Given the increasing size and complexity of M&A transactions, it is perhaps natural that M&A agreements would also increase in length and linguistic sophistication. In a new discussion paper, Professor John Coates of Harvard Law School examines the evidence for this hypothesis in the period from 1994 to 2014. He finds in that time frame the average M&A contract in his sample more than doubled in length and significantly increased in linguistic complexity.
Coates studies a sample of 564 public M&A agreements over the relevant time period. The sample is confined to all-cash deals over $100 Million USD in deal value, between US buyers and non-regulated US publicly held targets. He finds that these contracts grew from being on average 16,994 words in 1994 to 44,730 in 2014—an increase of 163%. He also finds that the average agreement increased in complexity from Flesch-Kincaid grade 20 ("post-graduate") to grade 30 ("post-doctoral").
Coates argues that the changes stem mainly from an increased appreciation of both relevant legal risks and changes in deal and financing markets and not from parties seeking to "grandstand" by adding provisions without significant content. Such provisions include sections addressing, for instance, financing conditions, reverse termination fees, specific performance, dilution, unlawful payments, and forum selection. As Coates writes, these kinds of provisions "represent rational responses by deal participants to a changed deal environment."
In the experience of our Canadian deal lawyers, Coatess' conclusions about the reasons for these changes tend to be borne out. We believe that the growth in length and complexity has originated in large part from the increased sophistication of our clients, who demand more complex and detailed drafting. The use of word processing and computers has no doubt made this task easier, which has also accelerated contract length.
While Coates' sample is confined to the context of US public M&A, many of the same considerations that have tended to increase the length of M&A contracts will also apply in the context of private transactions. We also find that the Canadian market typically lags but does follow the US market. In some cases, our US clients have been surprised by the relative shortness of Canadian M&A contracts.
While it remains to be seen whether the length and complexity of M&A contracts will continue to increase at the same sharp pace, these developments reflect parties' heightened expectations that M&A contracts will account for an increasing number of risks and potential complications.
The author would like to thank Joseph Bricker, Articling Student, for his assistance in preparing this legal update.
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