Barking without Biting: How Corwin did not Change M&A

Our working paper, Barking without Biting: How Corwin Did Not Change M&A, explores the influence of two Delaware Supreme Court decisions—C & J Energy (2014) and Corwin (2015)—on deal practice. The decisions have faced criticism for potentially curbing directors’ fiduciary duties by reducing the ability of plaintiffs to seek remedies for breach of fiduciary duties in M&A transactions. Our study examines the effect of these decisions on M&A practices, including termination fees, market checks, and go-shop provisions, finding that their actual impact on shareholder protections and investor returns has been limited.

The Perceived Impact of Corwin and C& J Energy

In the world of M&A, litigation is often seen as a “deal tax” paid to plaintiffs’ counsel, irrespective of the suit’s merits. To address abuses from the early 2010s, courts intervened, with Corwin emerging as a landmark decision. This Delaware Supreme Court ruling moved away from Revlon’s enhanced scrutiny, opting instead for the business judgment rule under specific conditions, namely, a fully informed, uncoerced vote by disinterested stockholders. Only a year earlier, in C & J Energy, the same Court limited preliminary injunctions in the absence of rival bids, ruling that active solicitation of superior deals was not required as long as other bidders had a fair chance to offer a superior deal and shareholders could vote the deal up or down.

Together, the two decisions are considered to reduce shareholder protections in M&A transactions. Previously, investors had two safeguards: their voting rights and the ability to sue directors for breaching fiduciary duties if the sale process was flawed. Following these cases, however, shareholder voting might serve as the primary protection in most deals, especially when there is no rival bid and shareholders’ approval is expected. These cases are often seen as having significantly enhanced the ability of boards to commit to a single bidder without a substantial risk of judicial intervention. As a result, many legal scholars see Corwin as emblematic of a broader trend labeled with various expressions such as “Delaware’s retreat”, “the fall of Delaware standards”, and even “the death of corporate law.”

Our empirical study

In our paper, we examine the influence of Corwin and C & J Energy on transaction planning, wondering whether Revlon still constrains directors’ actions in M&A transactions. If these cases were indeed impactful, we would expect to see—if not immediately, then gradually—a more relaxed approach by M&A players in planning, structuring, running, and protecting deals. Analyzing all domestic public deals from 2010 to 2018 involving contestable domestic targets with equity values of at least $100 million (excluding banks, insurers, and REITs), with 996 cases in total, we investigate indicators of potentially reduced shareholder protections. We conduct a series of multivariate Difference-in-Difference regressions to test our hypothesis about whether these cases impacted deal terms. Specifically, we compare the possible impact of the cases on deals involving Delaware targets versus non Delaware targets and, within Delaware, on transactions with financial versus strategic buyers. We examine deal protections, assessing whether termination fees increased (indicating stronger protection for the original deal). We also investigate deficiencies in the deal process that could signal a non-competitive sale price, such as no pre-signing market checks, no go-shop provisions when a pre-signing market check is also absent, length of go-shops, and incidence of matching rights. Additionally, we analyzed deal returns, premiums, and the number of transactions.

Overall, we find no considerable impact on merger contracting practices. Most of our regressions fail to reject the null hypothesis of no impact of either case. While there are a few exceptions, we do not believe these suggest major changes that would support the strong interpretations of Corwin and C & J Energy held by some commentators.

First, we found an increase in the number of financial deals (relative to strategic deals) after Corwin, but we could not identify a difference between Delaware and non-Delaware targets. This may reflect other market developments. Similarly, we observe an increase in the incidence of what we term “bad process” in financial deals relative to strategic deals. While statistically significant, the change is not substantial quantitatively. We also found no difference in trends between Delaware and other states. We do find weak evidence for fewer competing bids in Delaware; however, the number of such offers is minimal, indicating that a few deals likely drive this statistical significance. Finally, we find an impact of the cases on cumulative abnormal returns after deal announcements: returns for financial deals have increased, bringing these closer to strategic deals, where CARs are generally higher. In other words, the gap between strategic and financial deals has become smaller. Yet, there is no clear theoretical basis to explain why financial deals would – after the cases – show poorer processes while the return gap between strategic and financial deals shrank.

Conclusion

The ongoing effect of the Corwin preconditions (full information, no coercion, and disinterest) further reinforces this deterrence, as Delaware’s judiciary has rigorously enforced these preconditions, disallowing Corwin defenses when they aren’t met and discouraging poor processes.

Several plausible explanations account for the small impact of Corwin and C & J Energy on dealmaking. One explanation is that Revlon was already substantively less strict during the 2010s, and early-decade deal activity had already systematically exhibited flawed processes. Another explanation is that directors of Delaware corporations and especially their advisors continue to respond strongly to deterrence. This deterrence is fueled by the risk aversion among deal planners regarding potential rival bids, which might trigger more extensive judicial review. Moreover, legal advisers play a vital role in guiding boards and discouraging aggressive deal structuring due to professional risk aversion and reputational concerns. The ongoing effect of the preconditions to Corwin (full information, no coercion, and disinterest) reinforces this deterrence, as Delaware’s judiciary has rigorously applied these preconditions, disallowing Corwin defenses when they are not met and discouraging poor processes.

We empirically tested Corwin during a period (end of 2015-2018) when the expectation was that it could make dealmaking more lenient unless judges took the preconditions seriously. While it took judges a few years to signal that preconditions were indeed applied rigorously, this was not necessarily the expectation of the market at the time of our testing — yet transaction planners still “behaved.” Why? Perhaps their lawyers anticipated that sooner or later, judges would have tightened their grip, as they did, via the preconditions or perhaps they saw no advantage in pushing for more locked-up deal terms. This confirms our findings: commentators rushed to the conclusion that judicial review was no longer important. In fact, transaction planners did not change their dealmaking approach. If anything, our data show that transactional practices in other states are converging toward those in Delaware in recent years.

The full paper is available for download here.