Black Holes and Boilerplate in M&A Practice

By Feldman, Reid | Business Law International, May 2018 | Go to article overview

Black Holes and Boilerplate in M&A Practice


Feldman, Reid, Business Law International


Serious academic studies of M&A deal documents are focusing attention on the quality and cost-effectiveness of the work of M&A lawyers. The studies seek to evaluate the quality and efficiency of the work by empirical analysis of business agreements, including so-called 'boilerplate', that is, standard contract clauses. Some of the studies point out that less-than-optimum lawyering can not only be inefficient but also result in a standardised boilerplate clause becoming devoid of meaning, to such an extent that the clause becomes a 'black hole', unintelligible to the parties and to the courts. These studies focus on United States legal practice but the commentary and implications drawn could apply to practice in Europe and more widely.

Review of these empirical studies is useful for deal lawyers, because they furnish a welcome new viewpoint for evaluating the extent to which drafting, negotiating and redrafting deal documents really adds value for a client and for the M&A process.

Some of the criticisms and prescriptions for reform set out in these recent studies seem inapplicable to M&A deal practice, notably because they focus on lawyers' services as a commodity, and take insufficient account of factors such as the complexity of an M&A deal and of the typical M&A agreement; the hands-on involvement of clients and the high chance that key language in the agreement will be tested within a short timeframe; and the potential for a lawyer to add value by thoughtful review, reflection and judgement. But some of the criticisms should be taken to heart.

This article explores these issues in the context of the process of drafting and negotiating a share purchase agreement (SPA) for acquisition of a private target, in Europe and the US. It discusses:

* the spirited academic debate about 'boilerplate', contractual 'black holes' and standardisation;

* the typical organisation and complexity of an SPA, including some examples relating to representations and warranties, which makes standardisation difficult;

* the context in which SPAs are drafted and negotiated, which leaves little room for inattention or complacency on the part of deal lawyers; and

* some issues relating to SPAs on which the debate about black holes and performance of lawyers is quite relevant.

The debate about boilerplate and black holes

Among the major contributions to this debate are the following recent papers by eminent US law school professors:

* 'The Black Hole Problem in Commercial Boilerplate'1 by Stephen Choi, Mitu Gulati and Robert E Scott, who write about problems arising from interpretation of a commercial boilerplate clause (the pari passu clause) in sovereign debt bond indentures;

* 'Engineering Greater Efficiency in Mergers and Acquisitions'2 and 'Boiling Down Boilerplate'3 by Robert Anderson and Jeffrey Manns, who evaluate 'efficiency' in M&A agreements including 'boilerplate' provisions thereof, based on computer-aided textual analyses of a very large sample of US merger agreements over the 20-year period 1994-2014;

* 'Why Have M&A Contracts Grown? Evidence from Twenty Years of Deals'4 by John C Coates IV, who also analyses a large sample of higher-value US merger agreements, over the same 20-year period; and

* 'The Architecture of Contract Innovation'5 and 'Asymmetric Standardization in M&A Agreements',6 by Matthew Jennejohn, who applies sophisticated 'network analysis' techniques to analyse US M&A agreements from 2012 to 2014 involving three New York firms, focusing on interrelationships among specific provisions in those agreements and among the lawyers who worked on them.

The first two sets of articles are quite critical of deal lawyers, whereas the last two provide a more positive assessment.

Here are some key take-aways from these papers.

'The Black Hole Problem '

In this much-remarked article, Choi, Gulati and Scott draw conclusions from their long-standing studies of pari passu clauses in sovereign bond indentures. …

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