Via Ken Adams’ excellent blog, comes news of a very interesting article, The Inefficient Evolution of Merger Agreements. Written by two associate professors at US law schools, Robert Anderson and Jeffrey Manns, it describes and comments on an empirical legal research project.
The authors analysed the text of over 12,000 merger agreements that had been filed with the Securities and Exchange Commission by publicly-listed corporations between 1994 and 2014. US-listed corporations are required to provide copies of their material contracts to the SEC, which places them on its EDGAR online database.
EDGAR is a very useful source of examples of agreements, though it can be time-consuming and frustrating to find what one is looking for. Anderson (no relation to IP Draughts) and Manns used computer programs to automate their searches and to analyse the results.
The purpose of this research was “to explore whether transactional drafting is a driven by a rational process that minimizes the cost of deal documentation and risk to clients or by an ad hoc process that increases billable hours and risk.” Guess what they found?
By comparing the wording of the agreements and using a technique known as Levenshtein distance, or edit difference, they were able to map the extent to which major US law firms used a template (precedent) when drafting a merger agreement or just grabbed a document from a recent transaction that the law firm associate thought suitable.
Their maps included those shown below. Where agreements are drafted from a single source, such as a firm precedent, the map will show lines radiating from that source. The authors’ research revealed very little of that radiation. Instead, there was evidence of documents being several generations away from an official firm precedent. For example, below is the map of contracts drafted by Sullivan & Cromwell.
The authors also included a map of contracts drafted by Davis Polk, which was similar to the map shown above. In the case of one law firm, Cooley Godward, there was one clear focus point of radiation, but also a lot of non-radiation.
IP Draughts finds this paper fascinating for several reasons. First, it echoes his experience of how some clients work, when drafting IP-related agreements. They use a document that is loosely based on their official template agreement, but includes some deal-specific terms from previous transactions, which may or may not be suitable for the present transaction. Even if the added terms are desirable in principle, they were probably drafted in haste in the pressure of negotiations, or reflect a pragmatic compromise (taking account of the quirks of the person they were negotiating with) rather than an ideally-drafted clause. Over time, by starting with a document from a previous transaction, rather than going back to the official template, the documents that they use become corrupted with junk.
It is very interesting to see major law firms, which trade on their reputation, doing exactly the same thing. The authors discuss the dynamics within law firms, including ridiculous time pressures, which may lead to an associate grabbing a familiar document rather than an official precedent. One point that is not mentioned in the article, but which IP Draughts thinks may also be relevant, is the extreme length and complexity of many agreements nowadays, which may make it difficult for a busy associate to understand fully the terms of his firm’s precedents. It may be tempting to use a document that he recently worked on; he spent many late nights negotiating that document, so there may be a comfort factor that he understands at least some parts of that document better than the official precedent.
(This is not a good excuse, by the way, for avoiding precedents that IP Draughts has drafted, which try to be concise and clear!)
The other point that IP Draughts finds very interesting in this article is its discussion of the fact that “there has been amost no empirical work on the legal drafting process in transactional law”, and that “the deal drafting process has been all but ignored by legal scholars”. IP Draughts agrees with these statements, and has ambitions to bring this type of subject to the UCL Faculty of Laws. Research at the boundary between doctrinal law and legal practice is an under-developed area, particularly in relation to commercial transactions. He has had exploratory discussions with the faculty about establishing a Contracts Institute (or similar) there, which would do a mixture of research, teaching and public engagement.
If any reader knows anyone who might be interested, in principle, in funding such an initiative, (eg a major law firm, alumnus/alumna, or other benefactor) he would be very glad to hear from them. This idea is at too early a stage for us to have established structures for funding. But by way of comparison, the sponsorship opportunities for UCL’s Institute of Brand and Innovation Law can be found here.
A small example of the type of work we might do in this institute is the panel discussion that UCL will be hosting in November. See here for details.