ARTICLE CONTRACT REALISM AND FORMALISM IN PRELIMINARY ACQUISITION AGREEMENTS AND NEGOTIATIONS Joseph A. Franco* Preliminary negotiations in which a binding contract is im- puted, and formal preliminary agreements, which may create a binding contract of undetermined scope, have special promi- nence in the corporate acquisition context. Case law in this area of preliminary dealings is arguably confused and unsat- isfying. In recent years, contract scholars (including M&A scholars) have theorized about the purpose of such preliminary dealings primarily in the context of formal preliminary agree- ments, and they have also considered the role of informal ne- gotiations and non-binding agreements in contract creation. Notwithstanding differences, these scholarly analyses have uniformly maintained that common law principles (if applied correctly) provide a coherent approach to preliminary dealing conduct. In contrast to this approach to preliminary dealings, this paper argues that, in the corporate acquisition context, preliminary dealings should be addressed under a different re- gime of formal contracting standards. The existing common law regime protects the integrity of preliminary dealing con- duct (both formal and informal) at the risk of mistakenly im- posing contract obligations on an unsuspecting party. In the distinctive context of corporate acquisitions, this approach fails to minimize efficiently the costs arising from the mistaken imposition of contractual obligations. Specifically, corporate *Professor of Law, Suffolk University Law School, Boston, MA. The author would like to thank participants at the National Business Law Scholars Conference (June 16–17, 2022) for helpful comments on an early draft of this paper. I am grateful for the efforts of several research assistants in bringing this paper to fruition: Kori Dean (‘22), Mark Shettle (‘22), Ian Lu- ciano (‘23), and Danielle Palmer (‘24). 100 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 acquisitions invariably conjoin features that alter the mar- ginal social costs and benefits associated with contract for- mation, features which are uncharacteristic of many, if not most, contracting situations. Salient features in the corporate acquisition context jointly include: (i) an intrinsically multi- step bargaining process; (ii) the routine participation of sophis- ticated business counsel; (iii) potentially enormous contractual liability arising from contested (and generally equivocal) infer- ences where contractual clarity can be obtained at relatively low cost; and (iv) disproportionate windfalls or forfeitures for third-party stakeholders in the case of mistakenly imposed ob- ligations. This paper proposes an alternative formal regime: an en- hanced statutory signed acquisition agreement requirement (“SAAR+”). The requirement would directly address prelimi- nary negotiations in acquisitions where a binding contract might otherwise be imputed, as well as the ill-defined contrac- tual status and scope of formal preliminary acquisition agree- ments. Drawing inspiration from Judge Friendly’s observation advocating a fairly simple bright-line approach in complex business negotiations generally, a SAAR would preclude the formation of a binding agreement based on preliminary nego- tiations regardless of specificity in the absence of a signed ac- quisition agreement. A simple SAAR formality, however, would do little to eliminate the contractual opacity that inheres in signed formal preliminary acquisition agreements which may or may not be binding and, if binding, whose scope may be ill-defined. This inherent opacity of formal preliminary agreements is addressed with the enhanced SAAR+ regime: a simple SAAR coupled with a default rule that would limit damage remedies to reliance damages unless the parties ex- pressly contract otherwise, either to eliminate damages, or to allow damages in excess of reliance damages. The default rule would incentivize contracting parties to make their intentions explicit with respect to the intended status and scope of any formal preliminary acquisition agreement. I. Introduction ...................................................................... 102 No. 1] CONTRACT REALISM AND FORMALISM 101 II. The Formation Problem in Preliminary Dealings: Formation Opacity and Contract Surprise ................ 113 A. Formation Opacity in Informal Agreements Generally and in Acquisitions ............................. 115 B. Formation Opacity in Formal Preliminary Agreements Generally and in Acquisitions ........ 129 C. The Relevance of Confounding Considerations in Contract Law and Corporate Law Affecting Creation of Binding Obligations ......................... 143 1. Disclaiming Intent ........................................... 144 2. Contemplating Memorialization ..................... 147 3. Statutory Formalities ..................................... 149 4. Developments in Corporate Practice ............... 152 III. Normative Theories of Formal Preliminary Agreements and Their Incompleteness.......................................... 155 A. Functional Theories of Formal Type II Preliminary Agreements .......................................................... 156 B. On the Incompleteness of Normative Theories of Preliminary Agreements ..................................... 164 IV. The Case for Formalism in Binding Preliminary Acquisition Dealings: The SAAR+ Proposal .............. 170 A. Reassessing the Costs/Benefit Calculus of Opacity in Acquisition Preliminary Dealings ....................... 172 1. The Challenge of the Common Law’s Contract Surprise Problem in Corporate Acquisitions .................................................... 172 2. Corporate Acquisitions Represent a Distinctive Contracting Context .................... 176 3. The Cost of Opacity Outweigh Its Benefits in Preliminary Acquisition Dealings.............. 181 B. The SAAR+ Proposal ............................................. 185 1. Eliminating Formation Surprise in Informal Acquisition Agreements ................................. 186 2. Mitigating Outcome Surprise in Formal Preliminary Agreements ................................ 187 C. Implementation of the SAAR+ Proposal and Its Limits ................................................................... 193 V. Conclusion ....................................................................... 197 102 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 Appendix A - Model Statutory Language for SAAR + Proposal ...................................................................... 197 “Under a view conforming to [the realities of complex busi- ness agreements], there would be no contract in such cases un- til the document is signed and delivered; until then either party would be free to bring up new points of form or substance, or even to withdraw altogether.”1 I. INTRODUCTION Preliminary dealings, whether in the form of negotiations that create an informal agreement or formal preliminary agreements, have attained special prominence in the context of acquisition agreements. This is hardly surprising. Business acquisitions by their very nature are complex, fact-specific, and even existential, transactions that invariably involve the controlled exchange (or, alternatively, the indirect revelation) of significant amounts of commercially sensitive information and the weighing of numerous business risks and contingen- cies. Such transactions are naturally suited to a multi-step process of negotiation and contract formation that is dissimi- lar to the simple and commonly invoked offer-and-acceptance model of mutual assent characteristic of many, if not most, ordinary commercial transactions. Numerous contract formation issues can beset preliminary dealings, and the common law provides various doctrines that govern contract formation generally that affect the contract- ing status of preliminary dealings, including preliminary agreements.2 Mere negotiations that contemplate an 1 Int’l Telemeter Corp. v. Teleprompter Corp., 592 F.2d 49, 57–58 (2d Cir. 1979) (Friendly, J., concurring). Judge Friendly’s lament, which he freely conceded was not the established view of the common law, was not made in connection with an acquisition transaction, but nevertheless pro- vides an apt point of departure for the themes developed herein. 2 See Richard Craswell, Offer, Acceptance and Efficient Reliance, 48 STAN. L. REV. 481, 482 (1996) (“While the question [of formation] is straight- forward enough, contract law attempts to answer it with a bewildering ar- ray of doctrines.”). The insight of Craswell’s article is developed in the No. 1] CONTRACT REALISM AND FORMALISM 103 agreement, either explicitly or implicitly, but that never result in one are well-recognized as outside the scope of contractual relations.3 Nevertheless, in the absence of a formal written agreement or an explicit oral agreement, negotiations in the colloquial (i.e., non-legal sense) can inadvertently trigger cre- ation of binding contractual obligations.4 Formal preliminary acquisition agreements represent a more advanced stage in the contracting process. Such agree- ments (whether couched as preliminary agreements or as a letter of intent, memorandum of understanding, or agreement in principle), by definition, contemplate a fuller and final spec- ification of rights and obligations in a subsequently executed definitive agreement. The subsequent contemplated definitive agreement refers to the final expression of the parties’ respec- tive rights and obligations in connection with the transaction. In contemporary practice, the difference between a formal pre- liminary agreement and a definitive acquisition agreement (notwithstanding obvious differences among acquisition agreements based on the nature of the contemplated transac- tion) is facially apparent in terms of detail and specificity; the former typically run fewer than 10 pages while the latter tend to run 40 to 50 pages. The very nature of formal preliminary context of offer and acceptance contract doctrine, a simpler method of estab- lishing contract formation than the fact-intensive alternative approach rel- evant to preliminary dealing, namely an approach heavily reliant on deter- mining the parties’ intent to contract through an extended negotiation process. 