Mitu Gulati, the Warner-Booker Distinguished Professor of International Law at the University of Virginia School of Law, Stephen J. Choi, the Bernard Petrie Professor of Law and Business and Director of the Pollack Center at the New York University School of Law, and Molly Ball, a J.D. candidate at the University of Virginia School of Law, have shed light on a fascinating dynamic within M&A contract drafting, one that challenges conventional understandings of how legal uncertainty influences market practices. Their recent article, "A dataset that says the opposite of what the gurus predicted," explores how a seemingly minor judicial footnote in a 2018 Delaware Supreme Court case unexpectedly reverberated through the M&A legal community, only for market practices to diverge from the widely disseminated expert advice.
The "Sandbagging" Enigma: A Judicial Footnote Creates Market Stir
The crux of the matter lies in the legal concept of "sandbagging" within mergers and acquisitions (M&A) transactions. Sandbagging refers to the practice where a buyer, despite possessing knowledge that certain representations made by the seller are false, proceeds with the closing of the deal and subsequently sues for breach of those representations. In the 2018 case of Eagle Force Holdings v. Campbell, Justice Valihura of the Delaware Supreme Court noted that the court had never definitively ruled on whether a buyer, aware of false seller representations, could still pursue a breach of contract claim post-closing. Then-Chief Justice Strine, in his partial dissent, concurred that Delaware law remained unsettled on this specific point.
This judicial ambiguity was perceived by many M&A practitioners as a significant signal that the legal landscape regarding sandbagging in Delaware, a preeminent jurisdiction for corporate law, was in flux. The prevailing understanding, often referred to as "pro-sandbagging" rules, was crucial for buyers, as it protected their bargained-for representations and prevented sellers from exploiting the buyer’s due diligence findings as a defense against liability. The sudden lack of clarity caused considerable consternation. This led to a flurry of activity within the legal profession. Law firms, including prominent names such as Ballard Spahr, Goodwin Procter, Mayer Brown, Paul Weiss, and Kramer Levin, issued client alerts and memos advising M&A professionals to explicitly include "pro-sandbagging" clauses in their contracts to safeguard their positions. The American Bar Association (ABA) also hosted Continuing Legal Education (CLE) programs addressing the issue. A blunt assessment from a leading M&A lawyers’ panel at Northwestern’s Securities Regulation Institute underscored the sentiment: "don’t assume silence is safe anymore – put an express pro-sandbagging clause in the contract."
The Market’s Unanimous, Yet Ignored, Advice
Despite this near-unanimous professional consensus and the urgent advice disseminated across the industry, the M&A market, in practice, largely ignored it. This counterintuitive market reaction prompted Gulati, Choi, and Ball to investigate further, leading them to build a comprehensive dataset of M&A agreements.
Data Unveils a Divergent Trend: Silence Prevails
To empirically assess the impact of the Eagle Force footnote, the researchers compiled a dataset of 3,642 publicly filed M&A agreements spanning from 2010 to 2025. Each agreement was meticulously coded as either "pro-sandbagging," "anti-sandbagging" (which represented a small fraction of explicit clauses), or "silent" on the issue. The prevailing contract theory suggests that in the face of legal uncertainty, sophisticated drafters will seek clarity by incorporating explicit clauses. Therefore, it was anticipated that the number of explicit sandbagging clauses, particularly pro-sandbagging ones, would increase following the Eagle Force decision.
However, the data revealed the exact opposite trend. Instead of an increase in explicit clauses, the incidence of silence on sandbagging within M&A contracts actually rose. Before the Eagle Force decision, 49.4% of deals were silent on the issue. During the period of doctrinal ambiguity that followed, this figure climbed to 60%. Crucially, after the Delaware Court of Chancery’s 2022 Arwood decision settled the matter definitively, the rate of silence increased further to an impressive 72.0%. This data starkly contradicted the predictions and advice that had saturated the M&A legal market.
Unpacking the "Delaware Signal": The Power of Informal Communication
The researchers proposed a compelling explanation for this divergence: the Delaware judiciary, despite the ambiguous footnote, did not intend to alter established practices. Vice Chancellor Laster’s 2018 Akorn opinion, issued shortly after Eagle Force, referenced the older, pro-sandbagging language as if the Supreme Court’s footnote had never been written. Subsequently, Vice Chancellor Slights’ 2022 Arwood opinion, and later Vice Chancellor Laster’s 2025 Dura Medic opinion, consistently reaffirmed Delaware’s stance as a pro-sandbagging jurisdiction. While these were Chancery Court decisions, the initial uncertainty had originated from the Supreme Court.
To understand how the market interpreted this seemingly mixed signal, Gulati and Choi, with Ball’s assistance, conducted over fifty interviews with senior M&A lawyers. These interviews uncovered a critical element often overlooked in traditional contract scholarship: an informal yet potent channel of communication between judges and the practicing bar. This communication occurred through avenues such as ABA panels, meetings of corporate law committees, and even informal social gatherings.
