A fascinating recent paper from Robert Anderson and Jeffrey Manns on M&A drafting is up in draft on SSRN, The Inefficient Evolution of Merger Agreements. It performs textual analysis on 12,000 or so public merger contracts in the US. The authors map the family trees of these deal documents, showing where the precedents for each deal came from and how similar they are in terms of the words used. The overall claim is that the process of precedent selection and development for M&A agreements is a rather improvised process based on haphazard choices made in the rush to get going on a deal, rather than from a basis of thoughtful calculation about ideal deal structures and contract drafting.
They suggest that:
- It is predominantly prior firm connection, rather than similarity of the deals, that drives precedent selection in M&A deals.
- Lawyers’ tend to use precedents that they are more familiar with or that relate to the particular client they are dealing with, rather than those that may be more readily adapted to the transaction at hand.
- Lawyers add significant amounts of extraneous information to each deal and inadvertently retain deal-specific information from prior deals. [They call this random drift]
Quite a lot of the article appears to be (very interesting) speculation based on evidence that M&A agreements tend not to be based not on a limited number of common precedents or ancestors. A precedent is adapted, that adaptation might get used or it may be ignored, and another precedent used instead, which in turn may get adapted or discarded in the future. From the outside, it looks ad hoc: any M&A deal might be based on any one of a number of prior examples in the firm, and very few deals match closely with their precedent, suggesting no standard or core approaches. Similarly, the main factor which influenced precedent choice was whether the client had previously been party to a deal. A factor which might be thought to have some influence (the client’s industry) did not have much impact save in banking.
The second element of the evidential case I would boil down to:
in the typical drafting process approximately 22,000 words are deleted or inserted in documents that are typically about 27,000 words in length. This fact suggests a remarkable level of editorial churning takes place throughout the drafting process and underscores the lack of standardization even within a given firm.
Whether this seemingly rather pragmatic approach to precedent choice, and the ensuing level of re-drafting, indicates a level of necessary artistry or a much more random, inefficient, even risky process of evolution is the central question the authors pose. The author’s make some space for alternative explanations for the data, and whilst I think there is some way to go to button down the explanations sufficiently with evidence, they make a good argument for their interpretations. The central claims have been well received by thoughtful practitioners critical of contractual practice (See Ken Adams here, and Mark Anderson here). I leave Anderson and Mann to summarise:
We use this innovative approach to explore whether transactional drafting is driven by a rational process that minimizes the cost of deal documentation and risk to clients or by an ad hoc process that increases billable hours and risk. We show that a high level of “editorial churning,” ad hoc edits that appear to be cosmetic rather than substantive, takes place in legal drafting. Over half of the text of merger agreements is routinely rewritten during the drafting process even though the substantive provisions of merger agreements have similar features. Significant variation exists among merger agreements even involving the same firm as there is no evidence of firm-specific templates or industry-specific templates in most cases. Lawyers appear to choose earlier merger agreements as deal templates based on familiarity with past deals rather than based on the economic needs of clients or cost mitigation. Our empirical findings provide strong evidence of significant (structural) inefficiency in the drafting process which raises costs and risk to clients.