ABSTRACT
Traditional law and economics theory places great confidence in the ability of contracting parties to bargain for optimal contracts, and the law reflects this confidence in many important ways. In this Article, I question the wisdom of a formalistic faith in bargaining by uncovering flaws in the bargaining process at the high end of the market, where parties are sophisticated and have substantial resources to aid them in bargaining.
My analysis focuses on the private equity fund industry, which is widely regarded as one of the most elite and sophisticated contracting spaces in the market. Because of rigorous investor qualification laws and other distinctive features of private equity funds, this industry enjoys a number of advantages compared to most real-world contracting settings. A careful review, however, reveals problems. Drawing on proprietary survey data and dozens of conversations with industry participants, this Article offers an in-depth analysis of problematic bargaining practices in private equity funds.
These bargaining problems raise a difficult question for scholars and policymakers: If optimal bargaining outcomes and processes are elusive in this high-end market and ongoing SEC intervention is needed, what can be expected in other real-world settings where parties are less sophisticated and have fewer resources? These findings call for greater skepticism of formalist assumptions about bargaining across the market more broadly, with important implications for contract law, the law of business organizations, and securities law.
Clayton, William W, High-End Bargaining Problems (October 18, 2021). Vanderbilt Law Review, forthcoming, BYU Law Research Paper No 21-20.
First posted 2021-10-22 16:00:04
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