Merger Remedies Unbound

How should foundational contract law doctrines apply to corporate mergers? This Article argues that recent changes in Delaware law grant parties expansive contractual freedom to define their preferred remedies in merger agreements, untethered from the limits imposed by traditional contract law. A new provision in the Delaware corporate code permits penalty clauses in merger agreements, departing from the traditional “anti-penalty doctrine” that forbids punitive liquidated damages in contract. Delaware courts have also shown deference to specific performance provisions, treating them as presumptively enforceable commitments instead of retaining their traditional judicial discretion over the choice of remedies. Given that Delaware law governs the vast majority of major corporate transactions, these developments reflect a significant shift toward contractual freedom in merger law. Merging parties can now customize their contractual remedies with minimal judicial intervention.

This Article, however, argues that such expansion of contractual freedom can carry undesirable and unanticipated risks. Allowing parties to move away from the traditional anti-penalty doctrine could lead to inflated liquidated damage provisions, including termination fees, that impede efficient dealmaking. These inflated terms can also exacerbate issues relating to information asymmetry between negotiating parties, allow managers to prioritize their own interests over those of shareholders, and harm third parties, including competing bidders who cannot acquire the target and consumers adversely affected by the successful completion of anticompetitive mergers.

To address these concerns, the Article proposes legislative and judicial solutions  to mitigate the risks of relying exclusively on the transacting parties to craft merger remedies and to curb the excessive application of contractual freedom in merger law. Legislators should consider amending the Delaware corporate code to restore the traditional contract law limits that are suitable for merger transactions. Courts, for their part, could invalidate excessive or socially inefficient merger remedies and only order specific performance when they deem monetary damages to be inadequate. Together, these interventions would preserve the benefits of contractual flexibility while restraining its most distortionary effects.