Delaware’s New Legal Landscape: Lost Premium Damages in M&A
the economic rationale and importance of lost-premium provisions in M&A transactions. Part III delves into the legal analysis of lost-premium provisions, challenges the reasoning behind the Crispo v. Musk decision, and advocates for the enforceability of these provisions.
M&A transactions involving public target corporations are commonly structured using direct or triangular mergers, with reverse triangular mergers being a popular choice when cash is the merger consideration. In such transactions, target shareholders benefit economically from the merger, although they are not parties to the merger agreement. On the other hand, the target corporation, despite not being the economic beneficiary, is a party to the merger agreement. This disconnect creates a legal dilemma in seeking remedies for unjustifiable buyer refusals to close a deal.
To address this issue, M&A practitioners introduced lost-premium provisions in merger agreements to align economic and legal realities. These provisions allow target corporations to claim damages, including the lost premium that shareholders would have received had the deal closed. Given that US listed target shareholders typically receive premiums exceeding 40% of the market price, lost-premium provisions serve as a crucial deterrent against buyer non-performance by increasing the potential costs for reluctant buyers.
Despite their widespread use in Delaware-governed merger agreements, the enforceability of lost-premium provisions was called into question in the Crispo v. Musk case. The Delaware Chancery Court deemed these provisions unenforceable under the anti-penalty doctrine, causing concerns among stakeholders and negatively impacting ongoing mergers. To address these concerns, the Delaware General Assembly swiftly amended the Delaware General Corporation Law to restore the legality of lost-premium provisions.
In challenging the analysis in Crispo, we argue that lost-premium provisions are both legally sound and economically justified. Contrary to the court’s reasoning, lost-premium provisions should not be considered unenforceable under the anti-penalty doctrine. Target corporations have a legitimate expectation interest in the consideration paid in a deal, and damages under lost-premium provisions are proportionate to the actual loss suffered, rather than punitive in nature. These provisions offer a practical and effective way to calculate damages in failed merger deals.
In conclusion, we advocate for the continued use and enforceability of lost-premium provisions in M&A transactions. These provisions play a crucial role in safeguarding target corporations and shareholders from unjustifiable buyer breaches, ensuring fair outcomes in merger agreements. Other state courts should resist following the Crispo decision and uphold the validity of lost-premium provisions, recognizing their doctrinal defensibility, economic sensibility, and policy considerations.
