The Law and Finance of M&A Contracts

PhD Thesis# 564
Christel (C.G.J.) Karsten
Prof. F. López-de-Silanes, Prof. J.W. Winter


This thesis considers the role of contracts and legal advisors in corporate acquisitions. M&A transactions are complicated because of economic concerns related to information asymmetry, agency problems, and risk allocation. Contract design can provide mechanisms to mitigate these concerns. This thesis studies proprietary M&A contracts, which have been obtained from a leading international law firm. The thesis analyzes whether contracts are used as instruments to primarily alleviate these concerns or whether non-economic factors, such as the styles of legal advisors, are also affecting contracting outcomes. The first essay documents that the economic deal environment explains around one third of the variation in provisions that protect buyers against adverse selection and moral hazard through warranties and covenants. The styles of the involved law firms and lawyers explain an additional part of the variation. Though the effect of legal advisors is modest on average, it is relatively large for contract provision that address concerns which are generally similar across deals, such that adjustments to the law firms’ specimen contracts are not needed, or concerns where the interests of both parties are not aligned, such that lawyer negotiation styles are influential. To identify the consequences of contract design, the second essay shows that more buyer protection through warranties and covenants leads to significantly higher acquisition prices. This effect varies across the underlying concerns that are addressed through different warranties or covenants. It is strongest for provisions with a direct economic impact on target valuations, and for deals where seller bargaining power is highest. Finally, the third essay sheds light on the channels through which personal styles of lawyers affect M&A outcomes. To this end, it analyzes the effects of lawyer expertise on contract design, the bargaining process, and acquisition prices. Measuring expertise of the buyer lawyer relative to the seller lawyer, this essay documents across several measures that more expertise on one side of the negotiation table is associated with more beneficial bargaining outcomes. Together, this thesis suggests that M&A contracts reflect the underlying deal environment, but that they are also significantly affected by the styles of the involved legal advisors.

Publisher of the TI-theses is: Rozenberg Publishing Services