3 See RESTATEMENT (SECOND) OF CONTRACTS §26 (AM. L. INST. 1981) (ex- plaining that a person’s “manifestation of willingness to enter a bargain” is without contractual consequence if the counterparty “has reason to know that the person . . . does not intend to conclude a bargain” without taking subsequent action). The preliminary negotiation principle precludes char- acterization of many preliminary dealings as an offer, a result that would otherwise give the counterparty the “power” to create a binding contract through acceptance. See Arthur Corbin, Offer and Acceptance, and Some of the Resulting Legal Relations, 26 YALE L.J. 169, 181–82 (1917); see also RE- STATEMENT (SECOND) OF CONTRACTS §24 (AM. L. INST. 1981). Strict offer and acceptance problems in the acquisition context are infrequent. Neverthe- less, the proposal advocated here would also alter this dynamic in the ac- quisition context. 4 See infra Section II.A. 104 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 acquisition agreements is thus a strange contractual bird, po- tentially creating obligations that may govern subsequent ne- gotiations or even the substantive rights and obligations of participants in a proposed transaction, but at the same time denoting in some sense that the terms of the intended contem- plated agreement are incomplete and remain to be negotiated. To avoid confusion, it is useful before proceeding to sketch out terminological conventions followed in this Article (and anticipated in the preceding paragraphs). First, this Article is focused only on formation of bilateral contractual agreements and not related to issues of precontractual liability (i.e., prom- ises enforceable based on reliance that may precede contract formation).5 Second, this Article addresses negotiations that may give rise to a binding “final agreement” that is oral.6 Such acquisition agreements will be denominated as informal ac- quisition agreements. Third, the Article refers to formal agreements, meaning executed (that is, signed) written docu- ments. Formal acquisition agreements can be framed as a “preliminary agreement” (i.e., an agreement that 5 See, e.g, Hoffman v. Red Owl Stores, Inc., 133 N.W.2d 267 (Wis. 1965) (holding that franchisor had made enforceable promises to a prospective franchisee over extended negotiations, even though the negotiations of the franchisor and prospective franchisee never resulted in an enforceable fran- chise agreement). The issue of non-consensual pre-contractual liability aris- ing in the context of negotiations (i.e., quasi-contractual promissory liability absent contract formation) has elicited significant scholarly commentary. See generally Avery Katz, When Should and Offer Stick? The Economics of Promissory Estoppel in Preliminary Negotiations, 105 YALE L.J. 1249 (1996); Omri Ben-Shahar, Contracts without Consent: Exploring a New Ba- sis for Contractual Liability, 152 U. PA. L. REV. 1829 (2004); Juliet P. Kostritsky, Uncertainty, Reliance, Preliminary Negotiations and the Holdup Problem, 61 SMU L. REV. 1377 (2008). Although not addressed explicitly, the proposal advanced herein would foreclose pre-contractual liability in the context of acquisition-related preliminary dealings. 6 In this sense, an oral agreement is used broadly to encompass agree- ments that are the product merely of oral negotiations, but also may include oral negotiations supplemented by written materials, such as correspond- ence, draft documents or unsigned term sheets that disclaim any independ- ent binding effect. In other words, as used here, an oral acquisition agree- ment that purports to be a final agreement is meant to contrast with a formal agreement (as defined in the text below) that memorializes either a preliminary agreement or definitive agreement. No. 1] CONTRACT REALISM AND FORMALISM 105 contemplates a subsequent agreement that will fully express the terms of a final agreement for a proposed transaction)7, or a “definitive agreement” (i.e., a longer agreement that pur- ports to be a complete expression of the terms of the agree- ment for a proposed transaction).8 Contract formation principles are a source of uncertainty in the acquisition context. The uncertainty stems directly from the fact that common law principles tolerate a fair degree of opacity both in formation (i.e., uncertainty regarding whether a binding agreement exists because the determina- tion must be inferred from facts and circumstances) and out- come (i.e., where an agreement exists, uncertainty whether the agreement is binding and, if binding, the scope of the bind- ing agreement). Formation opacity can lead to contract sur- prise: one or the other party’s subjective expectations regard- ing whether an agreement has been reached may diverge from the law’s conclusion as to the existence of an agreement. Spe- cifically, for example, a party engaged in negotiations may be surprised that a binding contract has been inadvertently formed,9 or conversely, a counterparty may be frustrated to learn that no binding contract has been created, notwith- standing the appearance of the trappings of a binding agree- ment.10 For the sake of clarity, this Article distinguishes 7 In theory, a preliminary agreement could be expressed in an oral or unsigned agreement. This issue can be ignored in this Article since oral or unsigned preliminary agreements will be treated the same as other forms of informal preliminary negotiations (i.e., under the SAAR+, they too will be unenforceable). In contract, as discussed below, formal preliminary agreements (i.e., signed written agreements) exhibit a different kind of an- alytical issue. For this reason, throughout the Article, preliminary agree- ments is a term used interchangeably with formal preliminary agreements. 8 To be sure, a definitive agreement will also be a final agreement. However, to maintain a sharp distinction between informal and formal final agreements, this Article will refer to the informal oral agreement as a final agreement and the formal final agreement as a definitive agreement. 9 For example, a party may exclaim after the fact: “I didn’t think there was a deal until we signed a document.” 10 For example, a counterparty after a handshake deal (e.g., “We have a deal, let’s shake on it”) may be frustrated to learn that because the deal involved a land contract subject to a statute of frauds provision, the hand- shake deal cannot be enforced. 106 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 between two different types of generic contract surprise. Sur- prise that a binding agreement has been formed will be re- ferred to as “inadvertent contract formation surprise” (or sometimes merely as “contract formation surprise”), while frustration arising from a finding of no agreement when one party believes an agreement exists is referred to as “contract formation frustration” (or merely “contract frustration”).11 For the most part, common law principles of mutual assent and certainty (or definiteness) can be viewed as attempting to bal- ance reasonably between these conflicting sources of contract formation surprise and contract frustration.12 Under the common law, contract formation principles gov- erning acquisitions are, in theory, no different from the prin- ciples applicable in other contracting contexts, though facts and circumstances in each context may inform their applica- tion. As a result, contracts casebooks frequently use prelimi- nary dealings in acquisition case law to illustrate problems in contract formation generally.13 Typically, case law reduces to 11 Of course, the concepts of “surprise” and “frustration” are very much in the eye of the beholder and the notational convention adopted here is merely to capture the twin unanticipated effects when the contracting par- ties view of a putative agreement diverge as to the issue of formation. One might be tempted to think of the concepts of surprise and frustration as symmetrical problems, but that itself may prove to be a contested assertion as argued below, if the costs of mistaken enforcement and non-enforcement and the costs of avoidance of contract surprise are context specific. 12 The common law requirements of mutual assent and certainty are respectively summarized in general terms in RESTATEMENT (SECOND) OF CONTRACTS §§17, 33 (AM. L. INST. 1981). 13 For example, established acquisition cases in the preliminary deal- ing canon—Texaco, Inc. v. Pennzoil, Co., 729 S.W.2d 768 (Tex. App. 1987) (affirming jury verdict on claim of tortious interference with contract based on jury’s subsidiary finding as to the existence of a binding acquisition agreement in light of partially signed preliminary agreement and oral ne- gotiations); Empro Mfg. Co. v. Ball-Co Mfg., Inc., 870 F.2d 423 (7th Cir. 1989) (holding that binding preliminary acquisition agreement requiring further negotiation was not breached by subsequent failure to reach a de- finitive agreement); Copeland v. Baskin Robbins U.S.A., 117 Cal. Rptr. 2d 875, 885 (Cal. Ct. App. 2002) (distinguishing binding preliminary agree- ments from “agreement[s] to agree” and imposing duty to negotiate in good faith on the former, but limiting damages for breach to reliance damages); SIGA Techs., Inc. v. PharmAthene, Inc., 67 A.3d 330, 346–47 (Del. 2013) No. 1] CONTRACT REALISM AND FORMALISM 107 a very practical determination in the case of informal agree- ments: did the parties have a contract? In the case of a formal preliminary agreement where par- ties to the preliminary agreement ultimately fail to execute a definitive written agreement, uncertainty arises as to out- come in several senses. Of course, there is the garden variety outcome uncertainty relating to issues of meaning, construc- tion and performance. However, as relevant here, a radical form of outcome uncertainty inheres in formal preliminary agreements. As in the case of inadvertent informal agree- ments, formal preliminary agreements have underlying exis- tential outcome issues unlike garden variety outcome uncer- tainty issues. The issues include: (i) whether the formal preliminary agreement is binding; (ii) if binding, is it binding as to the contemplated final transaction or, merely as to an obligation to negotiate in good faith toward execution of a de- finitive agreement; and (iii) what are the remedial conse- quences of failure to negotiate in good faith.14 [hereinafter SIGA I] (finding party breached duty to negotiate in good faith by insisting on “drastically different and significantly more favorable” terms than set forth in term sheet attached to preliminary agreement)—are com- monly used in casebooks to illustrate issues of contract formation. See, e.g., RANDY E. BARNETT & NATHAN B. ORMAN, CONTRACTS: CASES AND DOCTRINE 221 (7th ed. 2021) (featuring Empro and Copeland to illustrate written me- morials contemplated in formation contexts); JOHN P. DAWSON, WILLIAM BURNETT HARVEY, STANLEY D. HENDERSON & DOUGLAS G. BAIRD., CON- TRACTS, CASES AND COMMENTS 428-34 (11th ed. 2019) (including SIGA I to demonstrate liability arising from preliminary negotiations); E. ALLAN FARNSWORTH, CAROL SANGER, NEIL B. COHEN, RICHARD R.W. BROOKS & LARRY T. GARVIN, CONTRACTS, CASES AND MATERIALS 190–91 (10th ed. 2023) (referencing Texaco and another acquisition case). 