Dhruv Aggarwal is an Assistant Professor of Law at Northwestern Pritzker School of Law, Albert H. Choi is the Paul G. Kauper Professor of Law at the University of Michigan, and Geeyoung Min is an Associate Professor of Law at Michigan State University College of Law. This post is based on their recent paper and is part of the Delaware law series; links to other posts in the series are available here.
How should foundational contract law doctrines apply to corporate mergers? In a forthcoming paper, we argue that recent changes in Delaware law grant parties an unprecedented degree of contractual freedom to define their preferred remedies in merger agreements, far beyond the limits imposed by traditional contract law. Delaware’s newly permissive attitude toward contractual remedies in mergers stems from a legal dispute about “lost premium” provisions, which allow target companies to recover the premium that their shareholders were promised, in case the buyer breached the agreement and the merger failed to close. In Crispo v. Musk, the Delaware Chancery Court held that Twitter could not enforce the lost premium provision in its merger agreement with Elon Musk after Musk attempted to walk away from the transaction. The Crispo court based its decision on contract law’s anti-penalty doctrine. Under this doctrine, liquidated damages—the contractually stipulated sums intended to compensate the injured party—must not be unreasonably large. The decision came as a surprise to many practitioners, and raised concerns that buyers could opportunistically walk away from deals without compensating the target. Several months later, the Delaware legislature responded to these concerns and amended the Delaware corporate statute, expressly overriding the Chancery Court’s Crispo ruling and allowing targets to collect the lost premium when such a provision is stipulated in a merger agreement, as was the case in the Twitter deal.
The Delaware legislature’s endorsement of lost premium provisions, despite concerns over their compatibility with the anti-penalty doctrine, is consistent with a parallel, longer-running trend in Delaware jurisprudence: an increasingly contractarian approach to specific performance. Traditionally, courts have exercised substantial discretion over determining whether an injured party is entitled to specific performance as a remedy, regardless of whether an agreement expressly provides for it. Recently, however, Delaware courts have grown far more willing to enforce specific performance provisions in merger agreements as written.
The legislative response to Crispo and the Delaware courts’ growing deference to negotiated specific performance provisions, taken together, signal a broader shift toward allowing contracting parties wide-ranging freedom to dictate their preferred remedy with minimal judicial interference. But this increasing deference to party-drafted remedies raises crucial questions about the appropriate boundaries of contractual freedom. To what extent should the parties’ stipulated remedy in a merger agreement be enforced as written? How should courts and legislatures balance deference to private ordering with the equitable principles that traditionally govern the enforcement of remedies? More fundamentally, what remedy should a disappointed party be entitled to when a merger falls apart? READ MORE »
