Contract Production in M&A Markets

Abstract

Contract law scholarship has devoted considerable attention to understanding how contract terms are designed to properly incentivize parties to fulfill their obligations. Little attention, however, has been paid to the tradeoffs parties make between using widely used boilerplate terms and designing bespoke provisions. In thick markets such as those for corporate or sovereign bonds everyone uses the standard form despite the known drawbacks of boilerplate. But in thinner markets, such as the private deal M&A world, parties trade off costs and benefits of using standard provisions and customizing clauses to their needs. This Article reports on a case study of contract production in the M&A markets. We focus on the changes in contract law that have motivated commercial parties to contract over fraud. Initial moves to define fraud narrowly gradually spread across the market. Using both qualitative and quantitative data, we find evidence of an informal information network that transforms bespoke changes in contract terms into industry-wide standard provisions. This organic coordination structure leads to both market wide coordination as well as a diversity in this response as individual actors implement bespoke variations of the new standard.

Keywords: M&A, contract design, contract law, fraud, private equity

JEL Classification: K12, K22