We were not making contracts

How lawyers guide the transformation of one legal reality into another.

At some point during my years in M&A, the documents stopped appearing to me as the transaction itself. I began to see the system beneath them.

Until then, I had understood much of the work through the things we produced. An NDA. A letter of intent. A due-diligence report. An acquisition agreement. A disclosure letter. A signing agenda and, eventually, a closing bible. That was also how assignments were usually given to me: review this document, draft that clause, update the issues list.

It was therefore natural to think that the document was the work and that becoming a better lawyer mainly meant becoming better at producing it.

It took me time to understand that the client almost never really wants the document.

The client wants to buy a company, sell a business, share ownership, secure a relationship or change an existing arrangement without accepting an unacceptable level of risk. The document matters because it gives legal form and force to part of that intended result. But the document is not the result itself.

We were helping to turn one legal reality into another.

That is much more exciting than drawing up paperwork.

A legal reality under pressure

Take an old chocolate factory. It started small and grew over time. A production line was added when demand increased, a warehouse when a large retailer came on board, and processes that once lived in the founder’s head became spreadsheets, habits and workarounds. The business is successful, but it was never redesigned as a whole and is no longer optimised for its current size.

The family that built it wants to sell. It may have reached the limits of what it wants or is able to invest, or the founder’s descendants may no longer want to carry the responsibility of ownership. A larger group sees room to improve the machinery, distribution and systems and believes that, with further investment, it can make the company grow.

Legally, the family still owns the factory. Economically, the present arrangement is already under pressure. The seller wants to release value and responsibility. The purchaser wants to commit capital and build something larger. In that limited but meaningful sense, the economy wants the transfer to happen. The existing arrangement is no longer the arrangement either party wants.

The intended future, however, does not become real merely because both parties want it. Between intention and transfer sit information, uncertainty, financing, approvals, negotiation, trust and risk. The lawyer helps the parties navigate that landscape and construct a route through it.

The morning after completion, the factory may look exactly the same. The same people enter the same building and the same chocolate moves through the same machinery. Yet the legal reality around it has changed: who owns, who decides, who benefits and who bears the consequences when something goes wrong.

We can compress the outcome into one ordinary sentence: the company was sold.

The legal work required to make that sentence true is neither ordinary nor simple.

The shift happens in stages

Where a matter is simple and the parties require little protection, a legal change can happen quickly. Complexity and the need for certainty and comfort usually make the route more gradual.

An NDA creates a protected setting in which information can move that the parties could not safely exchange before. A letter of intent narrows the routes still under consideration. Even where much of it is non-binding, it can cause both sides to spend time and money on shared assumptions and may temporarily prevent the seller from speaking with another purchaser.

Those documents do not complete the transaction. They establish milestones and create intermediate legal realities that make the next step possible.

The parties first explore what the future might look like and which route could take them there. They investigate the company, test assumptions, arrange financing and identify approvals or consents. They then settle what they can agree on. Signing creates a further reality: the seller may still own the company, but both parties are now bound by a system of obligations intended to preserve the business, satisfy conditions and reach completion. Only when the final gates are passed does the transfer occur.

The shift can therefore happen bit by bit. First we design and explore. Then we agree which future we are willing to pursue. Then we create the obligations, milestones and actions that can make it happen.

The document is not the destination. Each document helps define, narrow or trigger part of the route towards it.

Lawyers work with futures that do not yet exist

Before a lawyer can design the contract, the lawyer must understand the present reality, the intended reality and the routes between them.

An acquisition may be structured as a share deal or an asset deal. Sometimes the route is almost obvious. Sometimes several remain available, each with different tax, regulatory, financing, timing, governance and liability consequences.

Transactional lawyers therefore do more than organise what exists today. Much of the work consists of imagining future situations clearly enough for people to make choices about them. Who acquires what? What must be true before the transfer may occur? What happens if the business deteriorates, a customer leaves, approval is refused or a statement about the company proves untrue?

There is an element of prediction in that, but not prophecy. Lawyers cannot know which future will occur. They identify the futures that are plausible and important enough to govern, decide which routes the parties refuse to accept and design consequences for the routes that cannot be closed entirely.

A contract cannot ensure that only one future remains possible. Reality is less obedient than that. What it can do is establish one future as the agreed destination, close some unacceptable routes and govern the routes that reality may still force upon the parties.

