loan no longer needed.
Examples of Drop-Dead Fees
Dr. Pepper/Seven-Up
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.
Investment Banks in India
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 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.
Related terms:
Accounting
Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to oversight agencies, regulators, and the IRS. read more
Acquirer
An acquirer is a company that acquires rights to another company or business relationship through a deal. read more
Acquisition
An acquisition is a corporate action in which one company purchases most or all of another company's shares to gain control of that company. read more
Acquisition Fee
An acquisition fee is charged by a lessor to cover the expenses, usually of the administrative variety, that they incur in arranging a lease. read more
Asset Sales
An asset sale is when a bank sells its receivables to another party. read more
Discount House Defined
Primarily operating in the United Kingdom, a discount house bought, sold, and negotiated bills of exchange or promissory notes. read more
Divestment
Divestment is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. read more
Down Payment
A down payment is a sum of money the buyer pays at the outset of a large transaction, such as for a home or car, often before financing the rest. read more
Drop-Dead Date: & Overview
A drop-dead date is a provision in a contract that sets out a finite deadline that, if not met, will automatically trigger adverse consequences. read more