Always grab the pen?

Badawi, Adam B. and de Fontenay, Elisabeth, Is There a First-Drafter Advantage in M&A? Badawi, Adam B. and de Fontenay, Elisabeth, Is There a First-Drafter Advantage in M&A? Available at SSRN:

Does the party that provides the first draft of an agreement get better terms as a result? Transactional lawyers tend to argue that by grabbing the pen they get better outcomes for their clients (who incidentally also incur higher laywers’ fees in the process).

But is it true that holding the pen for the first draft of the agreement can give an advantage in the final deal reached?

A paper by Adam B. Badawi (Berkeley) and Elisabeth de Fontenay (Duke) examines this question based on data relating to drafting practices in large M&A transactions involving U.S. public-company targets. The abstract of their paper concludes:

“We find, first, that acquirers and sellers prepare the first draft of the merger agreement with roughly equal frequency, contrary to the conventional wisdom that acquirers virtually always draft first. Second, we find that there is little or no advantage to providing the first draft with respect to the most monetizable merger agreement terms, such as merger breakup fees. Third, and notwithstanding, we do find an association between drafting first and a more favorable outcome for terms that are harder to monetize, more complex, and that tend to be negotiated exclusively by counsel, such as the material adverse change (MAC) clause. These findings are consistent with the view that the negotiation process generates frictions and agency costs, which can affect the final deal terms and result in a limited first-drafter advantage.”

They also come up with a hypothesis to explain this soft effect:

“To explain this limited first-drafter advantage, we hypothesize that the negotiation process itself alters the incentives of the parties and their lawyers, leading to less negotiation than is efficient of terms that are hard to monetize. Because lengthy negotiations are costly (primarily in terms of delay), the nondrafting party must choose which terms to focus on in negotiations. Our results are consistent with principals having strong beliefs about monetizable terms, but less concern for more lawyerly provisions, which are more difficult to value. If the target’s lawyers agree to a high termination fee, for example, they may get immediate negative feedback from their client. But if those lawyers concede to a MAC clause that favors the buyer, there may be little or no feedback. This dynamic is consistent with lawyers using their limited negotiating capital to push back on draft terms that are most salient to their clients.”

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