Deal Protection Devices

71 Pages Posted: 7 Apr 2020 Last revised: 7 Jun 2021

See all articles by Albert H. Choi

Albert H. Choi

University of Michigan Law School; European Corporate Governance Institute (ECGI)

Date Written: June 7, 2021


In mergers and acquisitions transactions, a buyer and a seller will often agree to contractual mechanisms (deal protection devices) to deter third parties from jumping the deal and to compensate a disappointed buyer. This paper analyzes various deal protection devices, with a focus on two most commonly used mechanisms: target termination fees and match rights. A match right gives the buyer a right to “match” a third party’s offer so as to prevent the third party from snatching the target away, while a termination fee compensates the buyer when a third party acquires the target. Such mechanisms raise a number of important corporate and contract law questions. How effective are they in preventing third parties from competing for the target? Do they steer the target to be sold to the buyer who values the target less? Are the devices harmful to the target shareholders? To what extent can the negotiated deal price represent the target’s “fair value” when such devices reduce or eliminate the competition? The paper attempts to answer these questions with the help of auction theory. The paper shows, foremost, that these devices can actually increase the target and the buyer’s joint return and possibly the target’s stand-alone return. Termination fees and match rights function quite differently, however. While a larger termination fee reduces the target’s stand-alone return and can lead to allocative inefficiency, unlimited match right increases the target’s stand-alone return and promotes allocative efficiency. The paper argues that answering the corporate law questions ultimately turns on the question of how and why the target directors are utilizing the devices. If the devices are being deployed with the objective of maximizing the target shareholders’ return, not only can they be beneficial for the target shareholders, but their presence can also make the deal price a more reliable indicator of target’s fair value. With an improper objective, not only do the devices undermine target shareholders’ return, but the court also should not use the deal price as evidence of fair value. The paper also analyzes stock and asset lockups and examines deal protection devices through the lens of contract law.

Keywords: mergers and acquisitions, deal protection devices, termination fee, match right, stock and asset lockups

Suggested Citation

Choi, Albert H., Deal Protection Devices (June 7, 2021). 88:4 University of Chicago Law Review 757 (2021), U of Michigan Public Law Research Paper No. 674, U of Michigan Law & Econ Research Paper No. 20-002, Available at SSRN: or

Albert H. Choi (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels


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