Incomplete contract theory recognizes that contracts cannot be comprehensive and that state law necessarily has to fill in gaps when conflicts arise. The more complex the transaction, the more that lawyers face practical constraints that force them to limit the scope of drafting and broadly rely on legal defaults and open-ended terms to plug holes and address contingencies. In theory Delaware law serves as lawyers’ preferred jurisdiction and forum for merger and acquisition (M&A) transactions and other high-end corporate deals because of the state’s superior default rules for corporate law and its judiciary’s expertise in discerning the “hypothetical bargain” of the parties.
This paper sets out to examine whether lawyers’ professed confidence in Delaware defaults actually shows up in the drafting of merger and acquisition agreements. Lawyers may base deals in Delaware law because of their familiarity with its provisions, or Delaware’s appeal may reflect the substantive adding of value in filling contractual gaps. Our premise is that the best proxy for examining lawyers’ reliance on a jurisdiction’s defaults is the extent of brevity in legal drafting, which is closely related to reliance on standards rather than rules. Incomplete contract theory predicts that reliance on defaults should broadly translate into implicit (and explicit) references to existing defaults that conserve time and space in drafting, especially through the use of parsimonious standards rather than prolix rules. To the extent to which comparable contracts grounded in different jurisdictions have systematic differences in length, this finding would serve as evidence that lawyers are placing greater reliance on the defaults of one jurisdiction compared to another.
In this paper we compare the length of public company merger and acquisition (M&A) agreements between Delaware transactions and those governed by the law of other jurisdictions. To the extent practitioners regard Delaware law as more comprehensive, more precise, or more settled (due to the Delaware General Corporation law, case law, or the judicial system) compared to other jurisdictions, then we would expect that Delaware M&A agreements would be more concise because of greater reliance on defaults and open-ended terms.
We found agreements governed by Delaware law are no shorter, and in fact are generally longer than agreements governed by the law of other states even when we accounted for a spectrum of control variables including the deal structure, the quality of law firms, deal complexity, and the size of the transaction. This finding held true even when we identified and controlled for the textual source of the precedent documents. Our results challenge the conventional wisdom about contracting parties’ placing greater reliance on Delaware law.
Our findings suggest that a gap exists between the Delaware legal system’s outsized reputation and the actual practice of lawyers in drafting M&A agreements who appear to place no more reliance on the defaults of Delaware law than on the defaults of other jurisdictions. This finding calls into question why Delaware’s statutory and judicial defaults do not appear to matter in the contracting context in which the Delaware difference compared to other states should be the most apparent. Lawyers’ confidence in Delaware may be genuine when it comes to steering incorporations and M&A litigation to Delaware. But if lawyers rely on the defaults of Delaware contract law no more (and perhaps less) in contract drafting than that of other jurisdictions, then it suggests that Delaware’s reputation for corporate law exceeds its substance. We conclude that the text is likely influenced far more by fortuitous events in the drafting process, such as the precedent chosen, than by the default rules of the jurisdiction.