In this April 2011 blog post, I said that it would be a simple matter to commoditize the drafting of M&A contracts. Since then I’ve discussed this notion with a couple of friendly M&A practitioners, and here’s what’s on my mind:
The Benefits of Commoditizing
Both of my interlocutors think that I’d be unlikely to get any of the major U.S. law firms interested in forming a consortium to create a set of M&A document-assembly templates. Their main point is that law firms will get off their duff only if clients pressure them to. Because, they say, creating first drafts of M&A contracts represents a small fraction of transaction costs, a client looking for efficiency is likely to be more concerned about, say, hours-long multiparty conference calls to discuss issues that are marginal or irrelevant. So it follows that commoditizing M&A drafting isn’t anything that clients are likely to get worked up about.
But that underestimates the benefits of commoditizing. Sure, using document-assembly templates would greatly reduce the time it takes to draft M&A contracts. But that’s just the start—creating the templates would also provide a perfect opportunity to streamline M&A documentation by cutting unnecessary verbiage and using clear and modern language for what remains. It’s a safe bet that any M&A template I prepare would allow you to create acquisition agreements that are 25% shorter than their traditional counterparts and twice as clear. (Imagine a contract full of the efficiencies on display in this recent blog post.) As result, negotiations would go faster, with less confusion.
That doesn’t even take into account the benefit of using industry-accepted templates. Once you’ve become familiar with them, you’d quickly be able to assess, without poring over every word, what’s different about a given draft. And the annotations that accompany document-assembly templates would explain the issues raised by any given provision; that too would help speed negotiations.
And reducing the bloat and incoherence in M&A documentation would reduce the risk of dispute of the sort on display in the litigation between Cerberus and United Rentals. (Go here for a PDF copy of my 2008 New York Law Journal article on that litigation.)
So creating a set of clear and modern templates that are accepted by the major M&A law firms would make the deal process significantly more efficient.
Law Firms as Agents of Change?
I agree with my interlocutors that looking to law firms to work collectively to commoditize M&A drafting would seem wishful thinking. I’ve long acknowledged that the process of drafting contracts is resistant to change, but the M&A field seems particularly stuck in the mud.
From a trivial personal perspective, I’ve noticed that compared with my other posts, my blog posts on M&A topics have attracted very little interest. And I haven’t had much luck engaging M&A luminaries in a dialogue. More generally, practitioner-authored M&A commentary does a lot of recycling of the conventional wisdom.
As for what prompts this extra-strength inertia, my best guess is that because M&A transactions are usually mission-critical (to use Jordan Furlong’s term), law firms are under little pressure to offer efficiencies.
Clients as Agents of Change?
Perhaps another factor allowing law firms to continue business as usual is the lack of a centralized client voice to help encourage change—an M&A organization analogous to, say, the National Venture Capital Association. In the absence of the kind of carrot-and-stick incentives such an organization might bring to bear, I suspect that individual clients agitating for change would be unlikely to make much progress.
Neverthess, it’s clients who have the greatest incentive to effect change. They’re the ones paying the bills, and they’re the ones with most to gain by making the process more efficient.
As always, the first step is a cost-benefit analysis.
Ken, interesting to hear that corporate lawyers don’t engage with your posts. Instinctively, I am not surprised by this, but I don’t know why. Something to do with the nature of M&A transactions compared with other commercial transactions, perhaps. As a non-M&A lawyer, I think of M&A as being mostly due diligence, identifying the assets and arguing about warranties. One would think a commoditised standard agreement would fit well within that process-driven world. As you say, perhaps clients will create the pressure for standard documents.