DealLawyers.com Blog

October 12, 2016

What If Deal Protections Were Illegal? Ask the UK

The United Kingdom prohibited “deal protections” in M&A transactions in 2011. Before that time, termination fees of up to 1% of transaction value were permitted and there were no restrictions on other protection devices such as “no-shops” and “force the vote” clauses. A new study on the results of that prohibition comes to some interesting conclusions:

– M&A deal volumes in the UK declined significantly in the aftermath of the prohibition, relative to deal volumes in the European G-10 countries.

– There were no countervailing benefits to target shareholders in the form of higher deal premiums or more competing bids.

– Completion rates and deal jumping rates also remained unchanged.

– Before the prohibition on deal protections, approximately 50% of all deals in the sample involved targets from the UK. After the ban, this proportion fell to approximately 34%.

– In addition, the authors estimate $19.3 billion in lost deal volumes per quarter in the UK relative to the control group due to the prohibition on deal protections, implying a quarterly loss of $3.2 billion for shareholders of UK companies.

The results suggest that deal protections provide “an important social welfare benefit by facilitating the initiation of M&A deals.”

John Jenkins