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Drop-Dead Fee

Drop-Dead Fee

What Is a Drop-Dead Fee?

A drop-dead fee is a fee paid by a borrower to a lender when a transaction, typically a acquisition, financed by the last option fails to work out. The term is of British beginning and is mostly applied in the United Kingdom.

Understanding a Drop-Dead Fee

Purchasing another company can be costly. Some of the time it is fundamental for a prospective acquirer to ask a lending institution for a loan to raise the important funds to satisfy its obligations.

Once armed with the loan, the acquirer ought to be in a position to continue, table a suitable bid, and get the deal over the line. Or on the other hand perhaps not: now and again, it is possible that the company, subsequent to getting the required financing, flops in its endeavor to purchase the target company. In these cases, a drop-dead fee could be vital.

If a loan is secured and afterward becomes superfluous, the borrowing company must return the borrowed money, as well as, maybe, paying a drop-dead fee penalty to repay the loaning institution for lost interest.

Significant

A drop-dead fee is applicable provided that it is negotiated into the terms of the loan as of now not required.

Instances 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 compensated with a humble drop-dead fee of about $300,000 each for the difficulties, while another 13 banks โ€” which had more modest yet at the same time huge commitments of about $50 million each as lead supervisors โ€” were left with nothing since they failed to incorporate the fee while arranging the deal's terms.

Investment Banks in India

In 2001, the government of India presented a law that entitled investment banks (IB) engaged with government divestment deals โ€” the most common way of selling shares of Indian freely claimed ventures โ€” to a drop-dead fee in the event that a deal fails to work out. This proposal, carried out to keep up with IB interest in these types of transactions, implied that Indian investment bankers' fee structures on divestment deals included both a triumph fee, a fixed percentage of the gross sale proceeds of a government asset sale, and the drop-dead fee assuming that the divestment deal turns out badly.

The Indian government suggested giving investment bankers 3% of gross sale proceeds from asset sales after interview with investment banks like Goldman Sachs, Merrill Lynch, and Jardine Fleming. The fees that Indian investment bankers received on divestment deals changed from one case to another, contingent upon the method of divestment, total value, the amount of work required to complete the transaction, the degree of difficulty, and odds of coming out on top.

Drop-Dead Fee versus Drop-Dead Date

A drop-dead fee ought not be mistaken for a drop-dead date: a provision in a contract that sets out a finite deadline that, in the event that not met, will naturally trigger adverse results.

Neglecting to comply with the time constraint made explicit in the terms of a written agreement could just bring about the deal being terminated. On the other hand, it might bring about a financial penalty.

Features

  • A drop-dead fee is applicable provided that it is negotiated into the terms of the loan as of now not required.
  • A drop-dead fee is a fee paid by a borrower to a lender when a transaction, generally an acquisition, that the last option assists with financing winds up falling through.
  • On the off chance that a loan is secured and, becomes superfluous, the borrower must return the borrowed money and pay a drop-dead fee penalty to repay the lender for lost interest.
  • The term is of British beginning and is for the most part applied in the United Kingdom.