I admit it . . . I was a deal junkie. When I was in practice, I loved doing deals, advising clients, spending days at the printer (although that was in part due to the unlimited supply of Cinnamon Altoids). It was fun; it was exciting; each day there was a new crisis. It was enough to make any fresh-out-of-law-school lawyer feel like important things were getting done by lawyers.
Now that I have stepped away from putting out fires each day, I am beginning to reflect on the days of deal-making. I’ve even looked at old deal documents to try and see if I can catch mistakes or determine why we did things in a certain way. For example, in looking at the merger agreement from an all-cash public/public merger transaction, I noticed that it included a “specific performance” remedy for both the buyer and the seller. However, there is at least some argument that the seller has an adequate damages remedy at law. I am fairly certain that counsel on either side never marked up this provision or even talked about it. I am just as certain that the clients on either side wouldn’t have cared much about this provision if we brought it to their attention, and may have been very annoyed by the fees we would have racked up negotiating a provision that was in the “Miscellaneous” section of the agreement.
There is a need for increased academic inquiry into deals and deal structures in part because deal-making is an imperfect process. While working on my recent paper on reverse termination fees (RTFs), two competing themes came to light. On the one hand, the study of 2008-09 strategic deals demonstrated that there has been considerable innovation in the use of RTFs to provide flexibility and predictability for both sides in an acquisition transaction. Some of the more sophisticated contracts revealed that parties, as well as their counsel, had noted the lessons of the failure of the private equity option-style RTF structure (if you haven’t read it, see Steven Davidoff’s illuminating article on the failure of private equity). On the other hand, it was abundantly clear that some deals continued to replicate the mistakes that were made during the private equity boom of 2005-2007. For example, there were a number of transactions where the option-style structure (i.e. where the buyer could walk away for any reason by paying the RTF) was modeled after the private equity structure where the RTF is set at an amount that is identical or nearly identical to the standard termination fee. This was somewhat surprising given that one of the most criticized developments in the wake of many failed private equity deals was the process by which the actual amount of the fee was set and its parity with the standard termination fee even though the two fees addressed vastly different risks. Of course reading hundreds of agreements also revealed other typical problems, such as important defined terms not being defined, provisions that included incorrect cross-references to other sections of the agreement, etc.
Some of these mistake can be attributed to lawyers structuring current deals based on old precedents; some to clients not wanting to pay (or spend the necessary negotiation energy) for innovation; and some to the difficulty of negotiating and drafting complex agreements under severe time pressure (usually at 2 am and after having eaten too many altoids). But hopefully, greater academic study (and criticism) can help deal junkies think about whether their agreements are bungled or even address the risks that they are trying to address.
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