When Silence is Golden: Why the Business Judgment Rule Should Apply to No-Shops in Stock-for-Stock Merger Agreements

Abstract

This Article argues that the business judgment rule, and not Unocal enhanced scrutiny, ought to apply to most no-shop provisions in stock-for-stock merger agreements. As a doctrinal matter, the Article argues that such no-shops are functionally different from defensive measures in several key aspects. Unlike defensive measures, no-shops are enacted primarily for the buyer's benefit and not to protect the target; no-shops are not enacted unilaterally by the target but instead are bargained for with the buyer; and no-shops do not prevent a target from being acquired. This Article also examines the costs and benefits of judicial intervention into this area. It argues that the need for judicial intervention is reduced because the potential for board conflicts is low relative to the potential for such conflicts when classic defensive measures are adopted; because no-shops, properly considered, do not cause boards to make uninformed decisions; and because shareholders are able to protect themselves from the harm that might be caused by agreeing to an overly restrictive no-shop. In addition, this Article argues that the costs of judicial intervention would be relatively high given the nature of the inquiry a reviewing court would have to undertake, the comparative risk of error of engaging in such a review, and the scarcity of judicial resources.

JEL Classification: A00