A recurring narrative emerged from these interviews. At an ABA meeting held after the Eagle Force decision, when the room was buzzing with apprehension about the implications of the footnote, a sitting Delaware judge reportedly mimed making a phone call to then-Chief Justice Strine. The judge was quoted as saying, "Hi Leo – remember that footnote in Eagle Force, on sandbagging?" After a pause, he addressed the room, relaying, "He doesn’t remember." This anecdote, circulating in various forms for years, served as a powerful signal from the judiciary. It suggested that despite the perceived ambiguity in the Supreme Court’s footnote, no fundamental change in Delaware’s established pro-sandbagging position had occurred.
Further anecdotal evidence corroborated this informal communication channel. In one instance, a lawyer proposing a panel discussion on sandbagging contracts approached a Delaware judge, who reportedly dismissed the notion as "silly" and expressed disinterest in "wasting his time" on such a topic. In another vignette, during a morning of watching English Premier League football at a hotel hosting an M&A conference, a Delaware judge joined a group of lawyers. When sandbagging arose in conversation, this judge, distinct from the previous ones, characterized the entire debate as a "storm in a teacup," emphasizing that Delaware "has always been, and remains, pro sandbagging." He reportedly added, "But I am glad they asked."
The collective sentiment from these interviews was succinctly captured by one lawyer: "We listen." When formal legal signals are ambiguous, the elite M&A bar tends to place significant weight on informal signals – those conveyed at conferences, dinners, and even during casual conversations, rather than solely relying on the precise wording of judicial opinions.
Alternative Explanations and the Convergence of Signals
While the informal judicial communication provided a strong explanatory framework, the researchers acknowledged other potential factors contributing to the market’s move toward silence. Some practitioners pointed to the increasing prevalence of Representations and Warranties (R&W) insurance. Indeed, the widespread adoption of exclusive R&W insurance policies can render the sandbagging issue largely moot, as insurance coverage typically addresses breaches regardless of the buyer’s prior knowledge. However, the study’s data indicated a rise in silence even in deals completely devoid of R&W insurance, suggesting that the informal Delaware signal influenced drafting practices independently of insurance trends. Other respondents attributed the shift to the Chancery Court opinions themselves (Akorn, Arwood, Dura Medic) as key signals. While these explanations were cited less frequently than the informal communication narrative, most interviewees indicated that all three factors likely played a role in shaping market practices.
The Default Becomes the Path of Least Resistance
Even with the perceived informal guidance from the judiciary, a crucial question remained: why did lawyers opt for silence rather than the seemingly easier route of simply copying existing pro-sandbagging clauses? The practitioners interviewed explained that sandbagging clauses are far from boilerplate. They are genuine points of negotiation, often causing client confusion and leading to protracted discussions before a deal is finalized. When Delaware’s default stance on sandbagging appeared uncertain, the effort and client friction involved in negotiating an explicit clause might have been deemed worthwhile. However, once the informal and formal judicial signals converged to convey a clear message – "Delaware is pro-sandbagging, full stop" – the perceived benefit of negotiating an express clause diminished significantly. Silence, in this context, became the more cost-effective and less contentious default. This effect was most pronounced at the higher echelons of the market, where elite firms and larger deals exhibited the fastest shift toward silence, correlating directly with lawyers’ closer proximity to the judiciary’s informal communication channels.
Delaware’s Lead: A Sharper Shift in Drafting Practices
The hypothesis that informal access to Delaware’s judiciary plays a significant role in shaping contractual practices was further supported by a comparative analysis of Delaware-governed deals versus those governed by other states’ laws. Prior to the Eagle Force decision, Delaware deals were actually less likely to be silent on sandbagging than non-Delaware deals (47.8% compared to 51.1%). This suggests that before the perceived ambiguity, Delaware might have been seen as a jurisdiction where explicit clauses were more necessary or common. However, in the post-Arwood era, this dynamic reversed dramatically. Delaware-governed deals exhibited a silence rate of 73.3%, significantly higher than the 67.6% observed in deals governed by other states’ laws. This sharper increase in silence among Delaware deals underscores the impact of the specific judicial signals and informal communications originating from within that jurisdiction.
Broader Implications: Beyond the Footnote
The study’s findings offer a critical insight into the practical realities of contract law and the influence of informal communication within specialized legal communities. The conventional view of contract drafting, which emphasizes the direct impact of judicial opinions on textual revisions, overlooks the powerful role of informal dialogue and shared narratives among legal practitioners. In a close-knit, repeat-player environment like M&A law, where Delaware reigns supreme, the judiciary’s informal signals can shape market norms and practices more effectively than the explicit text of a ruling.
The question naturally arises whether this dynamic extends to other areas of law, such as bond or loan contracts. In these fields, judges may not have the same level of integration with the legal practitioners involved, potentially limiting the impact of informal communication channels. Further research is needed to explore these possibilities. However, for corporate lawyers navigating M&A contracts, the lesson is clear: the written word in legal opinions is not always the final arbiter of practice. The informal conversations and shared understandings within the legal community can, and often do, carry more weight, profoundly influencing how contracts are drafted and disputes are ultimately resolved. This nuanced understanding of legal influence is crucial for comprehending the true mechanics of contract law in practice.