14 To distinguish the ways in which contract surprise figures in discuss- ing preliminary dealing, this Article will use the qualifier “formation” with respect to contract surprise or uncertainty when talking about inadvertent informal agreements (i.e., formation surprise) and the qualifier “outcome” with respect to contract surprise or uncertainty regarding formal prelimi- nary agreements (i.e. outcome surprise). In addition, it is important to un- derscore that the use of outcome surprise is in the specific radical sense dis- cussed above rather than in the generic sense of any number of sources of outcome uncertainty than may inhere in any binding contract. 108 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 Issues involving preliminary dealings, including issues re- garding formal preliminary agreements, have received much attention from legal commentators over the last twenty-five years.15 Preliminary agreements, in particular, have garnered significant attention from contract scholars. Some scholars have honed in on the economic logic of binding preliminary agreements and argue that contract law should facilitate the objectives of the contracting parties in entering such agree- ments, or even argue that the common law actually provides an optimizing framework for contracting.16 In addition, others have sought to explain the utility of non-binding preliminary agreements that rely on self-enforcing mechanisms to serve their purpose.17 As evidenced by their widespread use, preliminary agree- ments and other forms of preliminary dealing are viewed as advantageous by contracting parties. Nevertheless, as this ar- ticle will demonstrate, the desirability of the current regime of common law principles governing preliminary dealings in the corporate acquisition context is not free from doubt. Con- ventional accounts which provide rationalizations for existing 15 See E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 COLUM. L. REV. 217, 218–20 (1987). Farnsworth’s comprehensive discussion of the common law approach is widely regarded as a foundational contribution to the literature. For a slightly earlier statement of the need for doctrinal clarity with respect to formal preliminary agreements, see generally Charles L. Knapp, Enforc- ing the Contract to Bargain, 44 N.Y.U. L. REV. 673 (1969). 16 See Alan Schwartz & Robert E. Scott, Precontractual Liability and Preliminary Agreements, 120 HARV. L. REV. 661 (2007); Albert H. Choi & George Triantis, Designing and Enforcing Preliminary Agreements, 98 TEX. L. REV. 439 (2020). 17 This literature emphasizes the use of agreements to effectuate self- enforcing mechanisms rather than legally binding obligations, such as the importance of non-legal norms in preliminary acquisition agreements. See Cathy Hwang, Faux Contracts, 105 VA. L. REV. 1025 (2019) [hereinafter Faux Contracts]; Cathy Hwang, Deal Momentum, 65 UCLA L. REV. 376 (2018) [hereinafter Deal Momentum]. See generally Robert E. Scott, A The- ory of Self-Enforcing Indefinite Agreements, 103 COLUM. L. REV. 1641 (2003). Scott’s leading article frames the issue of self-enforcing agreements more broadly in the contracts literature apart from preliminary agreements per se. No. 1] CONTRACT REALISM AND FORMALISM 109 common law norms suffer from a flawed shared assumption. They assume normatively that largely the same common law contract formation principles should apply with respect to pre- liminary dealings across contracting contexts and ignore the possibility of alternative contracting formation frameworks that might be more desirable from a policy perspective in the case of corporate acquisitions.18 This article challenges this received wisdom in two re- spects. It rejects the idea that the common law approach to contract formation should be applied in the context of corpo- rate acquisitions without qualification. More generally, cer- tain contracting contexts (and, as relevant here, acquisition scenarios) may be better suited for modified contract for- mation regimes.19 Second, the contracting formation regime 18 Farnsworth is unapologetic in this respect. Farnsworth, supra note 15, at 220 (“Some observers have concluded that existing contract doctrines are not adequate to the task of protecting the parties. I argue that, on the contrary, those doctrines, imaginatively applied, are both all that are needed and all that are desirable.”). The position of other scholars may be more hedged, but they embrace the same type of unified common law ap- proach. See, e.g., Schwartz & Scott, supra note 16, at 691, 705 (deriving gen- eral “framework for treating early reliance cases that . . . would improve efficiency if courts were to adopt it” and applying the model to case law to show consistency with decisional law); Gregory Klass, Intent to Contract, 95 VA. L. REV. 1437, 1440, 1499 (2009) (“examin[ing] various common-law rules that condition the enforcement of an agreement on the parties’ intent to contract” and “demonstrat[ing] the potential value of tailored [common law] defaults and opt-out rules that condition legal liability on the parties’ intent to contract”). In rejecting a unitary approach in this area, this Article prac- tically embraces a more instrumental approach. See Avery W. Katz, The Economics of Form and Substance in Contract Interpretation, 104 COLUM. L. REV. 496, 524 (2004) (challenging “a unitary theory for choosing between form and substance, since the answer in any particular case will turn on a comparison of various types of transaction costs”). This rejection of the dom- inant unitary view suggests that formalism might indeed be preferred for instrumental reasons in some categories of cases, as argued here. 19 Indeed, what is rather surprising about the unconscious assumption that preliminary dealings be governed by a uniform corpus of principles is that scholars who have adopted such an approach would never dispute the core premise of the U.C.C.’s Article 2—that contract formation principles should give way to commercial realities in the context of contracts for the sale of goods. See, e.g., Architectural Metal Sys., Inc. v. Consolidated Sys, 110 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 for corporate acquisitions would benefit from contracting rules (rules or standards imposed by statute rather than rules or standards derived solely from common law principles) that prescribe a higher degree of formality in formation. The basic argument advanced here is essentially one where the proof is in the pudding: that is, the ability to provide clearer and more predictable formal contract rules governing formation in the context of preliminary dealings in corporate acquisitions ne- cessitates rejecting the common law status quo and legisla- tively mandating an alternative regime. In particular, this article proposes a concise legislative pro- posal (with model language set forth in an appendix) that of- fers a pragmatic alternative to the common law with respect to preliminary dealings in corporate acquisitions. The statu- tory-based alternative would bring clarity and predictability to contracting outcomes in this area. The proposed statutory mandate consists of two basic requirements. First, all acquisi- tion agreements (preliminary and definitive) would be subject to a signed acquisition agreement requirement (“SAAR”). This mandate would put the onus on the contracting parties to make their contracting intent explicit in the form of a signed written agreement before judicially enforceable contractual obligations would attach. A second requirement, applicable to formal preliminary agreements alone, would fix the remedy for breach to reliance damages unless the preliminary agree- ment explicitly provided otherwise. For example, an agree- ment could provide for expectation damages (or some reason- able liquidated measure thereof) or eliminate any right to damages in the event of a breach. Together, the two require- ments embrace a formalist approach to contracting in the Inc., 58 F.3d 1227, 1230 (7th Cir. 1995) (“The Uniform Commercial Code, its draftsmen mindful of the haste and sloppiness, and disregard for law- yerly niceties, that characterize commercial dealing, tolerates a good deal of incompleteness and even contradiction in offer and acceptance.”). The U.C.C.’s formation principles are famously more lenient than the common law, and the common law’s certainty requirements are considerably relaxed by the U.C.C.’s gap-filler provisions. See, e.g., U.C.C. §§ 2-204–2-207, 2-305– 2-310 (AM. L. INST. & UNIF. L. COMM’N 2022). No. 1] CONTRACT REALISM AND FORMALISM 111 acquisition context, mandating expressed intent. This is re- ferred to herein as the SAAR+ regime.20 The formal bright-line contracting principle (the simple SAAR alone) is superior than the common law in the context of acquisition