M&A Break Fees: US Litigation vs. UK Regulation

Abstract

This paper contrasts UK and US governance of M&A break fees to see what the contrast can teach us about trade-offs between litigation and regulation as modes of governance, including how laws change under each regime over time. Data on 1,136 bids in 1989-2008 and 61 fee disputes show: (1) the UK caps fees at a low level with a simple ex ante rule based not on regulatory expertise but on an arbitrarily chosen percentage of bid value, which nonetheless has the virtues of clarity and lower litigation costs, and enhances competition conditional on an initial bid, and (2) US courts evaluate fees ex post with a complex and vague standard, allowing for greater variation and higher average fees, reducing bid competition and increasing bid completion rates, and possibly increasing M&A overall, at the cost of legal uncertainty and litigation (although less than might be expected), in part because courts resist articulating clear rules. Laws in each nation exhibit inertia; are protected by entrenched interest groups (institutional investors in the UK, lawyers in the US); and co-exist with the opposite approach (litigation in the UK, regulation in the US), even within the domain of M&A law. Subject to strong limits on external validity, the case study suggests that interest groups may be the most important factors shaping the initial choice between regulation and litigation, even for otherwise similar nations in a similar context, and that a combination of interest groups formed in response to a given choice, as well as lawmaker incentives, may preserve those choices even after the conditions giving rise to the initial choice have passed away.

JEL Classification: G18, G34, K10, K20, K22, K41, L51