Termination fee
Encyclopedia
A termination fee is a charge levied when a party wants to break the term of an agreement or long-term contract
. They are stipulated in the contract or agreement itself, and provide an incentive for the party subject to them to abide by the agreement.
Early Termination Fee – The total fee that will be charged for early termination of a contract or agreement. If the contract has a declining rate “Early Termination Fee” refers to the initial or starting amount.
Early Termination Fee Amount – The fee that would be assessed at a point in time. If the contract has a flat fee, the fee remains constant for the period described in the contract. If the contract has a declining fee the fee decreases at a rate described in the contract as a period of time elapses.
Early Termination Fee Rate – The Rate at which an Early Termination Fee declines.
, and so on, where they are often known as early termination fees (ETFs). For instance, a customer who purchases cellular phone service might sign a two-year contract, which might stipulate a $
200 fee if the customer breaks the contract. Consumer interest groups have criticized such fees as being anti-competitive because they prevent users from migrating to superior services http://www.nera.com/NewsletterIssue/nl_at_insights_at549_0609-FINAL.pdf.
termination fees are often levied in the event that one party fails to consummate a merger—for instance, because it was unsuccessful in getting shareholder approval or because it agreed to a competing offer. For instance, in 2005 Johnson & Johnson
agreed to acquire Guidant
, but Guidant later accepted a competing offer and was subject to a termination fee of $705 million.
These termination fees have been criticized as well. Shareholders in companies being purchased sometimes believe that termination fees are too high, and instead of representing the costs that the purchasing party would suffer should the deal fall through, instead act as a way of forcing shareholders and directors to accede to the deal. http://www.wiggin.com/pubs/advisories_template.asp?GroupName=Business&ID=231829862000
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
. They are stipulated in the contract or agreement itself, and provide an incentive for the party subject to them to abide by the agreement.
Early Termination Fee – The total fee that will be charged for early termination of a contract or agreement. If the contract has a declining rate “Early Termination Fee” refers to the initial or starting amount.
Early Termination Fee Amount – The fee that would be assessed at a point in time. If the contract has a flat fee, the fee remains constant for the period described in the contract. If the contract has a declining fee the fee decreases at a rate described in the contract as a period of time elapses.
Early Termination Fee Rate – The Rate at which an Early Termination Fee declines.
Service industries
Termination fees are common to service industries such as cellular telephone service, subscription televisionTelevision
Television is a telecommunication medium for transmitting and receiving moving images that can be monochrome or colored, with accompanying sound...
, and so on, where they are often known as early termination fees (ETFs). For instance, a customer who purchases cellular phone service might sign a two-year contract, which might stipulate a $
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
200 fee if the customer breaks the contract. Consumer interest groups have criticized such fees as being anti-competitive because they prevent users from migrating to superior services http://www.nera.com/NewsletterIssue/nl_at_insights_at549_0609-FINAL.pdf.
Mergers and acquisitions
In mergers and acquisitionsMergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
termination fees are often levied in the event that one party fails to consummate a merger—for instance, because it was unsuccessful in getting shareholder approval or because it agreed to a competing offer. For instance, in 2005 Johnson & Johnson
Johnson & Johnson
Johnson & Johnson is an American multinational pharmaceutical, medical devices and consumer packaged goods manufacturer founded in 1886. Its common stock is a component of the Dow Jones Industrial Average and the company is listed among the Fortune 500....
agreed to acquire Guidant
Guidant
Guidant Corporation, part of Boston Scientific and Abbott Labs, designs and manufactures artificial pacemakers, implantable defibrillators, stents, and other cardiovascular medical products. Their company headquarters is located in Indianapolis, Indiana. Their main competitors are Medtronic, St...
, but Guidant later accepted a competing offer and was subject to a termination fee of $705 million.
These termination fees have been criticized as well. Shareholders in companies being purchased sometimes believe that termination fees are too high, and instead of representing the costs that the purchasing party would suffer should the deal fall through, instead act as a way of forcing shareholders and directors to accede to the deal. http://www.wiggin.com/pubs/advisories_template.asp?GroupName=Business&ID=231829862000