Re-Evaluating the Emerging Standard of Review for Matching Rights in Control Transactions

Abstract:     
In recent years courts have taken a permissive approach to matching rights, viewing them as standard features in merger agreements. Matching rights are deal protection devices intended to give the rightholder assurance that the deal will be completed, consequently these measures can deter subsequent bidders and, in the event a subsequent bid appears, ensure that the initial bidder is advantageously positioned to succeed. This Article argues that courts should re-evaluate the emerging legal standard governing the use of "matching rights" in merger agreements.

Plaintiffs have brought challenges to the use of matching rights in various circumstances. Until now, however, courts have refused to acknowledge that there might be circumstances in which matching rights are preclusive deal protections and therefore unreasonable. Consequently, the emerging legal standard with respect to matching rights is one of permissiveness. In fact, there are circumstances in which one can expect matching rights to be potentially powerful deterrents to second bidders. In such circumstances, the use of matching rights may be unreasonable.

Courts should employ the same fact-intensive review to the use of matching rights that they employ with respect to other deal protection measures. Once sensitized to the specific deterrent effects of matching rights, courts should more closely scrutinize the use of matching rights, particularly when the right-holder is a financial buyer or the sales process demonstrates characteristics of a common value sale.

Number of Pages in PDF File: 45

Keywords: matching rights, mergers, unocal, rights of first refusal

JEL Classification: K20, K22

Accepted Paper Series