Is There a First-Drafter Advantage in M&A?

Abstract

Does the party that provides the first draft of a merger agreement get better terms as a result? There is considerable lore among transactional lawyers on this question, yet it has never been examined empirically. In this Article, we develop a novel dataset of drafting practices in large M&A transactions involving U.S. public-company targets. First, we find that acquirers and sellers prepare the first draft of the merger agreement with roughly equal frequency, contrary to the conventional wisdom that acquirers virtually always draft first. Second, we find that providing the first draft offers little or no advantage with regard to the most monetizable merger agreement terms, such as merger breakup fees. Third, and notwithstanding, we do find an association between drafting first and attaining a more favorable outcome for terms that are harder to monetize, that are more complex, and that tend to be negotiated exclusively by counsel, such as the material adverse change (MAC) clause. These findings are consistent with the view that the negotiation process generates frictions and agency costs, which can affect the final deal terms and result in a limited first-drafter advantage.

Keywords: M&A, merger agreement, contract, bargaining power, auction, law firm

JEL Classification: D86, G34, K12, K22