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 present a theoretical analysis to generate empirical predictions. Second, we show that the decision led to a decrease in both the target and the joint values in mergers governed by Delaware law. Third, we hand-collect relevant provisions from merger agreements and find that the agreements governed by Delaware law responded by including target-friendly non-price terms after the decision. We also present evidence suggesting the deal price decreased for transactions governed by Delaware law that incorporated the non-price contract terms. Overall, the paper demonstrates how remedy provisions play an important role in merger transactions and how contracting parties respond to an exogenous change in deals jurisprudence.