In mergers and acquisitions transactions, a buyer and a seller will often agree to contractual mechanisms, such as termination fees and match rights, to protect the deal. Judicial attitude towards various deal protection devices migrated from fairly strong hostility to a more permissive allowance over time. This is evidenced by the line of cases, starting from Revlon and Paramount v. QVC to In re Toys R Us, Lyondell Chemical, and C&J Energy Services. While the question of whether entering into certain deal protection devices can constitute a breach of target directors’ fiduciary duty has not been fully resolved, the recent controversy over appraisal has breathed new life into the questions over the desirability of deal protection devices. A prominent issue was whether the court could use the deal price itself as an indicator of “fair value.” In cases, such as DFC Global, Dell, and Aruba, the Delaware Supreme Court stated that when an acquisition is done at “arms’ length” and when there is sufficient competition for the target, either before or after the agreement has been signed, the deal price is a reliable indicator of “fair value” of the target’s shares. In determining whether a transaction satisfies such a standard (i.e., whether “Dell-compliant”), the presence or absence of deal protection devices has become one of the core issues.

The line of cases, from Revlon and Paramount v. QVC, through In re Toys R Us, Lyondell Chemical, and C&J Energy Services, and to the recent appraisal cases (DFC Global, Dell, Aruba, and their progeny) raises interesting and important questions about deal protection devices. To the extent that the parties are trying to “lock up” the deal, to what extent are deal protection measures successful in ensuring that a third party buyer will not try to “jump” the deal? How do they affect a third party’s incentive to compete? For instance, can the inside buyer’s unlimited match right deter a third party from competing against the buyer? Will an unlimited match right create a “winner’s curse” problem? What if the target has to pay a sizable termination fee? What about for the target shareholders: do the deal protection devices undercut their return? Finally, in the context of appraisal, does the presence of deal protection devices undermine the reliability of the deal price as an indicator of “fair value”? Should the presence of an unlimited match right, for instance, make the deal price inadmissible as evidence of “fair value”?

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