Deal Networks

Abstract: A growing literature, focused particularly upon the sovereign debt market, has identified powerful network effects and agency problems that impede contractual innovation. However, similar conditions exist in the M&A market, where innovation proceeds at a regular, if incremental, cadence, presenting a challenging counterfactual to current theory. This Article argues that the key to understanding innovation in the M&A market is recognizing that some commercial contracts are produced by networks of designers, rather than single attorneys or even single law firms. Using a combination of hand-collected data of 15 years of investment bank and law firm deal relationships in the M&A market, supplemented with the results of dozens of interviews with M&A practitioners and jurists, the Article demonstrates that the collaborative approach to designing contracts in the M&A market ensures that diverse perspectives and expertise are brought to bear in the creation of a merger agreement, unsettles expectations, requires deal lawyers to interrogate their transactional designs, and spurs communication. Because the combination of law firms and attorneys changes from deal to deal, that diversity is continually replenished, preventing stasis from setting in. In short, the networked production of M&A agreements builds dynamism into the market. At the same time, as attorneys and their law firms participate in the deal network over time, they gain a common foundation of expertise, which allows members of the network to quickly assimilate new ideas and approaches when they encounter novelty in a new transactional situation. Thus, the deal network is simultaneously a source of change and continuity in the market. The paper then discusses implications of this study of the M&A market for broader contract law and policy, and argues that contextual contract interpretation may be a key ingredient in the efficient operation of a deal network such as the one found in M&A.