DealLawyers.com Blog

In the wake of Crispo v. Musk, we blogged a lot in the last year about possible ways to address the enforceability issues with contractual provisions intended to preserve claims for lost premium that stockholders would have received had a busted deal closed. One of those proposed solutions was to amend the DGCL — which actually happened, effective August 1st. A recent paper — Lost-Premium Damages in M&A: Delaware’s New Legal Landscape — suggests that this was the right outcome — that lost-premium provisions should be legal.

This entry in the CLS Blue Sky Blog discusses the paper and summarizes the arguments as follows:

We suggest that allowing a target to recover lost premiums is supported by both doctrinal principles and policy considerations. … It is not clear why receiving a bargained for premium would be an unconscionable amount of damages, particularly given the often balanced bargaining power and sophistication of parties in M&A transactions. Indeed, targets are allowed to bargain for large merger termination fees that are payable to them directly. Twitter, for example, negotiated a $1 billion termination fee for its benefit.

Lost premiums can also be an appropriate measure of a target’s own damages. In the case of a breach of contract by the prospective purchaser, the target does lose the benefit of its bargain for negotiating a change in control. A target corporation expects to receive consideration for doing the deal, particularly in cash-out transactions, where the target’s singular goal in negotiating a merger agreement is to get the best possible deal for shareholders. In cash-out transactions, the target and its shareholders’ interests are aligned or even identical. The target’s loss is best assessed by its shareholders’ loss, since the consideration payable most accurately represents the value and substance of the target corporation’s bargain.

This interpretation is also sensible in policy terms because there is no other equally reliable means of calculating a target’s damages in a busted deal. If not lost premiums, should courts award (in contexts where specific performance is not available) lost synergies, lost cash flows, or another speculative measure? Awarding lost-premium damages is also most consistent with other forms of M&A structures, such as asset sales, where a target may claim the full benefit of the bargain, including a change of control premium.

It concludes by saying that while “Delaware legislature’s amendments have, at least for now, settled the issue, it may emerge in other jurisdictions. Should this occur, we suggest that courts in states without similar statutory provisions have a credible way of upholding lost-premium provisions.”

– Meredith Ervine