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 target and 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 provide evidence suggesting that transactions governed by Delaware law that adopted such non-price contract terms experienced a relative decrease in deal price. 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.