Private Law Theory

ABSTRACT
This article examines how drafters of M&A agreements value individual clauses, using the relative degree of tailoring of different clauses under time pressure as a proxy. Empirical work on the content of M&A agreements faces a number of methodological challenges. We address two of them in this paper. The first is the problem of analyzing the text in M&A agreements in a way that reflects how lawyers draft those agreements. Deal lawyers almost universally draft from templates that are edited to suit the deal at hand. We introduce a method that is able to distinguish between borrowed text and edited text without requiring access to the underlying template. The second challenge stems from the endogeneity and selection effects that are inherent to M&A deals. We address this challenge by identifying deals that appear to be leaked shortly before their announcement, which is a plausibly exogenous shock to the drafting conditions of the agreement. We apply these methods to a set of 2,141 public-company M&A agreements signed between 2000 and 2020. After identifying shared templates among these agreements, we assess how much individual clauses deviate from the language of the template. We find strong evidence that agreements for leaked deals are edited less than those for other deals based on the same template, suggesting that time constraints can and do alter the final contract signed by M&A parties. We also show that lawyers prioritize some clauses over others when under time pressure, and identify which clauses are prioritized. Overall, the findings help to validate some theoretical models of contract drafting and vindicate what lawyers say about which terms in M&A agreements are the most important.

Badawi, Adam B and de Fontenay, Elisabeth and Nyarko, Julian, The Value of M&A Drafting (January 25, 2023), Duke Law School Public Law and Legal Theory Series No 2023-14.