agreements because it preserves the ability of one or both parties to remain free from contract with cer- tainty, an element of contracting that assumes unusual im- portance in acquisition transactions. In contrast, as noted, the common law approach deliberately favors formation opacity because formation opacity meets other objectives appropriate in other contracting contexts. The common law regime seeks to promote the integrity of informal negotiation processes to protect legitimate contractual expectations, but it does so at the risk of mistakenly imposing contract obligations on an un- suspecting party. In short, the common law regime is tied to an implied balancing of costs and benefits. However, as this article will argue, the balance of benefits and harms in the context of acquisition agreements dramatically differs from other contracting contexts in ways that warrant imposing a higher evidentiary burden in establishing contractual inten- tionality. Four features in the acquisition context are particu- larly salient: (i) an intrinsically multi-step bargaining process; (ii) the routine participation of sophisticated business counsel; (iii) the costs of potentially enormous contractual liability arising from contested (and generally equivocal) inferences where contractual clarity can be obtained at relatively low cost; and (iv) disproportionate windfalls or forfeitures for 20 To sharpen the reader’s intuitions about the Article’s argument, an- other way to think about its thesis is as follows: just as the U.C.C. relaxed common law contract formation principles in the context of the sale of goods, this Article is suggesting a higher degree of formality in contract formation than the common law with respect to corporate acquisitions. Indeed, as is well known, statute of frauds (“SOF”) principles also impose a higher degree of formality in certain contract formation contexts. Although the SAAR+ proposal advanced here may sound like an SOF proposal for corporate ac- quisitions, it is more exacting in that it requires more than merely a suffi- cient signed writing evidencing an agreement and functions dramatically differently with respect to formal preliminary acquisition agreements where damage remedies would need to be specified. See infra Section II.C. 112 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 third-party stakeholders in the case of mistakenly imposed ob- ligations.21 Although a simple SAAR requirement standing alone would resolve the issue of inadvertent contract surprise with respect to preliminary negotiations, it offers little clarity as to other issues arising from formal preliminary agreements. The simple SAAR requirement will, by definition, always be satis- fied in the case of a formal preliminary agreement. Neverthe- less, preliminary agreements can give rise to a different type of inadvertent contract surprise: uncertainty as to scope of any binding obligations with respect to a final definitive agree- ment. Courts have recognized three loose categories of prelim- inary agreements: non-binding agreements to agree; prelimi- nary agreements that bind the participants to a final agreement because they are materially complete (so-called Type I agreements); and preliminary agreements that impose a duty to negotiate in good faith with respect to a final agree- ment (so-called Type II agreements).22 These categories of agreement entail drastically different contractual obligations and remedial consequences for contracting parties. Applica- tion of recognized common law principles to formal prelimi- nary agreements entails fact-specific determinations which engender uncertainty as to the scope of any resulting obliga- tions. This uncertainty is unresolved by a simple SAAR re- quirement since the issue arises from a formal agreement. Hence, the purpose of a second requirement (SAAR+). 21 In other words, the proposal envisions elevating freedom from con- tract considerations (inherent in inadvertent contract formation surprise) in corporate acquisitions over freedom to contract considerations (arising from contract formation frustration). 22 Of course, preliminary agreements can also implicate subsidiary en- forceable contractual obligations arising from ancillary promises relating to the ultimate transaction (such as, confidentiality or exclusivity obligations). These issues are not dealt with in this Article and would be unaffected by the SAAR+ proposal. See, e.g., EV3, Inc. v. Lesh, 114 A.2d 527 (Del. 2014) (distinguishing between binding confidentiality and non-binding funding obligations in letter of intent); SCS Commc’ns, Inc. v. Herrick Co., Inc., 360 F.3d 329, 341 (2d Cir. 2004) (holding that although the preliminary agree- ment’s ultimate acquisition objective was not enforceable, the agreement’s covenant to “acquire it together or not at all” was). No. 1] CONTRACT REALISM AND FORMALISM 113 The second requirement (the “+” in “SAAR+”) would im- pose a formal requirement on the contracting parties with re- spect to the remedial consequences of formal preliminary agreements. The second requirement would make reliance damages the default remedy for breach of a preliminary agree- ment regardless of type, unless the parties explicitly negotiate around the default. Thus, in the case of formal preliminary acquisition agreements, SAAR+ mitigates contractual sur- prise by requiring the contracting parties to unambiguously agree ex ante to any remedy measure other than the default of reliance damages. The practical consequence of such a re- quirement is to force contracting parties to negotiate ex ante with respect to a default that otherwise fixes the preliminary agreement’s status and scope rather than rely on courts to as- certain the preliminary agreement’s status and scope by hind- sight or, if binding, to determine how damages should be measured. The article is structured in three parts. Part II addresses the conventional common law formation issues posed by pre- liminary dealings. Part III describes current scholarly expla- nations for formal preliminary agreements and discusses how these explanations both clarify and obscure legal policy as to corporate acquisitions. Part IV shows how an alternative to existing common law formation principles and policies based on contract formalism provides a superior approach to con- tracting with respect to corporate acquisition agreements. Specifically, Part IV describes the SAAR+ proposal and demonstrates why such an approach would improve bargain- ing outcomes in that context. II. THE FORMATION PROBLEM IN PRELIMINARY DEALINGS: FORMATION OPACITY AND CONTRACT SURPRISE Preliminary dealings that result in either informal or for- mal acquisition agreements implicate a number of overlap- ping common law contract formation issues. These issues highlight the risk of “formation opacity” in the contracting process. Doctrines that permit formation opacity may advance legitimate policy considerations, but they also entail cost for 114 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 contracting participants, especially in the context of complex acquisition negotiations. This Part provides an overview of the most salient formation challenges faced by contract partici- pants in preliminary dealings, highlighting how they can con- tribute to formation opacity. Even conceding that formation opacity arising under the common law may be beneficial in many contracting contexts, the doctrinal principles operate across all contracting contexts, posing a question of whether the same level of formation opacity is desirable in all con- texts—a presumption challenged in this article.23 Formation opacity gives rise to instances of avoidable unexpected con- tract formation surprise. The problem of contract surprise is especially costly and unnecessary in the case of corporate ac- quisitions and, accordingly, this article advocates for greater formalism in contract formation principles in that context. Generally, preliminary dealings raise two practical issues: (i) when do preliminary dealings (oral negotiations or unexe- cuted documents, including drafts) give rise to a binding agreement; and (ii) what is the nature and scope of the binding obligations in formal preliminary agreements that contem- plate definitive agreements. These practical considerations are heavily affected by two related common law contract for- mation doctrines: mutual assent and definiteness. The two doctrinal concepts assume different significance in the two contracting contexts: informal agreements and formal prelim- inary agreements. Preliminary dealings result in a binding in- formal agreement only if the parties mutually assent to an agreement.24 This issue assumes unusual significance in in- formal agreements because assent may be reasonably inferred from conduct even if a party “does not in fact assent” (or did 23 As noted already, contracting regimes, depending on the context, may be more or less tolerant of formation opacity. Formality requirements minimize formation opacity, but can increase the potential for seemingly arbitrary outcomes that either impose excessive costs to contracting or frus- trate the legitimate expectations of a contracting parties. This provides the basis for widely shared critiques of the statute of frauds, see infra Section II.C. 24 See infra Section II.A (discussing requirement of parties’ mutual as- sent to form binding agreement). No. 1] CONTRACT REALISM AND FORMALISM 115 not subjectively intend to be bound).25 In such circumstances, courts also consider the definiteness of the proposed arrange- ment as a factor in analyzing the parties’ assent.26 In the case of formal preliminary agreements, the issue of mutual assent recedes into the background because both par- ties have explicitly assented to the arrangement. As a result, the requisite definiteness, rather than some proxy for intent to be bound in the abstract, assumes critical significance in determining whether an enforceable obligation exists and what its scope is. This Part addresses the basic common law principles and case law in contributing to what in this article is referred to as formation opacity—the lack of clarity in determining the existence of a binding informal agreement based on the total- ity of facts and circumstances or in determining the scope of any binding obligation under a formal preliminary agreement. As noted, tolerance of formation opacity in the common law serves the important function of allowing parties to conclude binding agreements in routine contracting contexts (as dis- cussed below, inferring what parties would reasonably infer from the course of negotiations). Nevertheless, it is necessary to consider how common law principles contribute to for- mation opacity in the context of complex business transac- tions, such as acquisitions. Formation opacity may figure in both informal acquisition agreements and formal preliminary acquisition agreements, and in each context, formation opac- ity contributes to the incidence of contract surprise. A. Formation Opacity in Informal Agreements Generally and in Acquisitions In the context of informal agreements, a binding agree- ment must be inferred from the parties written or spoken 25 See RESTATEMENT (SECOND) OF CONTRACTS §19(1) (AM. L. INST. 1981). 