Bulletproof: Mandatory Rules for Deal Protections

Abstract

This Article provides an economic analysis of mechanisms that protect negotiated acquisitions of companies and explains the need for a mandatory rule limiting the use of such mechanisms. The Delaware courts have in fact imposed restrictions on various forms of deal protection without recognizing a consistent underlying economic logic to their decisions and without establishing a consistent principle governing different forms of deal protection. At the same time, practitioners continue to push the edge of the envelope seeking ways to create stronger deal protection. I argue that when viewed together from an economic perspective, the courts' somewhat ad hoc decisions relating to deal protection are consistent with the efficiency objective underlying corporate law and should be bolstered rather than undermined. Specifically, I argue that sellers should be prohibited from providing buyers in non-Revlon transactions with "bulletproof" protection. Instead, sellers should be permitted to provide limited protection only to the extent necessary to compensate bidders for the transaction and opportunity costs of making bids. A well-measured termination fee should be sufficient for this purpose.

Keywords: Corporate and Securities Law

JEL Classification: K22