Contractual Remedies in Mergers

This paper investigates the impact of a recent Delaware corporate law decision that restricted a merger target’s ability to recover damages from a breaching buyer. First, we provide a theoretical analysis to generate empirical predictions. Second, we show that the decision led to a decrease in both target and joint values in mergers governed by Delaware law. Third, we hand collect relevant provisions from merger agreements and find that deals governed by Delaware law include more target-friendly nonprice terms after the decision. We also provide evidence suggesting that transactions governed by Delaware law that adopted such nonprice contract terms experienced a relative decrease in deal price. Overall, the paper demonstrates the importance of remedy provisions in merger contracting and shows how contracting parties respond to an exogenous change in jurisprudence on deals.