January 28, 2019 (Monday) 4:20 PM - 6:10 PM
- Associate Professor, The University of Utah College of Law
Author: Cathy Hwang
Why do parties use non-binding agreements? This Article explores the role of nonbinding preliminary agreements in mergers and acquisitions (M&A) deals. It provides a modern, comprehensive account of how and why sophisticated parties use these common bargaining tools, even when they have the option of using binding contracts.
In private M&A deals, parties enter into non-binding preliminary agreements, such as term sheets and letters of intent. Once parties sign a non-binding agreement, they behave as though bound and almost always follow up with a formal contract with terms that closely resemble the non-binding agreement’s terms. Scholars and courts have long treated preliminary agreements as contract-like tools that parties will enforce when counterparties breach. This Article develops an alternative explanation for why parties use non-binding preliminary agreements. These agreements are not contracts—rather, they are signposts for when enough momentum has accumulated that a deal is likely to go forward. Despite not being contracts, however, preliminary agreements’ signaling, organizational, and formal functions can facilitate complex dealmaking.
Using interviews with deal lawyers, this Article provides a rich and layered account of how sophisticated parties use these agreements in modern dealmaking. Parties almost never disclose non-binding preliminary agreements publicly, so interviews offer a rare glimpse into this common, but little-understood, deal practice. This Article also differentiates, for the first time, between the formal and substantive functions of preliminary agreement-making. By focusing on these agreements’ contractual qualities (their substantive functions), scholars have overlooked their useful formal functions. By reframing preliminary agreements as signposts for deal momentum, rather than as contracts, this Article highlights those functions, and discusses the implications of this reframing for contract theory, contract enforcement, and deal design.
February 11, 2019 (Monday) 4:20 PM - 6:10 PM
- Oscar M. Ruebhausen Professor of Law, Yale Law School
Authors: Conor Clarke, Henry Hansmann
Of the 90,000 “governmental units” counted in the most recent United States Census of Governments, only about 40,000 are “general-purpose” governments such as municipalities and counties. The other 50,000 are “special-purpose” governments that typically undertake only a single activity, such as water supply or fire protection. With the exception of school districts – which constitute only 12,000 of the 50,000 – special-purpose governments have been largely ignored by the academic literature in law and the social sciences. Yet these overlooked entities have been expanding far more rapidly than any other form of government at the federal, state, or local level.
The nation’s increasing reliance on special-purpose governments raises two conspicuous issues regarding the boundaries between organizational types. The first issue is the stark gap between special-purpose governments and general-purpose governments. While there are tens of thousands of each type, there is virtually nothing in between – that is, there are almost no governments that provide, say, two or three distinct services. The second boundary issue is the contrasting absence of any clear line, in terms of either services or structure, between special-purpose governments and private-law organizations such as cooperatives and condominiums.
This peculiar pattern of boundaries between organizational forms raises, in turn, further basic questions. What, for example, does it mean for an organization to be a “government”? And should the law of special-purpose governments be revised to resemble more closely that which governs private-sector entities by, for instance, adopting uniform enabling statutes that remove limits on permissible purposes or allow formation as of right? Or should the law of special-purpose governments be revised to resemble more closely that applied to general-purpose governments by, for example, extending to them the doctrine of one-person-one-vote? This article addresses these issues, and a variety of others, in an analytic framework that draws heavily on public choice theory and organizational economics. The article concludes by outlining a reformed general statutory structure for special-purpose governments.
February 25, 2019 (Monday) 4:20 PM - 6:10 PM
- Professor of Law, University of Pennsylvania School of Law
Authors: Shaanan Cohney, David Hoffman, Jeremy Sklaroff and David Wishnick
This Article presents the legal literature’s first detailed analysis of the inner workings of Initial Coin Offerings. We characterize the ICO as an example of financial innovation, placing it in kinship with venture capital contracting, asset securitization, and (obviously) the IPO. We also take the form seriously as an example of technological innovation, where promoters are beginning to effectuate their promises to investors through computer code, rather than traditional contract.
