Why Use Many Contracts for One Deal?

Why do we memorialize some bargains in dozens of related contracts, rather than just one? Mergers and acquisitions deals, for example, are often formed through constellations of agreements that I call “unbundled bargains.” At the center of an unbundled bargain, there is a heavily negotiated acquisition agreement. Surrounding it, there are dozens of ancillary agreements that buttress the deal.

In a paper forthcoming in the University of Pennsylvania Law Review, and available here, I argue that unbundled bargains help parties design better deals ex ante and enforce deals more effectively ex post. I also argue that recognizing deals as unbundled bargains has important implications for how to design deals and interpret deal contracts.

The key to understanding unbundled bargains is to first appreciate why their components—ancillary agreements—exist. Ancillary agreements can do many types of work: they can slice out a substantive part of the deal to be governed by a separate agreement, bridge gaps in times when parties gain access to particular information, or bring together additional parties or subsets of parties. When they are part of an unbundled bargain, ancillary agreements help make the deal more specific, more precise, and more modular.

An escrow agreement, for example, allows parties to bridge differences in what information they know and when they know it. At the time of sale, a seller knows that her company is worth, let’s say, $100 million. But the buyer doesn’t really know the company’s worth until he takes possession, kicks the tires, and figures out for himself that the company is worth $100 million. This is where an escrow agreement comes in. Common in private deals, an escrow agreement is an agreement between the buyer, the seller, and an outside escrow agent, and is separate from the acquisition agreement. The buyer puts part of the purchase price into escrow, and the escrow agent releases that amount to the seller after the buyer has had a chance to kick the tires.

Ancillary agreements also make deals more modular. Modularity is a concept borrowed from computer science, and it is the idea that complex systems can be broken into smaller, self-contained chunks.[1] These chunks, or modules, can then be worked on separately, without causing too many ripple effects throughout the rest of the machine. In a car, for example, a tire is a module: it can be removed, worked on (patched, inflated, fitted with chains, or replaced with a new tire entirely), and popped back into place without affecting the rest of the car.

In practice, M&A lawyers often break out the simplest and most complex parts of the deal into ancillary agreement modules. Simple modules, like escrow agreements, are boilerplate and straightforward. They’re broken out so they can be assigned to junior associates, who bill at a lower rate, thereby reducing ex ante deal costs. And because simple modules are straightforward, junior attorneys with little experience can do a good job drafting them, which means that clients get lower cost—but not lower quality—work.

Complex modules work much the same way, but instead of being assigned to junior attorneys, they’re assigned to subject-matter specialists. Such modules typically involve a complex and specialized area of substantive law, like a tax or employment agreement. Assigning complex modules to specialists means that those modules more likely to be accurate, reflective of industry custom, and compliant with regulatory requirements, which improves deal design ex ante. And because complex modules tend to be comprehensive and thorough ex ante, they’re also less likely to be enforced ex post, which reduces downstream enforcement costs.

Perhaps the most important takeaway is that unbundled bargains exist at all. An acquisition agreement’s integration clause usually offers some clue that a deal consists of several agreements—it may note, for example, that the acquisition agreement, a confidentiality agreement, and a voting agreement form the entire deal. But, invariably, deals (especially big ones) are struck through more than just those few contracts—they’re struck through dozens. Recognizing that those ancillary agreements exist, and that they’re doing essential work, suggests that deal boundaries might be bigger than an integration clause suggests.

Recognizing that deals have large boundaries—in which there are acquisition agreements, and also ancillary agreements—has implications for how deals are interpreted, disclosed, and designed. The paper discusses these implications in greater detail. For example, perhaps courts should look outside of integration clauses when interpreting deal disputes. Or perhaps regulators should alter disclosure rules so that more of a deal is disclosed. Figuring out where the boundaries of a deal begin and end (and in what contexts) gets at the very heart of what deals are, which helps dealmakers design better deals and courts interpret deal disputes more accurately.


[1] While this article discusses modularity in deals, others have written about modularity in contracts. See Margaret Jane Radin, Boilerplate Today: The Rise of Modularity and the Waning of Consent, 104 Mich. L. Rev. 1123, 1224 (2006); Henry E. Smith, Modularity in Contracts: Boilerplate and Information Flow, 104 Mich. L. Rev. 1175 (2006); George Triantis, Improving Contract Quality: Modularity, Technology, and Innovation in Contract Design, 18 Stan. J. L. Bus. & Fin. 177 (2013).

The preceding post comes to us from Cathy Hwang, Resident Academic Fellow at Stanford’s Rock Center for Corporate Governance.  The post is based on her recent paper, which is entitled “Unbundled Bargains: Multi-Agreement Dealmaking in Complex Mergers and Acquisitions,” forthcoming in the University of Pennsylvania Law Review and available here.