26 Definiteness functions as an independent principle that imposes a constraint on enforceability. See RESTATEMENT (SECOND) OF CONTRACTS § 33 cmt. a, b (AM. L. INST.1981) (“[T]he agreement must be capable of being given an exact meaning and . . . . the degree of certainty required may be affected by the dispute which arises and by the remedy sought.”). 116 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 words or their conduct.27 Preliminary dealings (such as ex- tended oral negotiations) may create a binding agreement where the parties’ dealings culminate in mutual assent based on the contracting parties’ objective manifestations of assent to be bound to an agreement.28 The manifestation of assent is in many contexts viewed as coincident with evidence of an in- tent to be bound, but while the former is required, the latter is not.29 In the absence of a signed written agreement, the common law relies on reasonable inferences drawn from objective man- ifestations of bargaining behavior of the contracting parties in determining assent.30 As a result, the requisite assent for con- tract formation in the case of informal agreements may not necessarily be subjectively intended by a contracting party. Contract law is replete with examples of the potential diver- gence between objective manifestations of assent and in- stances where intent to be bound are contested based on as- serted subjective expectations to the contrary.31 This tendency 27 See RESTATEMENT (SECOND) OF CONTRACTS §19(1) (AM. L. INST. 1981) (providing that assent manifested by written words, spoken words, or other acts). 28 See id. (noting that a party may manifest assent even without as- senting in fact). 29 See Klass, supra note 18, at 1447 (discussing distinction between American contract law where intent to be bound is not required and English contract law where it is); see also RESTATEMENT (SECOND) OF CONTRACTS § 21 cmt. a (AM. L. INST. 1981) (“[Facts relating to intention to be legally bound] may be important in interpreting their manifestations of intention and in determining legal consequences, but they are not essential to the formation of contract.”). 30 See RESTATEMENT (SECOND) OF CONTRACTS § 19(1) (AM. L. INST. 1981) (“The manifestation of assent may be made wholly or partly by written or spoken words or by other acts or by failure to act.”). 31 See, e.g., Lucy v. Zehmer, 84 S.E.2d 516, 522 (Va. 1954) (rejecting defendant-seller’s defense that he and his wife had been joking when they signed a document of sale in order to fool the putative purchaser and ex- plaining: “The mental assent of the parties is not requisite for the formation of a contract. If the words or other acts of one of the parties have but one reasonable meaning, his undisclosed intention is immaterial except when an unreasonable meaning which he attaches to his manifestations is known to the other party.”). No. 1] CONTRACT REALISM AND FORMALISM 117 is only further underscored in the offer and acceptance con- text, where very specific consequences follow from acceptance of an offer which, though definite, may not even involve an integrated statement of the terms of the agreement.32 The potential divergence between acts of assent and sub- jective intent to be bound may be enhanced when an informal agreement evolves out of multi-step negotiation process that relies heavily on multiple inferences about conduct, progress in the negotiation, and the relationship among the issues raised. Although courts may seek objective manifestations of assent, the analysis in such situations will likely incorporate proxies for assent that try to ascertain intent to be bound.33 Nevertheless, the common law’s emphasis on objective mani- festations of assent (such as an offer and acceptance) in nego- tiating an unexecuted complex business agreement means that a binding informal agreement may arise even though the parties reasonably diverge in their belief as to the existence of a binding agreement.34 In such circumstances, what may be 32 See, e.g., Embry v. Hargadine, McKittrick Dry Goods Co., 105 S.W. 777, 779 (Mo. Ct. App. 1907) (holding that the parties’ subjective intent was not relevant to jury’s finding of a binding agreement when defendant-em- ployer stated “don’t let that worry you” in response to employee’s request for clarification of continued employment term). 33 See Craswell, supra note 2, at 537 (“The courts seem to agree that the issue in [cases involving preliminary agreements] is whether parties in- tended to be bound, keeping in mind that intentions must be interpreted objectively, and that secret intentions undisclosed by one party are irrele- vant.”); Klass, supra note 18, at 1444 (noting in discussing difference in American and English rules regarding the necessity of showing intent to be bound that “[t]he rules agree that an agreement is enforceable where there is a manifest intent to be bound and that it is unenforceable when there is a manifest intent not to be bound. They differ on those cases in which one or both parties manifest no intent with respect to legal liability, neither an intent to be bound, nor an intent not to be bound.”); see also Melvin Aron Eisenberg, Expression Rules in Contract Law and Problems of Offer and Ac- ceptance, 82 CALIF. L. REV. 1127, 1131 (“A deep difference between classical contract law and modern contract law is that classical contract law tended to be objective and standardized, while modern contract law tends to include subjective and individualized elements as well.”). 34 A frequent lament of commentators has been the deficiencies of the offer-and-acceptance paradigm as a basis for inferring an intent to be bound across a wide variety of contracting contexts, including complex business 118 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 regarded as merely continued preliminary dealings by one of the contracting parties may be sufficient to sustain a finding that an agreement exists (though such an agreement may seem to be incomplete in some respects). In short, at common law, there can be significant opacity as to formation in infer- ring an informal agreement from a multi-step negotiation pro- cess. Over the last fifty years, the United States Court of Ap- peals for the Second Circuit, putatively interpreting New York law, has taken a leading role in carving out a widely followed jurisprudence regarding enforceability of both informal agree- ments in complex business transactions, and, as discussed in the following section, formal preliminary agreements that constitute a binding final agreement. As to the binding nature of informal agreements, the Second Circuit standard is formu- lated as a four-part multi-factor test: transactions. See Jason Scott Johnston, Communication and Courtship: Cheap Talk Economics and the Law of Contract Formation, 85 VA. L. REV. 385, 465–66 (1999) (arguing that “[t]he process by which complex business deals are arranged differs markedly from that presumed by the offer-and- acceptance paradigm[,]” and as a result, the common law has struggled to avoid “doctrinal uncertainty” with respect to formation issues in the former context). Some commentators have sought to blunt the rigid and mechanical aspects inherent in the offer-and-acceptance paradigm by stressing alterna- tive analytical approaches. See Craswell, supra note 2, at 483–84 (arguing that underlying economic incentives of the contracting parties should be used to aid in inferring the “parties most likely intentions”); Eisenberg, su- pra note 33, at 1148 (noting that modern contract law has moved away from black-letter expression rules that define the offer-and-acceptance paradigm in cases where those rules are not “highly congruent with general principles of interpretation.”); see also Shawn J. Bayern, Offer and Acceptance in Mod- ern Contract Law: A Needless Concept, 103 CALIF. L. REV. 67, 73 (2015) (ar- guing that “general interpretive principles should replace not just individ- ual expression rules (operating within the offer-and-acceptance paradigm) but the whole notion of offer and acceptance”). These critiques of the offer- and-acceptance paradigm suggest greater reliance on multi-factor fact-in- tensive approaches to inferring contractual intent. The SAAR+ proposal ad- vocated here, however, suggests a far different approach and less fact-inten- sive approach to inferring intent to be bound in preliminary dealings by specifically insisting on formal statements of express intent within a written agreement. No. 1] CONTRACT REALISM AND FORMALISM 119 1) whether there has been an express reservation of the right not to be bound in the absence of a writing; 2) whether there has been partial performance of the contract; 3) whether all of the [material] terms of the alleged contract have been agreed upon; and 4) whether the agreement at issue is the type of con- tract that is usually committed to writing.35 As a preliminary matter, two methodological features are notable in this multi-factored approach. First, the test com- mits courts to a facts-and-circumstances determination which is likely to produce outcomes in which courts (or the finder of fact if a question of fact) could reach different ultimate conclu- sions based on similar facts by virtue of weighting different factors differently. Second, while the test is nominally objec- tive in its application (i.e., what a reasonable observer would infer from the observable conduct of the contracting parties), its application is likely to be open-ended in complex contract- ing contexts. Thus, an outcome under the multifactor ap- proach is less likely to produce bright-line outcomes than say, for example, classic offer-and-acceptance sequences to estab- lish mutual assent. In practice, two of the test’s four factors have assumed out- sized significance: the first, regarding an express reservation of the right not to be bound, and the third, whether there has been agreement to the agreement’s essential terms.36 35 See Winston v. Mediafare Ent. Corp., 777 F.2d 78, 80 (2d Cir. 1986) (Judge Pratt’s decision restating four factors identified in his earlier au- thored opinion in R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69 (2d Cir. 1984) and declining to find a binding informal agreement based on oral negotiations and unexecuted drafts). 