Be careful what you wish for

And then there's the Crispo amendment. Frankly, I don't understand the motivation for rushing this one through. Really, I don't think anyone has thought very hard about the implications of this amendment. Why? 

Proposed § 261 permits parties to merger agreements to include so-called “Con Ed” provisions. The typical Con Ed provision provides for a remedy for the corporation to seek damages, including “lost stockholder premium” on behalf of selling stockholders in the event the buyer willfully breaches the merger agreement and fails to close. Con Ed provisions are relatively common in merger agreements, but not uniformly so. 

On the other hand, parties to merger agreements uniformly agree to include specific performance clauses. As a matter of contract law doctrine, specific performance has always been a disfavored remedy. When at all possible, courts will seek to fashion a cash damages remedy rather than look to specific performance. This is just first year Contracts (or basic Remedies if law schools still taught that class).

However since IBP in 2001, practitioners have come to rely on the willingness of the Chancery Court to enforce negotiated specific performance provisions in merger agreements. Where two parties hire sophisticated counsel and negotiate away all the other remedies and then agree that as between them for this agreement, specific performance is the desired remedy, the Chancery Court has deferred to the parties' desire for deal certainty This has been especially true in recent years when buyers pointed to exogenous events (e.g. Global Financial Crisis & COVID-19) as reasons to walk away from deals.

In a recent article Chancellor McCormick noted that the Delaware court has departed from the traditional doctrinal aversion to ordering specific performance in order to honor the contracting parties desire for deal certainty:

As specific performance provisions became ubiquitous in M&A agreements, Delaware law’s analysis of specific performance in the merger context shifted away from the traditional equitable approach to instead prioritize the parties’ contractual scheme. This contractarian approach led the court to, in effect, invert the common-law framework for specific performance and treat specific performance as the presumptive remedy in the event of breach. 

[Chancellor Kathaleen St. Jude McCormick & Robert Erikson, Delaware’s Approach to Specific Performance in M&A Litigation, 20 NYU J. L & Bus. 7, 8 (2023).]

Deal makers have come to understand that when sophisticated parties have negotiated for specific performance and deal certainty, they will get it in Delaware. That's been a selling point for Delaware law. 

So, now I worry about the downstream effect on contracting parties and the court of raising Con Ed provisions from occasional boilerplate to a statutorily authorized remedy favoring cash damages in merger agreements.  I fear the existence of this statutory remedy will cause these provisions to proliferate in merger contracts.  Why? Increasing the salience of a damages remedy by way of statutory availability will result in lawyers adding them into their merger agreements. Let's be frank. Buyers will often hire repeat counsel to represent them in acquisitions. Sellers, on the other hand, often are represented by general corporate counsel. I'm sure they're nice people, but when a buyer asks for a Con Ed provision, pointing to the statute, a corporate lawyer who's only done 10 mergers in their career might say, "Hmm. Seems legit. Ok."

A future court may find itself facing a situation in which a reluctant buyer wishes to walk away from a merger agreement that includes two contractual remedies: a doctrinally disfavored specific performance provision and a statutorily authorized cash damages provision. In that situation, we may begin to see Delaware courts opt to fashion cash damages remedies for jilted sellers and step away from treating specific performance as the presumptive remedy in the event of breach of a merger agreement.

A contractual damages remedy would not be difficult to fashion. Experts are regularly deployed in the Delaware Chancery Court to estimate share premia in the context of statutory appraisal remedies on a normal briefing schedule. That's not hard. Compare that to fashioning a specific performance remedy on an expedited schedule. Expedited proceedings are costly for the court. Ordering specific performance in the face of an unwilling buyer is obviously not easy. In that case, one could well imagine courts leaning heavily on these statutorily authorized provisions and moving towards appraisal-like proceedings for busted deals.

It may be that's what Delaware wants: to reduce deal certainty. I can't imagine why. Here's a gun, shoot yourself in the foot. Maybe Delaware thinks ole' Chancellor McCormick is just plain old wrong and that Delaware should really be about creating more options to walk away from merger deals for buyers. And to create those options quickly!  I don't understand the motivation to move so quickly to erode a real comparative advantage. Reducing deal certainty just fills in the moat surrounding Delaware's corporate franchise.  It's idiotic, but who am I? I'm no fancy PE buyer on Wall Street. I'm just a professor sitting in Boston.

-bjmq