What are the important terms in the merger agreements? Mergers and acquisitions lawyers share the sentiment that the terms of merger agreements are important to the outcome of the transaction and to the gains of the parties. In theory, the specific terms of the deal entered into by the parties affect the likelihood of closing and the various deal risks borne by each party, which in turn should translate into actual dollars. However, researchers have made little progress in mapping specific conditions of agreement with expected gains. Empirical challenges abound, such as the difficulty of isolating the impact on agreement outcomes terms against agreement features. Similarly, researchers were unable to resolve the debate over whether lawyers tend to draft merger agreements optimally or whether they tailor the terms of the agreement too much or too little. .
In The Value of M&A Drafting, we approach these questions indirectly, by asking which terms M&A lawyers themselves deem most important during the drafting process. Specifically, we use textual analytics tools to measure the extent to which lawyers choose to accommodate different terms of the agreement, when under high time pressure versus when they are not. not. To do this, we compare the degree of adaptation in “leaked” agreements – those where information about the negotiations of the agreement became public before the signing – with the degree of adaptation in all other agreements. Leaks usually urge the parties to sign the merger agreement as quickly as possible, which puts the lawyers drafting the merger agreement under significant time pressure. Using a sample of 2,141 public company mergers and acquisitions agreements signed between 2000 and 2020, we find evidence that time pressure leads lawyers to prioritize negotiation and accommodation of certain terms by to others, suggesting which terms of the agreement lawyers believe are most important.
First, we estimate which M&A deals in our sample were derived from a common model and group them accordingly. Rather than drafting from scratch, lawyers draft M&A agreements from a template (usually an agreement for a prior agreement) so that their effort is limited to deciding which terms to modify and adapt (and to what extent). Second, for each transaction term of interest, we measure the average textual similarity between disclosed transactions in the cluster relative to transactions that were not disclosed. We find strong evidence that the agreements for the disclosed agreements are less modified than those for other agreements based on the same model, suggesting that time constraints can and do modify the final contract signed by the M&A parties. . We also show that lawyers favor certain clauses over others when they are pressed for time, and identify priority clauses. Overall, the results help validate some theoretical models of contract drafting and suggest the terms of M&A agreements that drafters themselves consider most important.
The article addresses two important challenges for empirical research on the value of M&A drafting. The first is to develop a method to analyze the text of mergers and acquisitions agreements in order to report on how deal lawyers write their agreements. Much of the existing research on text analytics in law and finance relies on simple word counting in disclosures and contracts (see, for example, Cohen et al. 2020; Hoberg and Phillips 2016; Paulus and 2021). Although this approach is popular for identifying groups of documents that have the same content, its neglect of word order makes the approach ill-suited to understanding the borrowing of text that is central to writing practices based on on models in mergers and acquisitions. In this article, we move from content similarity to textual similarity. In doing so, we develop a method that identifies collections of fusion chords that derive from the same model and quantifies the amount of modifications that have been made in order to modify the model in its final form.
The second challenge stems from endogeneity and selection effects in many decisions that decision makers and negotiation lawyers make during a transaction. Differences between documents may be due to characteristics of the transactions that researchers cannot observe and therefore cannot control. To overcome these limitations, we identify transactions that are (likely) subject to a leak or other public release of transaction information shortly before it is signed and officially announced publicly. We view this as a likely exogenous shock to the time lawyers have to draft M&A agreements. We hypothesize that when an agreement leaks, time pressure will cause drafting lawyers to rely more on templates rather than adapting the text to the current agreement. We use abnormal returns over the ten-day period prior to deal announcement to identify deals where leaks were likely to create time pressure, resulting in a balanced sample of disclosed and undisclosed deals. We then group the agreements according to the common merger agreement template from which they are derived. Within each group of common models, we perform a clause-level comparison of disclosed versus undisclosed offers. To do so, we design a new approach that enables statistical inference that overcomes several known problems with comparisons using computational text analysis.
Overall, we find that the text of disclosed agreements is consistently closer to the text of the template agreement than to the text of undisclosed agreements, i.e., there is less adaptation of the merger deal when lawyers face unexpected time pressure to finalize the deal. . But our conclusion that lawyers alter disclosed settlement agreements less than undisclosed settlement agreements does not apply to all terms of the agreement. We show that, for some provisions, lawyers engage in a similar amount of adaptation in disclosed and undisclosed cases. We infer that these clauses are among the most important in a transaction because, even when pressed for time, lawyers always ensure that these provisions are negotiated to about the same degree as they would be without constraints. of time. Clauses that fall into this category are broadly consistent with practitioners’ intuitions about the most important terms of the agreement. They include, among others, the Material Adverse Effects (MAE) Clause, which allocates the risk of changes in commercial terms between signing and closing, and the Commitment in the Ordinary Course of Business, which governs the operation of the company until the merger is finally completed. . In contrast, more mundane clauses such as choice of law and the obligation to comply with restrictive covenants are only suitable when there is sufficient time, but remain relatively intact under pressure.
Beyond identifying the terms of the deal that M&A lawyers themselves consider most important, these findings suggest that deal lawyers are in fact selective in their approach to deal tailoring. mergers and acquisitions: when pressed for time, they focus their efforts on specific terms that may affect the market of the parties. most.
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