36 The fourth factor is generally answered by courts in the affirmative since complex business transaction are expressed in writing. See, e.g., Tex- aco, Inc. v. Pennzoil, Co., 729 S.W.2d 768, 795 (Tex. Ct. App. 1987) (noting that while in complex corporate acquisition transactions “a signed contract would ordinarily be expected before the parties would consider themselves bounds[,] . . . we cannot say, as a matter of law, that this factor alone is determinative of the question of the parties’ intent”). The second factor does not generally figure as dispositive since the level of partial performance in preliminary agreement cases may be merely marginal or equivocal at best. 120 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 Interestingly, the first factor elevates the significance of the parties’ intent to be bound as part of the analysis of complex business transactions, and potentially invites a reasoned as- sessment of parties’ subjective intentions.37 There are two ways to think about this element of the analysis. If emphasis is put on an actual “express reservation,” then the factor func- tions as a means by which one party can unilaterally opt out from the possibility that the preliminary negotiations might be treated as binding.38 However, sometimes this feature is reframed, as Klass refers to it, as an “all-things-considered” factor that is not an explicit reservation but rather one in- ferred from the circumstances.39 In that sense, a generalized See, e.g., id. at 792 (in relegating this factor to the jury’s factfinding discre- tion, asserting: “[W]e find little relevant partial performance in this case that might show that the parties believed that they were bound by a con- tract. However, the absence of relevant past performance in this short pe- riod of time does not compel the conclusion that no contract existed.”). 37 See Embry, 105 S.W. at 779. As reflected in the RESTATEMENT (SEC- OND) OF CONTRACTS § 21 (AM. L. INST. 1981), demonstrated intent not to be bound typically precludes finding a binding agreement. See, e.g., Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 72–73 (2d Cir. 1989) (find- ing language referring to the possibility that negotiations may fail and ref- erencing a future binding sales agreement as evidence that Arcadian did not intend to be bound). However, as reflected in the footnotes below, in preliminary dealings involving complex business transaction, an under- standing of the parties’ affirmative intent to contract may assume virtually equal importance. 38 See, e.g., Reprosystem, B.V. v. SCM Corp., 727 F.2d 257, 261 (2d Cir. 1984) (reversing district court’s finding of contract based on preliminary dealings where evidence “clearly showed that the intent of both parties was not to be bound prior to execution of a formal, written contract”); Scheck v. Francis, 260 N.E.2d 493, 494 (N.Y. 1970) (“The writings before us likewise evidence the intention of the parties not to be bound until the agreements were signed.”); see also Klass, supra note 18, at 1487 (arguing for express opt-out rule found in common law). 39 In many cases, intent to be bound or not to be bound is inferred from the totality of facts and circumstances. See, e.g., Winston, 777 F.2d at 80–81 (“In any given case it is the intent of the parties that will determine the time of contact formation [i.e., the exact point at which an agreement becomes binding]. To discern that intent a court must look to ‘the words and deeds [of the parties] which constitute objective signs in a given set of circum- stances . . . . Although neither party expressly reserved the right not to be bound,” the lower court erred in enforcing a settlement agreement based on No. 1] CONTRACT REALISM AND FORMALISM 121 inquiry of an intent to not be bound becomes virtually sym- metrical with a generalized inquiry of an affirmative intent to be bound.40 The other factor that assumes great significance is the third factor which correlates with the definiteness of the agreement’s material terms, a requirement that has become increasing elastic under the common law.41 The fact that es- sential terms in a purported agreement are unresolved is evi- dence of indefiniteness, precluding finding a binding agree- ment.42 While the definiteness requirement serves as a partial a definitive draft where language in earlier correspondence to the appellate court “reveal[ed]” an intent not to be bound. (quoting R.G. Group, Inc., 751 F.2d at 74)); R.G. Group, Inc., 751 F.2d at 73–76 (holding that notwithstand- ing oral affirmation that “we have a handshake deal,” failure of other party to take exception to language in correspondence and drafts that expressly referenced a final written agreement supported finding that an intent not to be bound existed and therefore that no contract came into being); see also Int’l Telemeter Corp. v. Teleprompter Corp., 592 F.2d 49, 57 (2d Cir. 1979) (“Whether or not the parties have manifested an intent to be bound must depend in each case on all the circumstances.”). 40 As reflected in the cases cited in the preceding footnote, absence of evidence of an “intent to be bound” becomes interchangeable with an “intent not to be bound.” See, e.g., Schwartz v. Greenberg, 107 N.E.2d 65, 67 (N.Y. 1952) (“But there is no evidence of an intention of the parties to be bound by any mere oral understanding . . . . It is entirely plain, then, that the par- ties did not intend to be bound until a written agreement has been signed and delivered.”). 41 See RESTATEMENT (SECOND) OF CONTRACTS § 33(3) (AM. L. INST. 1981) (“The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.”) (emphasis added); U.C.C. § 2- 204(3) (AM. L. INST. & UNIF. L. COMM’N 2022) (“Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.”). But there are limits in this re- gard. See Joseph Martin Jr., Delicatessen, Inc. v. Schumacher, 417 N.E.2d. 541, 543 (N.Y. 1981) (“Thus, definiteness as to material matters is of the very essence in contract law. Impenetrable vagueness and uncertainty will not do.”). Accord RESTATEMENT (SECOND) OF CONTRACTS § 33(1), (2) (AM. L. INST. 1981). 42 The third factor, which is an implicit definiteness test, alternatively states that “there was literally nothing left to negotiate.” R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 76 (2d Cir. 1984). In some cases, 122 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 check to inadvertent contract formation, a definiteness re- quirement alone is hardly a sufficient standard to preclude in- advertent contract formation. As discussed below, unexecuted agreements may be sufficiently definite when given binding effect, even though one of the contracting parties subse- quently contends that it reserved the right to withdraw from a planned arrangement by never signing a draft agreement.43 Two notable scenarios for informal agreements have arisen in complex business transactions: (i) informal agreements premised entirely on oral negotiations alone; and (ii) informal agreements based on oral negotiations coupled with written drafts or unexecuted formal agreements. As to the first sce- nario, binding informal agreements are certainly possible in the case of relatively simple arrangements.44 Unsurprisingly, however, courts have generally declined to find a binding transaction in the case of complex business transactions, such as acquisitions, based on oral negotiations alone.45 The dearth of cases may reflect the fact that disappointed contracting par- ties realize that such actions are unlikely to succeed. indefiniteness is a close factual call, while in other cases, the purported agreement is plainly deficient in its terms, precluding its enforceability. Compare Shann v. Dunk, 84 F.3d 73 (2d Cir. 1996) (remanding the case to the district court to determine whether critical contract terms was unre- solved (rendering the agreement unenforceable) or resolved (in which case the agreement was binding)) with Adjustrite Sys. v. GAB Bus. Servs., 145 F.3d 543 (2d Cir. 1998) (affirming grant of summary judgment finding that signed two-page preliminary asset purchase agreement was not binding be- cause it omitted material terms). 43 See infra note 47 (discussing courts’ diverging treatment of unexe- cuted formal agreements). In these cases, the drafts may well establish rea- sonable definiteness, but may not always be sufficient to establish mutual assent. 44 See, e.g., Embry v. Hargadine, McKittrick Dry Goods Co., 105 S.W. 777 (Mo. Ct. App. 1907) (extending an employee’s term of employment). 