Are M&A Contract Clauses Value Relevant to Bidder and Target Shareholders?

39 Pages Posted: 22 Jun 2018 Last revised: 9 Jun 2019

See all articles by John C. Coates, IV

John C. Coates, IV

Harvard Law School

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics; Columbia University - Law School

Ge Wu

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: June 2019

Abstract

Merger and acquisition deals are governed by merger clauses which are negotiated between the bidder and target in order to communicate deal terms, specify risk sharing between the parties, and describe dispute management provisions in case of litigation. In a large sample of manually collected U.S. deal contracts involving publicly traded bidders and targets, we construct merger clauses indices based on legal scholars’ ex-ante prediction and examine the relationship between announcement returns and different types of merger clauses. We find that bidder protective clauses correlate with higher bidder returns while target protective clauses and pro-competition clauses correlate with higher target returns. We also find that bidder and target protective indices have larger impacts on announcement abnormal returns for “bad” deals than for “good” deals. Finally, we find that the inclusion of more bidder protective clauses leads to lower deal completion rates while the inclusion of more target protective clauses and pro-competition clauses has no impact on deal completion rates. These results are consistent with the expert lawyer/efficient contracting view of Cain, Macias, and Davidoff Solomon (2014), and Coates (2016), and against merger contracts as boilerplate agreements.

Keywords: Merger clauses, mergers and acquisitions

JEL Classification: K22

Suggested Citation

Coates, John C. and Palia, Darius and Wu, Ge, Are M&A Contract Clauses Value Relevant to Bidder and Target Shareholders? (June 2019). Available at SSRN: https://ssrn.com/abstract=3201235 or http://dx.doi.org/10.2139/ssrn.3201235

John C. Coates

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

Darius Palia (Contact Author)

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email )

111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Columbia University - Law School ( email )

435 W 116th St.
New York, NY 10027
United States

Ge Wu

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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