What Lawyers Say Determines Choice of Law in Merger Agreements: A Complex Truth

Finding out the truth about a matter can proceed in many different ways. Neoclassical law and economists would construct models built on certain assumptions. The empiricists and contextualists would collect data about the matter in the inductive not deductive sense.The choice of law in merger agreements presents an opportunity to study a contractual provision in the context of merger deals to see what we can learn from studying the choices in detail. There are a variety of ways to approach these provisions in merger agreements. Can we learn anything about how choices are made in the drafting of these contracts that will shed light on some of the larger issues in contract and in law practice? Will a study of the process of choice of law in merger agreements highlight the difficulties that courts face when they try to interpret the meaning behind any provision in a contract when the provision was negotiated between commercial firms with assistance from counsel? If a provision is included by a lawyer and the lawyer, not the client, makes the choice of law decision, what implications does that have for a court trying to ascertain the party’s intent on other issues not directly governed by the choice of law provisions such as what interpretive approach to take to the contract? Is there such a thing as a party’s intent when the party/firm played little role in choosing the provision? Choice of law provisions have generated great scholarly interest. Some scholars have used data to study whether there has been a shift in the preferred choice of law in merger agreements. To test a hypothesis that parties were fleeing to New York for their choice of law, Professors Eisenberg and Miller studied a group of merger agreements from a seven month period in 2002 and found that there is a flight from Delaware to New York for the parties’ choice of law in merger agreements. Other scholars relied on a later Eisenberg and Miller study of a broader array of contracts documenting a flight to New York to hypothesize that companies specify New York because of its substantively more formalistic contract law. In that case neoclassical economics scholars relied on empirical evidence of a flight to support the new formalist view that courts should reject contextualism since the parties’ flight to New York law demonstrates a formalistic preference. Their hypothesis built on earlier scholarship using models to show that utility maximizing commercial firms would prefer formalistic contract law and then supposed that the flight to New York law was related to that preference. The Scott and Kraus hypothesis is that parties use strategic thinking in choosing the law to govern and agreement to protect planning with respect to all of the terms in the contract. The choice of law is made to ensure that all of the contract terms which have been carefully negotiated and chosen ex ante are given their plan, ordinary meaning. This hypothesis rests on a view that lawyers carefully construct contracts and wish to guard against courts using their discretion to interpret contracts or fill in terms for the parties. A rival hypothesis of contract drafting in Contract theory is one in which clients and lawyers do not pay much attention to the terms of the contract ex ante. Instead, lawyers simply copy language from a prior agreement without much thought. The decision to copy prior language reflexively is motivated by the lawyer’s disinclination to spend time or hours on a provision or term that will be difficult to bill to the client. The theory is that the contract will not pay for bespoke drafting unless it is clear that the costs of the standard language pose so many risks as to outweigh the drafting costs.Another hypothesis fell into neither the Kraus/Scott model nor the reflexive copying of prior language is the one I began my research with. That hypothesis, was that the particular choice of law provision is made by lawyers, not because of any substantive aspects of contract law in a particular jurisdiction, but because of internal professional concerns of the lawyers. I surmised that because lawyers want to ensure that they are knowledgeable with the law that is chosen, and want to avoid any liability for malpractice that might come with specifying the law of a jurisdiction with which they are unfamiliar, lawyers would specify a choice of law with which they or a member of their firm are familiar. Initially, I thought that the lawyer would therefore likely choose or advise a client to only choose the law of a jurisdiction in which the lawyer or a member of her firm were licensed. However, my data demonstrated that being comfortable with the law of a jurisdiction, in the sense of the law or the state’s courts being predictable, meant lawyers seemed comfortable with the law of both Delaware and New York and that they could be comfortable with the contract law of another jurisdiction without necessarily being licensed to practice law in it unless the choice of law were for Alabama or California which seem to be outlier jurisdictions. One lawyer explained that the basic choice of law came down to four options: the acquiring party’s primary executive office, the state of incorporation, New York law, and Delaware law. My own hypothesis of contract drafting (and lawyering) that I find validated in the study falls somewhat in the middle between the Kraus and Scott position of carefully tailored strategic choice of law provisions and the reflexive copying model. I posit that my survey shows that lawyers do spend some thought on the choice of law provision; it is not reflexively copied or ignored. This thought is evidenced by the fact that some lawyers will use different states’ governing law in different merger agreements. But there is not deep thought given to the matter in part because lawyers seem comfortable with a range of governing laws and seek to avoid only one or two jurisdictions. This hypothesis rejects the hypothesis that there is strategic thinking by lawyers who make the choice to strategically choose a formalist law to protect planning with respect to all of the terms in the contract. Lawyers making choice of law decisions in merger agreements do not seem to be strategic thinking in a broad ranging fashion about all aspects of the contract but in a narrow one (which sandbagging provision applies) or a non-strategic view in which most jurisdictions proposed by the parties would be appropriate and that would usually be New York or Delaware or the jurisdiction where one party is headquartered. A preference for choosing a “rational jurisprudence” would seem to suggest that lawyers would be happy with a state’s governing law if it were rational and not aberrant or irrational. Lawyer interviews suggest that either the choice is unimportant or is not so important as to be “deal breaker” and therefore not one that clients or lawyers would insist on. The lawyers’ answers suggesting that the volume of case law is very important in choice of law suggests a discomfort with jurisdictions that lack a rich case law of reported business cases and an unwillingness to face the lack of precedent in cases or first impression or lack of knowledge and expertise. That preference does not clearly indicate a strategic preference for formalism. The three most important findings of my lawyer study are 1. that there is no one overarching or predominant reason lawyers give for choosing the law of a particular jurisdiction to govern a merger agreement; 2. lawyers, not clients, make the choice of law decision; and 3. that the particular context matters in the choice of law decision. Another additional insight (though hard to quantify) is that some lawyers may not consider the choice of law important or spend much time on it. Instead, the choice of law provision is considered an ad hoc one that is not heavily negotiated ex ante. These observations on how a choice is made raise questions about how much a court can glean about the parties’ intentions from a single contractual provision agreed to by lawyers and their clients who face budget constraints on negotiating terms. These findings suggest that there may be a disjunction between academics and practitioners on the significance of the choice of law issue. They suggest that the choice of law decision is too variegated to support a singular reason for the choice, such as a drive toward formalism.