45 See, e.g., United Acquisitions Corp. v. Banque Paribas, 631 F. Supp. 797 (S.D.N.Y. 1985) (holding that an oral agreement was not binding where parties contemplated written agreement and much was left to negotiate); see generally Mich. Broad. Co. v. Shawd, 90 N.W.2d 451 (Mich. 1958) (hold- ing that an oral agreement for sale of stock was not binding where negotia- tion of complex business issues was spread over several conversations that made reference to a final agreement). No. 1] CONTRACT REALISM AND FORMALISM 123 The other category—oral negotiations conjoined with draft or unexecuted agreements—represents a more challenging scenario where outcomes have varied with the facts and cir- cumstances. When negotiations become protracted, applica- tion of the Second Circuit’s multi-factor test becomes less pre- dictable since the ultimate determination turns on evaluation of the totality of facts and circumstances. Fully negotiated for- mal agreements which remain unexecuted represent an ex- treme illustration where results have diverged.46 In such cases, notwithstanding the fact that the parties (or their agents) may have verbally agreed to the terms of a written agreement in draft form and all that may be lacking is each party’s signature, courts must infer what significance should be attached to the unexecuted agreement.47 It does not appear 46 Compare Winston v. Mediafare Ent. Corp., 777 F.2d 78, 83 (2d Cir. 1986) (holding that a partially executed final draft was unenforceable, not- withstanding execution of preceding draft); Ciaramella v. Reader’s Dig. Ass’n, 131 F.3d. 320, 321, 323 (2d Cir. 1997) (holding that an unexecuted settlement agreement was unenforceable, notwithstanding the party’s at- torney previously orally affirming “We have a deal,” where other factors weighed against finding an intent to be bound) with Turner Broad. Sys., Inc. v. McDavid, 693 S.E.2d 873 (Ga. Ct. App. 2010) (holding that an unsigned asset purchase agreement relating to sports franchise related arena operat- ing rights was enforceable); Int’l Telemeter Corp. v. Teleprompter Corp., 592 F.2d 49, 56 (2d Cir. 1979) (holding that an unsigned settlement agree- ment relating to an intellectual property dispute was enforceable). Of course, a signature might well be required as in the case of an agreement within the scope of the statute of frauds absent other signed writings evi- dencing the agreement. See, e.g., Scheck v. Francis, 260 N.E.2d 493, 495 (N.Y. 1970) (holding that an asserted signed writing was non-compliant with statute of frauds requirements); R.G. Group, Inc., 751 F.2d at 77–78. 47 In a number of cases, courts have exhibited extreme reluctance to find a binding agreement, even where the objective manifestations appear very close to crossing the formation line. See, e.g., Winston, 777 F.2d at 80– 82 (holding that a signed copy of final agreement accompanied by payment where oral negotiations continued as to agreement’s language was not bind- ing); R.G. Group, Inc., 751 F.2d at 73, 76 (parties’ oral affirmation of “hand- shake deal” not a binding agreement where unexecuted franchise agree- ment made reference to “when duly executed” trigger and contained an integration clause); Schwartz v. Greenberg, 107 N.E.2d 65 (N.Y. 1952) (holding that no agreement came into being though parties had signed coun- terparts of a formal agreement, when delivery of counterparts withheld 124 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 unreasonable in such circumstances that one party psycholog- ically believes that there is an agreement, notwithstanding the absence of an unexecuted formal agreement, or that an- other party psychologically believes that by withholding its signature (i.e., preventing the formal agreement from coming into being) there cannot be a binding agreement (i.e., a bind- ing informal agreement cannot be inferred).48 Notwithstand- ing similarity of circumstances, courts have reached diamet- rically opposing results on enforceability when confronted by the absence of a signature and a fully complete draft agree- ment.49 While successful contract formation claims arising from in- formal preliminary dealings in acquisitions is relatively rare,50 this is in part because of the extreme caution exercised by deal lawyers to prevent such outcomes.51 Nevertheless, the issue is illustrated in spectacular fashion by the celebrated Texaco/Pennzoil litigation.52 The case memorably involved a while awaiting delivery of a cashier’s check and subsequently one party changed its mind). 48 See Reprosystem, B.V. v. SCM Corp., 727 F.2d 257, 261 (2d Cir. 1984). The infamous decision discussed in the next paragraph, Texaco, Inc. v. Pennzoil, Co., 729 S.W.2d 768 (Tex. Ct. App. 1987), illustrates the diver- gence in subjective understandings among participants—a bidder (Penn- zoil), a selling oil company (Getty Oil company), and Getty’s jointly control- ling shareholders (the Getty Trust and its trustee, and the Getty Museum)—in a complex business transaction involving interdependent agreements. 49 See supra note 47 (discussing courts’ disparate enforcement of unex- ecuted formal agreements). 50 See, e.g., United Acquisitions Corp. v. Banque Paribas, 631 F. Supp. 797 (S.D.N.Y. 1985) (holding that an oral agreement was not binding where parties contemplated written agreement and much was left to negotiate); Mich. Broad. Co. v. Shawd, 90 N.W.2d 451 (Mich. 1958) (holding that an oral agreement for sale of stock was not binding where negotiation of com- plex business issues was spread over several conversations that made ref- erence to a final agreement). 51 See Hwang, Faux Contracts, supra note 17, at 1048. 52 Texaco, Inc. v. Pennzoil, Co., 729 S.W.2d 768, 805 (Tex. Ct. App. 1987). While the decision of the Texas appellate court proved to be the final decision on the merits of the tortious interference claim, related litigation proceeded in Delaware, where Pennzoil initially sought relief. See Pennzoil Co. v. Getty Oil Co., No. CIV. A. 7425, 1984 WL 15664, at *20 (Del. Ch. Feb. No. 1] CONTRACT REALISM AND FORMALISM 125 successful $10.5 billion tortious interference claim brought by Pennzoil, a jilted bidder for a controlling stake in Getty Oil, in an action against Texaco, the eventual successful acquiror of Getty Oil in its entirety.53 The claim was premised on Texaco’s interference with Pennzoil’s informal agreement with Getty and its principal shareholders to acquire a substantial stake of Getty Oil.54 The informal agreement was allegedly breached when the Getty group agreed to be acquired by Tex- aco after Texaco made an offer for all Getty shares at $125 per share (compared to the informal agreement which involved a Pennzoil proposal to acquire all Getty public shares and those of one of the principal shareholders at $110 per share, later supplemented with an additional contingent $5 face-amount stub security).55 The events unfolded over a ten day period at the end of 1983 and the beginning of 1984 involving four parties—Penn- zoil, Getty, a Trust that controlled 40.2% of Getty’s common shares, and the Getty Museum which controlled an 11.8% of Getty’s common shares.56 The initial informal agreement would have had Pennzoil acquiring joint control of Getty with the Trust, with the Trust holding 57% of Getty and Pennzoil the remaining 43%.57 As part of the “agreement,” the Trust 6, 1984) (denying Pennzoil’s motion for a preliminary injunction); Pennzoil Co. v. Getty Oil Co., 473 A.2d 358, 359 (Del. Ch. 1984) (finding that plaintiff had an absolute right to dismiss action with respect to Texaco where Texaco had yet to file a response to the complaint). The U.S. Supreme Court’s re- lated decision arising from the same core facts turned on a collateral consti- tutional challenge to the enforcement of remedies. See Pennzoil Co. v. Tex- aco, Inc., 481 U.S. 1, 17 (1987). 53 Texaco, Inc., 729 S.W.2d at 784. 54 Id. This characterization is subject to possible challenge. Pennzoil and the Getty Group members never signed a definitive agreement. There was, however, a partially executed formal preliminary agreement. As dis- cussed below, Pennzoil’s argument was that the earlier partially executed agreement became fully binding upon board approval of a modified offer. The totality of the circumstances, according to the Texas Appeals Court, supported the jury’s finding of a fully binding agreement (that is, an infor- mal agreement, although not phrased as such by the court). 55 Id. at 786–87. 56 Id. at 785. 57 Id. 126 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 and Pennzoil would subsequently determine whether (i) to re- structure Getty in a new arrangement in which one or the other party would buy out the other; or (ii) divide Getty’s as- sets and operations among the two shareholders.58 This basic transaction structure was reflected in a partially executed January 2 formal preliminary agreement, an agree- ment that was not executed by Getty Oil or its senior officer pending approval by Getty’s board.59 However, the obligations of the two Getty shareholder signatories were subject to con- ditions. The Museum’s agreement was conditioned upon ap- proval at the Getty board’s January 2 meeting, which did not occur until a reconvened meeting on January 3.60 The trus- tee’s obligation was subject to a fiduciary out set forth in a side letter between the Trust and Pennzoil.61 The January 3 meeting did, after revised price terms, re- sult in an affirmative vote, though members of the board dif- fered as to the vote’s meaning.62 Nevertheless, the parties is- sued a joint press release on January 4 announcing that a preliminary agreement had been subject to negotiation and execution of a final definitive agreement.63 During the ensu- ing 48-hour period of continued negotiations relating to a de- finitive agreement and attempting to secure an executed for- mal preliminary agreement, Getty, with the willing participation of the Trust, the Museum, various parties’ out- side counsel and Getty’s investment banker, continued to so- licit other potential bidders, including Texaco, which in short order successfully submitted a topping bid and completed a definitive agreement.64 Texaco’s topping bid resulted in the Getty’s group decision to not proceed with a definitive agree- ment with Pennzoil.65 58 Id. 59 Pennzoil Co. v. Getty Oil Co., No. CIV. A. 7425, 1984 WL 15664, at *3–4 (Del. Ch. Feb. 6, 1984). 60 Id. at *4. 61 Id. at *17. 62 Id. at *5–6, *8–9. 