The Validity of Deal Protection Devices in Negotiated Acquisition or Merger Transactions under Anglo-American Law

Abstract

This paper analyses deal protection devices, specifically termination fees and lockup agreements, that are entered into by publicly listed target companies in favour of the preferred bidders under Anglo-American law. US (specifically Delaware) and UK law and regulation differ markedly in the regulation of these devices. Delaware law generally gives more leeway for the target board to enter into deal protection devices. The UK regime is much more shareholder-centric and severely restricts most types of deal protections. This paper explains the differences and argues that the UK regime is the result of the strong influence of institutional share ownership. In contrast, in the US, institutional share ownership is of more recent origin and market participants have instead pushed for greater board independence to counteract managerial self-interest. This paper also discusses the impact of recent trends, including changing shareholder ownership patterns and regulatory developments on the concepts of independence of outside directors, and their impact on the substantive rules on deal protections. It concludes that, while some modest changes to the substantive rules may be required, there is insufficient evidence to justify an overhaul of the rules in either jurisdiction.