To understand the dynamics of this shift, we first collect contracts, “white papers,” and other disclosures for the fifty top-grossing ICOs of 2017. We then analyze how the software code controlling the projects’ ICOs reflected (or failed to reflect) their disclsoures. Our inquiry reveals that many ICOs failed even to promise that they would protect investors against insider self-dealing. Fewer still manifested such promises in code. Surprisingly, in a community known for espousing a technolibertarian belief in the power of “trustless trust” built with carefully designed code, a significant fraction of issuers retained centralized control through previously undisclosed code permitting modification of the entities’ governing structures.
These findings offer valuable lessons to legal scholars, economists, and policymakers about the roles played by gatekeepers; about the value of regulation; and the possibilities for socially valuable private ordering in a relatively anonymous, decentralized environment.
March 11, 2019 (Monday) 4:20 PM - 6:10 PM
- Professor of Law and Economics, University of Amsterdam
Author: Giuseppe Dari-Mattiacci
The commitment of financial resources to a project is essential for long-term investment but brings about both a loss of control and a loss of liquidity for investors. Therefore, investors are ordinarily given an exit option. In this paper, I contrast three common ways to exit: tradability of one’s equity position, liquidation rights and redemption rights. I show that they balance liquidity and control very differently. Large safe projects are better associated with tradability, because the risk of inefficient continuation is low and the market provides enough liquidity. Small risky projects are better associated with redemption rights, because they can sort inefficient liquidations from inefficient continuations. Liquidation rights are desirable when redemption rights fail because of high costs of capital or the risk of runs on the company’s cash.
Keywords: liquidity, control, redemption, tradability, exit.
JEL codes: G30, K22.
April 1, 2019 (Monday) 4:20 PM - 6:10 PM
- Vice Dean for Finance and Strategic Initiatives
John F. Cogan, Jr. Professor of Law and Economics
Research Director, Center on the Legal Profession, Harvard Law School
Author: John C. Coates IV
Over 20 years, M&A contracts have more than doubled in size – from 35 to 88 singlespaced pages in this paper’s font. They have also grown significantly in linguistic complexity – from post-graduate “grade 20” to post-doctoral “grade 30”. A substantial portion (lower bound ~20%) of the growth consists not of mere verbiage but of substantive new terms. These include rational reactions to new legal risks (e.g., SOX, FCPA enforcement, shareholder litigation) as well as to changes in deal and financing markets (e.g., financing conditions, financing covenants, and cooperation covenants; and reverse termination fees). New contract language also includes dispute resolution provisions (e.g., jury waivers, forum selection clauses) that are puzzling not for appearing new but in why they were ever absent. A final, notable set of changes reflect innovative deal terms, such as top-up options, which are associated with a 18-day (~30%) fall in time-to completion and a 6% improvement in completion rates. Exploratory in nature, this paper frames a variety of questions about how an important class of highly negotiated contracts evolves over time.
Keywords: Merger; Acquisition; Contract; Contract Evolution; Legal Services; Agency
JEL Classifications: D23; D74; D82; G13; G32; G34; G38; K12; K13; K22; K40
April 15, 2019 (Monday) 4:20 PM - 6:10 PM
- George T. Lowy Professor of Law, New York University School of Law
Authors: Mitu Gulati and Marcel Kahan
Courts seeking to interpret a long-used, but rarely litigated, provision in a standard-form contract are periodically faced with choosing between the following perspectives. One side advances a position that it says is dictated by the strict text of the contract provision and the other counters by saying that the textual reading advanced by their opponents is illogical and inconsistent with historic market understandings of this boilerplate provision. This paper uses the opinion in Wilmington Savings Fund FSB v. Cash America International Incorporated to evaluate this conundrum.
April 29, 2019 (Monday) 4:20 PM - 6:10 PM
- Associate Professor of Law, Duke Law School
Authors: Adam B. Badawi & Elisabeth de Fontenay
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. We find, first, 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 there is little or no advantage to providing the first draft with respect to the most monetizable merger agreement terms, such as merger breakup fees. Third, and notwithstanding, we do find an association between drafting first and a more favorable outcome for terms that are harder to monetize, more complex, and that tend to be negotiated exclusively by counsel, such as the material adverse change (MAC) clause. Fourth, the distinction between non-price terms that are easier and harder to monetize persists when we analyze deals such as auctions that are subject to overt competitive pressure. 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.