Legal & Compliance
Fiduciary Out
A clause allowing a board to withdraw from a previously agreed deal if doing so is required by their fiduciary duties to shareholders.
A fiduciary out is a contractual provision that allows a company's board of directors to terminate or modify a previously agreed-upon transaction if continuing with the deal would violate their fiduciary duties to shareholders. This typically applies when a superior offer emerges after a deal is signed but before it closes, allowing the board to consider or accept the better offer despite an existing agreement.
In Practice
Despite signing a $500M merger agreement with Company A, the board exercised the fiduciary out when Company B offered $700M, determining that rejecting the superior offer would breach their duty to maximize shareholder value — though they had to pay a $15M breakage fee to Company A.
Why It Matters
Fiduciary outs protect shareholders from boards that might accept suboptimal deals. For VC-backed companies, they ensure that the board can pursue the best available exit even after initially agreeing to a specific transaction.
VC Beast Take
The interplay between fiduciary outs and breakage fees creates interesting game theory. A large breakage fee can effectively neutralize the fiduciary out by making it economically prohibitive to switch. This is why the breakage fee size is often the most contested point in deal negotiations.
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