An early termination fee (ETF) is a charge levied when a party wants to break the term of an agreement or long-term
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
. They are stipulated in the contract or agreement itself, and provide an incentive for the party subject to them to abide by the agreement.
Service industries
Termination fees are common to
service industries
Service industries are those not directly concerned with the production of physical goods (such as agriculture and manufacturing).
Some service industries, including transportation, wholesale trade and retail trade are part of the supply chai ...
such as
cellular telephone
A mobile phone or cell phone is a portable telephone that allows users to make and receive calls over a radio frequency link while moving within a designated telephone service area, unlike fixed-location phones ( landline phones). This radio ...
service, subscription
television
Television (TV) is a telecommunication medium for transmitting moving images and sound. Additionally, the term can refer to a physical television set rather than the medium of transmission. Television is a mass medium for advertising, ...
, and so on, where they are often known as early termination fees. For instance, a customer who purchases cellular phone service might sign a two-year contract, which might stipulate a
$350 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.
In the suburban Atlanta county of Gwinnett, customers were hit with termination fees of over $23 when the county commission chose not to renew the contracts of the county trash collectors in November 2008. The two companies charged this both in violation of county law and in breach of contract.
Mergers and acquisitions
In
mergers and acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...
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 (J&J) is an American multinational pharmaceutical, biotechnology, and medical technologies corporation headquartered in New Brunswick, New Jersey, and publicly traded on the New York Stock Exchange. Its common stock is a c ...
agreed to acquire
Guidant
Guidant Corporation, part of Boston Scientific and Abbott Labs, designs and manufactures artificial cardiac pacemakers, implantable cardioverter-defibrillators, stents, and other cardiovascular medical products. Their company headquarters i ...
, 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.
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See also
* Retained interest
References
{{reflist
Mergers and acquisitions
Mobile telecommunication services
Fees