Revising Boilerplate: A Comparison of Private and Public Company Transactions

36 Pages Posted: 21 Oct 2019 Last revised: 25 Nov 2019

See all articles by Stephen J. Choi

Stephen J. Choi

New York University School of Law

Robert E. Scott

Columbia University - Law School

G. Mitu Gulati

Duke University School of Law

Date Written: October 10, 2019

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

Suggested Citation

Choi, Stephen J. and Scott, Robert E. and Gulati, Gaurang Mitu, Revising Boilerplate: A Comparison of Private and Public Company Transactions (October 10, 2019). Columbia Law and Economics Working Paper No. 611; Duke Law School Public Law & Legal Theory Series No. 2019-74; Wisconsin Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3467350 or http://dx.doi.org/10.2139/ssrn.3467350

Stephen J. Choi

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Robert E. Scott

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States
212-854-0072 (Phone)

Gaurang Mitu Gulati (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

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