Revising Boilerplate: A Comparison of Private and Public Company Transactions

Abstract

The phenomenon of “sticky boilerplate” causing inefficient contract terms to persist exists across a variety of commercial contract types. One explanation for this failure to revise suboptimal terms is that the key agents on these transactions, including attorneys and investment bankers, are short sighted; their incentives are to get the deal done rather than ensure that they are using the best terms possible for their clients. Moreover, these agents face a first mover disadvantage that deters unilateral revisions to inefficient terms. If agency costs are indeed driving the stickiness phenomenon, we expect that the pace of revision will vary across settings where the agency costs are likely to be significantly different. Using a hand-collected dataset of “No Recourse” terms used in commercial contracts, we test whether agency costs explain contract stickiness by comparing two different contexts: public versus private company deals. Our study is preliminary, but we find evidence that market-wide revisions to the No Recourse clause are greater in the private company setting where agency costs are likely smaller. Further, we find that industry-wide coordination events that signal that other lawyers are likely to revise their clauses are key to inducing widespread change. This change appears to be accelerated by the presence of large law firms that may be better able to coordinate the shift to a new market standard.

Keywords: contracts, stickiness, private equity, corporate bonds

JEL Classification: K12, K22