Corporate Courtship Gone Sour: Applying a Bankruptcy Approach to Termination Fee Provisions in Merger and Acquisition Agreements

Abstract

This paper examines Delaware's judicial treatment of deal protection measures, particularly termination fee provisions. The paper explores the tension between the economic function of these provisions in inducing bidders and potentially compensating them for opportunity and transaction costs in the event of deal termination vs. the ability of large termination fees to constrain and coerce shareholder choice by obligating the target to pay out the fee in the event of a shareholder no vote.

In light of these issues, the paper explores the different standards of review that Delaware courts have and could potentially apply in ex post review of agreements containing termination fees. Ultimately, the paper argues that there are sufficient policy justifications to adopt more substantive review of these provisions. In light of several identifiable policy justifications, the paper suggests that a best interest standard that is used by bankruptcy courts in their more substantive review of termination fees in asset purchase agreements be adopted by the Delaware Courts analogously in the mergers and acquisitions context.

Keywords: Law and ecomomics, mergers and acquisitions, shareholder voting, deal protection provisions, Delaware law, corporate law

JEL Classification: G34, K00, K12, K22, K20, K41