Rob Anderson presents "Boiling Down Boilerplate Provisions in Merger and Acquisition Agreements" -- Duke Law School

April 10, 2017 | By Kylie Larkin -- Professor Robert Anderson presented "Boiling Down Boilerplate Provisions in Merger and Acquisition Agreements," with Jeffrey Manns at Duke Law School's symposium on "Contractual Black Holes."  The symposium, which was held on April 7-8, was co-sponsored with the Columbia and New York University Law Schools.

Abstract of "Boiling Down Boilerplate in M&A Agreements":

One of the most striking features of merger and acquisition agreements is the juxtaposition of numerous boilerplate provisions with a high level of "editorial churning," ad hoc edits that appear to be cosmetic rather than substantive. In our recent article, The Inefficient Evolution of Merger Agreements, 85 GEORGE WASH. L. REV. 57 (2017), we show empirically the high degree of "speciation" among merger agreements which hinders standardization both within law firms and across firms. We use a computer program to identify the "DNA fingerprints" of each precursor agreement that serves as a drafting template for over 12,000 public company merger agreements in a twenty-year data set. We document how on average over half of
the text of merger and agreements are rewritten in the drafting process each time that a precedent is adapted into a new acquisition agreement,
even though the substantive provisions of merger agreements have similar features.

In Boiling Down Boilerplate we focus on how editorial churning in acquisition agreements has shaped the evolution of boilerplate provisions and eroded both the standardization and meaning of these provisions. Scholars in other contractual contexts such as sovereign debt agreements have shown how the repetition of boilerplate text in the drafting process has produced pathologies known as the "black hole problem" and the "grey hole problem" as
changes have led repeated provisions to lose all or part of their meaning. The problem arises from repetition that involves "rote usage" of boilerplate terms without critical examination of the terms, especially when that rote usage is combined with the "encrustation" of variations in the otherwise boilerplate terms.

We extend this research by examining the evolution of boilerplate provisions in the merger agreement context. We leverage our existing data set of over 12,000 public company merger agreements from 1994 to 2014 to create a comprehensive picture of changes in key boilerplate provisions over time. We do this by using a computer program to compute the "edit distance" or "Levenshtein distance" between boilerplate provisions in merger agreements. This approach allows us to measure the degree of textual similarity or dissimilarity based on the number of insertions and deletions (i.e., edits) in boilerplate provisions across agreements. We complement this quantitative approach with qualitative assessments of both the extent and consequences of boilerplate provisions diverging across merger agreements.

We show how it is possible to identify the paragraphs of acquisition agreements which serve as boilerplate and demonstrate both the degree and type of textual "drift" of these provisions over multiple generations. We construct "family trees" for boilerplate provisions by tracing the descendants of each "ancestor" provision. We demonstrate that common ancestors have progeny extending out in multiple directions which become increasingly dissimilar to each other over a few generations of acquisition agreements.

We show that incremental changes in boilerplate from generation to generation lead to rapid "speciation" of the terms. Small additions and deletions from boilerplate text lead to significant cumulative effects over multiple generations. We demonstrate that this textual "drift" takes place both within boilerplate that falls within a given chain of precedent, but also even more broadly for boilerplate provisions that have a common ancestor precedent, but evolve separately along different lineages of precedents. We also show spatially that the pattern of boilerplate "speciation" we discovered in
entire merger agreements is replicated in individual boilerplate terms.

Our findings suggest that three inter-connected problems exist in the acquisition agreement context, which reinforce the black hole or grey hole hypothesis of the evolution of boilerplate having a potentially corrosive effect on the textual integrity and meaning of these terms. The core problem appears to be "rote usage." Lawyers recycle boilerplate without giving much, if any, thought to the meaning of this language. This lack of apparent reflection about the purpose of boilerplate provisions is coupled with the "encrustation" and "abrasion" of words in boilerplate provisions, i.e. the idiosyncratic addition or removal of words in the drafting process. These idiosyncratic edits are then preserved in later generations of the
provision, perpetuating drift away from the ancestor standard.

Small changes in legal language from one M&A deal to the next lead to significant distortions in boilerplate provisions over time, which reflects a broader problem of acquisition agreement "speciation" as the text of merger agreements becomes increasingly unrecognizable from the chain of precedent agreements. The process of ad hoc additions and deletions from boilerplate terms undermines the potential benefits of this (partial) standardization and may erode boilerplate language of its meaning.

The complete article may be found at www.law.nyu.edu