Mergers and acquisitions practitioners have long relied on contractual ‘lost-premium provisions.’ In case of a buyer’s unjustified refusal to close an agreed upon direct merger transaction, these provisions serve an important function. Although the Delaware Court of Chancery cast doubt on their validity, it is therefore a welcome development that the legislature reinstated lost-premium remedies.
The function of lost-premium provisions is to allow the target in a merger transaction to recoup the premium that its shareholders would have received had the deal closed but are denied when a buyer backs out. The purpose of lost-premium provisions is to close remedial gaps that may arise when shareholders lack standing to bring their own claims for breach of a merger agreement.
In Crispo v. Musk, a 2023 decision that arose in the context of Elon Musk’s acquisition of Twitter, the Delaware Court of Chancery held that lost-premium provisions were not enforceable. Subsequently, however, the Delaware Legislature intervened and introduced amendments that restored their legality.
Chancery Court Rejects Lost-Premium Provisions
The Delaware Chancery Court relied on fundamental contract law principles to conclude that Twitter could not enforce its lost-premium clause. Vice Chancellor McCormick reasoned that since the merger premium was payable directly to shareholders, Twitter as the target had no expectation of receiving it. To award such damages to Twitter would therefore create an unjustified windfall and run afoul of the traditional anti-penalty doctrine, which limits recovery to a party’s own loss.
For practitioners, the result was jarring. Lost-premium provisions have long been assumed enforceable, especially since they were regarded as a necessity after the Second Circuit’s 2005 decision in Consolidated Edison (Con Ed) v. Northeast Utilities had barred shareholders from claiming lost premiums directly. By rejecting them, Crispo seemed to invalidate a vital enforcement tool.
The Delaware Legislature Intervenes
Against the backdrop of negative reactions across deal markets, the reaction was swift. Recognizing a risk to Delaware’s standing as the premier forum for corporate law, the legislature stepped in. In 2024, the Delaware General Assembly amended section 261 of the Delaware General Corporation Law (DGCL). The revisions restored the legality of lost-premium provisions by expressly authorizing targets to recover such damages. They also provide an alternative enforcement mechanism: shareholders may appoint a representative with exclusive authority to pursue claims, including lost-premium damages, on their behalf.
The Case for Lost-Premium Damages
The Chancery Court’s Crispo decision is vulnerable on several grounds. Doctrinally, lost-premium damages are not penalties. They are the most accurate measure of the target’s lost bargain: the consideration negotiated for its shareholders. To deny them is to reduce the corporation’s contract to an empty shell. Indeed, the anti-penalty doctrine is not as strict as Crispo suggests. Contract law generally respects the parties’ self-determination, and it is common for contracting parties to define damages based on certain formulas, which, as long as they are reasonable, are enforceable even if they are not precise measures of losses.
Lost premiums can also be an appropriate measure of a target’s own damages. In the case of a breach of contract by the prospective purchaser, the target does lose the benefit of its bargain for negotiating a change of control. A target corporation expects to receive consideration for doing the deal, particularly in cash-out transactions, where the target’s singular goal is to get the best possible deal for shareholders and the target and its shareholders’ interests are aligned or even identical. The target’s loss is best assessed by its shareholders’ loss, since the consideration payable most accurately reflects the bargain.
Finally, lost-premium provisions are sensible in policy terms because there is no other equally reliable means of calculating a target’s damages in a failed deal. In cases where specific performance is not available, courts would have to resort to lost synergies, lost cash flows, or other speculative measures. Relatedly, lost-premium provisions deter opportunistic breach. Without them, a buyer may be tempted to abandon deals when market conditions shift. By contrast, lost-premium damages promote deal certainty.
Conclusion
Crispo cast doubt on one of the cornerstones of modern M&A contracting, but Delaware has already restored stability. The broader lesson is that remedies in merger litigation must reflect the true nature of the bargain. Lost-premium damages do precisely that, ensuring that buyers cannot cheaply escape deals and that targets are compensated for the real value lost.
This Insight is based on my co-authored article in the Yale Journal of Regulation Bulletin and NUS Law Research Blog post.