The difficult part is not imagining every disaster. It is recognising which possible futures deserve control and finding the fitting mechanism at a proportionate price.

We were designing imaginary machines

If an acquisition agreement only needed to describe the intended outcome, it could be extremely short: the seller transfers the shares and the purchaser pays the price.

Most of the agreement exists because the route may not remain that simple.

Beneath its paragraphs sits a collection of legal operations. Warranties require a party to stand behind agreed propositions about reality. Disclosure can qualify those propositions and change where the risk sits. Conditions create gates before the next legal state may be entered. Covenants direct behaviour. Indemnities allocate defined consequences. Decision rights enable action. Security supports actual recovery. Termination provisions govern failure.

These are not merely different kinds of clauses. They perform different functions, and those functions must work together.

Suppose a customer essential to the chocolate factory may terminate when the company is sold. “Obtain consent” is not yet a complete solution. Depending on the customer’s importance and the likelihood of termination, the transaction may need a condition to completion (condition precedent), an obligation to seek consent, rules about who may contact the customer, duties to preserve the relationship, a long-stop date and a fallback if consent never arrives. Change the surrounding facts and the fitting combination changes with them.

This was one of the shifts in how I learned to read contracts. I stopped seeing only separate clauses and started looking for the mechanism they formed together. I wanted to know what each part was supposed to do, what information activated it, who had to act, what happened next and where else the same decision needed to appear.

We were not just drawing up paperwork. We were designing imaginary machines: connected mechanisms first built and tested in the minds of the parties and their advisers, then expressed through language, law, decisions and actions.

They are imaginary only in the sense that they are designed before the relevant future arrives. Their consequences are real.

Drafting a sentence and designing the function that sentence must perform are not the same act; the first follows the latter.  

Certainty and comfort have a price

At some point, I started seeing large parts of an acquisition agreement as a structured pursuit of certainty and comfort.

The seller wants confidence that it will receive the price, that the transaction will complete and that its remaining exposure will be limited. The purchaser wants confidence that it will receive the company and the value it believes it is buying without an unknown problem fundamentally changing the bargain.

Mechanisms create different forms of comfort. Investigation and disclosure improve the parties’ view of the present and the past. Conditions prevent the next step until something essential is true. Interim obligations protect the company while the parties wait. Warranties and indemnities allocate consequences if reality differs from what was agreed. Escrow, retention or guarantees may improve the chance that a right can actually be recovered.

Each extra layer of certainty costs something. Investigation costs time and money. Negotiation consumes attention and creates friction. Security can tie up capital. Protection for one party can reduce deal certainty for the other. A condition that perfectly protects the purchaser may make the transaction impossible to complete.

Lawyers are exceptionally good at finding possible risk. That is part of our value and part of our danger.

At some point, the parties must decide which uncertainty should be removed, which should be allocated, which should be priced and which simply has to be accepted. The best transactional lawyer is not the person who produces the longest agreement or the greatest amount of theoretical protection. It is the person who understands the complexity well enough to find the simplest effective and acceptable system.

Simplicity is not the absence of complexity. It is complexity that has been understood well enough to be organised.

When design becomes drafting

Experienced lawyers already perform this work. They recognise patterns, simulate consequences and know that changing one mechanism may require connected changes elsewhere. Much of that design becomes professional intuition and remains inside the lawyer’s head.

Once the design is made explicit, parts of the work can also be broken down into repeatable and increasingly automatable steps: establish the objective, collect the relevant facts, identify possible future states, select the functions a response may require, test dependencies, draft the agreed mechanism and check whether it remains consistent across the documents and actions around it.

That does not mean the system chooses the future. Lawyers and clients still have to weigh the facts, decide how much certainty is worth its cost and authorise the route. But more of the investigation, comparison, connection, testing and preliminary drafting can be supported by systems.

By the time a final agreement is ready for signature, most of its intellectual architecture should already exist. Drafting is not clerical: putting a mechanism into precise language can expose gaps and force further decisions. But much of the final text records, connects, explains where necessary and legally articulates mechanisms that the parties and their advisers have already explored, selected and agreed.

The signature remains legally decisive. It activates parts of the agreed system; completion triggers others. But the final act of signing did not create the thinking beneath them.

Once I started seeing contracts this way, another question became unavoidable. If the document is only one visible expression of the system, what moves through the investigation, advice, negotiation and decisions that create it?

The answer is information. That is where the next article begins.