Does everyone remember the summer of 2024, when the hot corporate topic was SB 313 and Delaware’s move to authorize shareholder agreements? Much less discussed at the time, but still important, was the proposal to permit jilted merger targets to collect lost premium damages. Delaware amended its corporation law to provide:
Any agreement of merger or consolidation governed by § 251 of this title… may provide: (1) That (i) a party to the agreement that fails to perform its obligations under such agreement in accordance with the terms and conditions of such agreement, … shall be subject, in addition to any other remedies available at law or in equity, to such penalties or consequences as are set forth in the agreement of merger or consolidation (which penalties or consequences may include an obligation to pay to the other party or parties to such agreement an amount representing, or based on the loss of, any premium or other economic entitlement the stockholders of such other party would be entitled to receive pursuant to the terms of such agreement if the merger or consolidation were consummated in accordance with the terms of such agreement)…
In other words, DGCL 261 overrides the ordinary principle that penalties are not available for breach of contract, when the contract in question is a merger agreement.
Dhruv Aggarwal, Albert H. Choi, and Geeyoung Min have just posted a paper, Contractarianism in Corporate Mergers, discussing some of the problems and unanswered questions created by this provision, including the point that it allows parties to contract for termination fees so high they would functionally make “efficient” breach impossible, thus perhaps resulting in inefficient transactions. Much of their discussion would probably apply to the anti-penalty doctrine in contract law generally, but they also make merger-specific points, including that the provisions appears to create a bifurcated approach to termination fees, whereby fees associated with breaches – and only breaches – (perhaps) may include penalties, whereby fees associated with other grounds for termination (perhaps) may not, which may encourage a certain amount of contractual creativity as to whether a termination is classified as one or the other.
In recent years, there have been momentous developments regarding the remedies available to a disappointed party in a merger. First, Delaware law, which governs most major corporate transactions in the United States, now allows merger agreements to contain a “lost premium” provision for the benefit of the target. The provision permits the target to recover the premium its shareholders would have received from the buyer if the buyer breaches the agreement and the deal falls apart. Secondly, Delaware courts have become increasingly willing to enforce specific performance provisions contained in merger agreements, forcing the breaching party to complete the transaction. These developments collectively represent the strengthening of the contractarian principle in merger jurisprudence, essentially allowing the merging parties to design their own remedy. The Article critically examines this phenomenon, identifying several potential negative consequences. Unchecked application of the contractarian principle in designing remedies in a merger could lead to unreasonably high termination fees that will impede efficient transfer of assets, and exacerbate issues relating to asymmetric information, agency costs, and negative externalities on third parties. The Article explores legislative and judicial solutions to mitigate the risks of relying exclusively on the transacting parties to craft merger remedies.
And two other things. On the most recent Shareholder Primacy podcast, Mike and I talk about Tesla’s upcoming shareholder meeting – why the delay in scheduling? And what might we expect? Here at Apple; here at Spotify; and here at YouTube.
Prior to that, Mike interviewed Francine McKenna of The Dig, where they talked about the PCAOB and the AmTrust cert petition, among other things. Here at Apple; here at Spotify; and here at YouTube.