DealLawyers.com Blog

In a recent CLS Blue Sky Blog, Baker McKenzie’s Pete Korzynski argues that M&A practitioners may want to ignore the DExit debate when it comes to the choice of governing law for an acquisition agreement. He says that, while recent outcomes pushed some companies to consider other jurisdictions for governing their internal affairs, the choice of governing law for an acquisition agreement primarily concerns the target’s “’external affairs,’ specifically, its relationship to an acquirer.”

That choice implicates two other choices. First, if a dispute arises between the target corporation and the acquirer, what background rules will apply to interpreting the agreement terms? Second, who will apply those rules to resolve that dispute?

While the law of the state of incorporation will govern many parts of the acquisition process, including approval requirements, Delaware may still have a leg up on other jurisdictions, even for Nevada or Texas-incorporated targets.

Parties typically seek predictability and enforceability, and by contrast with states like Nevada and Texas, Delaware has a well-developed jurisprudence – and well-established merger-agreement terms based on that jurisprudence – for (i) managing the target corporation directors’ fiduciary duties and (ii) determining whether a target corporation has suffered a “material adverse effect,” the absence of which is a market-standard condition to an acquirer’s obligation to close a U.S. public company transaction. Equally important, Delaware judges are experienced in handling disputes over sophisticated transactions quickly and strictly in accordance with the parties’ agreement and well-established case law.

He acknowledges that this is all quite complicated:

Given how intertwined corporate internal and external affairs are in a merger, layering Delaware law and courts over Nevada or Texas corporate law is potentially complex. Target corporation stockholders, for example, may bring claims under the corporate law of the target’s state of incorporation with respect to breaches of fiduciary duties related to the transaction ,while the target corporation and acquirer may dispute contract terms in Delaware under Delaware law. Some parties opt for a compromise, especially in an international cross-border transaction. They expressly split the merger agreement governing law and, potentially, forums, providing the state of incorporation for internal affairs and Delaware for all other matters. In making that compromise, parties often seek to retain Delaware law specifically for its developed jurisprudence on “material adverse effects” while focusing disputes related to internal affairs in one jurisdiction.

But he still concludes that other states are simply behind when it comes to developing jurisprudence on fiduciary outs and no-shops and material adverse effects and other elements of acquisition agreements “that have similarly received extensive treatment under Delaware law by Delaware judges,” allowing deal parties to “make informed and enforceable risk allocations through their agreements.”

– Meredith Ervine