63 Id. at *6; Texaco, Inc., 729 S.W.2d at 789. 64 Pennzoil Co., 1984 WL 15664, at *7–8. 65 Texaco, Inc., 729 S.W.2d at 787 . No. 1] CONTRACT REALISM AND FORMALISM 127 Pennzoil prevailed in a jury trial that yielded a verdict for $10.5 billion.66 The existence of a binding preexisting agree- ment between the Getty group and Pennzoil for its partial ac- quisition of Getty represented a critical threshold legal is- sue.67 A Texas appellate court sustained the verdict and, in particular, the jury’s determination that Pennzoil had a bind- ing agreement with the Getty Group based on the well-estab- lished New York multi-factor test described above, especially in light of sufficient evidence on two of four factors.68 The first of the four factors was perhaps the most con- tested. Texaco argued that the preliminary agreement that was partially executed by the parties contained language ref- erencing the fact that it was “subject to” execution of a final agreement that was never completed.69 The court held that the language, as a matter of law, did not “clearly express the intent of the parties not to be bound” (i.e, did not preclude the jury finding of a binding agreement).70 The court also rejected Texaco’s challenge to the agreement’s failure to resolve all es- sential terms, merely concluding that the jury was free to con- clude otherwise.71 In particular, the court held that Getty’s failure to execute the partially executed formal preliminary agreement did not preclude the jury’s finding because the jury could reasonably infer that Getty board approval concluded the agreement and was not, as Texaco contended, merely an approval of Pennzoil’s revised pricing proposal.72 The court noted that any partial performance had been minimal73 and agreed that the fourth factor (a formal agreement was 66 Id. at 784 (summarizing jury findings, including damage awards). 67 Id. at 788 (summarizing Special Issue No. 1 and considering suffi- ciency of evidence to support jury’s finding that Getty intended to bind itself to an agreement with Pennzoil). 68 Id. at 788–95. 69 Id. at 789. 70 Id. at 790. 71 Id. at 792–95. 72 Id. at 794. According to the court, the jury was warranted in conclud- ing that an oral agreement to the transaction was merely conditioned on board approval and not execution of an agreement effectuating board ap- proval. Id. at 786. 73 Id. at 792. 128 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 normally expected to conclude negotiations) favored Texaco.74 However, these factors did not preclude the jury’s ultimate de- termination that Getty had intended to be bound by the trans- action.75 The Texaco/Pennzoil litigation demonstrates the signifi- cant weaknesses of common law formation principles when applied to acquisitions. The jury’s ultimate determination emerged from an ambiguous and contested factual record and represented one of two plausible versions of the facts. At the very least, the underlying facts suggest that the actual intent to contract of some parties was at odds with a legally inferred intent to contract.76 In this respect, the record of subjective cognitive dissonance regarding contract formation is quite stark: a collection of sophisticated deal lawyers and bankers believed that no binding agreement existed given the fluid state of negotiations.77 Second, the litigation’s outcome—that a binding agreement existed between Pennzoil, as acquiror, and the Getty Group—shows the inherent unpredictability of factual inferences using a multi-factored test in making ulti- mate determinations regarding contract formation in complex acquisition negotiations. Even if strictly correct as a matter of law, the result underscores the precarious nature of the foun- dations for such a determination where such a determination could easily have been resolved indisputably by a low-cost al- ternative legal standard, namely a requirement that 74 Id. at 795. 75 Id. at 792, 795. 76 Cf. Tess Wilkinson-Ryan & David A. Hoffman, The Common Sense of Contract Formation, 67 STAN. L. REV. 1269, 1286–87 (2015) (conducting a study showing a high subjective dissonance surrounding contract formation and demonstrating subjects’ tendency to believe that a contract becomes binding upon formal execution as opposed to verbal acknowledgement). 77 Id. at 786–87. Specifically, several sophisticated New York law firms simultaneously participated in independent drafting sessions with the two competing bidders, including negotiations relating to a definitive agreement with Pennzoil, and Goldman Sachs, one of the preeminent M&A investment banks in the United States, continued soliciting competing bids. No. 1] CONTRACT REALISM AND FORMALISM 129 agreements of such magnitude be governed by formal expres- sions of intent.78 B. Formation Opacity in Formal Preliminary Agreements Generally and in Acquisitions Formal preliminary agreements fundamentally differ from informal agreements in two obvious respects. First, formal agreements are signed writings while informal agreements encompass all other forms of agreements. Second, a formal preliminary agreement does not purport to be a definitive agreement. The agreement (whether labelled as a preliminary agreement, letter of intent, agreement in principle, or memo- randum of understanding) explicitly contemplates a subse- quent definitive agreement.79 In this sense, preliminary 78 Compare Robert M. Lloyd, Pennzoil v. Texaco, Twenty Years Later: Lessons for Business Lawyers, 6 TRANSACTIONS: TENN. J. BUS. L. 321, 352 (2005) (“Lesson 1: Make it clear whether you have a contract.”) with Mark G. Yudof & John L. Jeffers, Pennzoil v. Texaco, 27 ALBERTA L. REV. 77, 81 (1988) (“In our view, however, a major concern is whether corporate giants must live with the same standards of commercial morality and contract law as are applicable to the rest of us.”); see also David Crump, Halfway Deals: Or, When Is a Non-Contract a Contract, 46 UA LITTLE ROCK L. REV. 1, 7 (2023) (arguing forty years after the fact that, as a matter of legal policy, “Texaco v. Pennzoil is wrongly decided”); cf. Robert H. Mnookin & Robert B. Wilson, Rational Bargaining and Market Efficiency: Understanding Penn- zoil v. Texaco, 75 VA. L. REV. 295, 329 (1989) (in discussing bargaining strat- egies relating to litigation, concluding “Pennzoil v. Texaco appears to have been a case where rational choices by each party led to less than optimum outcomes for both”). 79 In general, these different labels—letter of intent, agreement in prin- ciple, and memorandum of understanding—reflect different ways of styling the tentative (that is, preliminary) agreement. The preliminary agreement does not have to be captioned as such to be binding—it is sufficient if the document, however styled, contains adequate terms to give rise to obliga- tions either to negotiate further, or to fully perform (notwithstanding con- templation of a fuller memorialization of the arrangement). See, e.g., Cox Commc’ns, Inc. v. T-Mobile US, Inc., 273 A.3d 752, 761–62 (Del. 2022) (find- ing binding preliminary agreement to negotiate in good faith implied where one sentence of contract provision established parameters of future business relationship, anticipated a future definitive agreement, set a duration, and left any additional terms to be “mutually agreed upon” by the parties); see also Brown v. Cara, 420 F.3d 148, 151 (2d Cir. 2005) (holding that fully 130 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 agreements are preliminary because they do not purport to fully reflect the final agreement’s anticipated terms. Use of a formal preliminary agreement, whether binding or not, evi- dences the parties’ recognition that attaining a definitive agreement will entail additional steps, such as to resolve an- cillary contractual issues, to resolve core issues that have greater complexity, or to resolve issues that require a sequen- tial negotiating process because they are contingent on or in- terdependent with other issues that that have not been re- solved.80 executed MOU setting forth terms and financing of partnership arrange- ment created a binding preliminary agreement to negotiate in good faith). Because of the elastic nature of each label, a “preliminary” document may contain a few or many terms, but typically the document will at least com- mit to the price and structure of the contemplated transaction. See, e.g., Cambridge Cap. LLC v. Ruby Has LLC, 565 F. Supp. 3d 420, 431 (S.D.N.Y. 2021) (involving a fully executed LOI in which the private equity sponsor was to invest $40 million in seller in exchange for 51% fully-diluted owner- ship interest). In many litigated cases, the issue is whether the preliminary document (however labelled) is a binding preliminary agreement or, if too vague, non-binding. Compare id. at 440–42 (explaining that the LOI at issue created a triable issue of fact regarding whether it was a binding prelimi- nary agreement to negotiate), with CKSJB Holdings LLC v. Epam Sys., 837 F. App’x 901, 904–05 (3d Cir. 2020) (explaining that the LOI at issue did not create an enforceable obligation to negotiate in good faith because it was merely aspirationally optimistic). See also Raymond L. Veldman, Letters of Intent-Look Before You Leap, 9 M&A LAW. 11, 13 (2005) https://1.next.westlaw.com/Docu- ment/Id8e9af21e6a411db98cd8b9e3c2e32f9/View/FullText.html?VR=3.0& RS=cblt1.0&__lrTS=20240515181950251&transitionType=Default&con- textData=%28sc.Default%29 [on file with the Columbia Business Law Re- view] (“[T]here is no uniform standard by which these agreements are judged and, as recent cases illustrate, the outcome is often unpredictable and may be surprising.”); Hwang, Faux Contracts, supra note 17, at 1053 (“Deal lawyers, for instance, uniformly reported that M&A term sheets, while formal-looking, are almost never binding or formally enforceable.”). 80 There is general consensus on the salience of this feature in motivat- ing use of preliminary agreements. See Farnsworth, supra note 15, at 249– 51; Schwartz & Scott, supra note 16, at 691–702 (discussing a caselaw da- taset involving the use of preliminary agreements that address contractual complexity of simultaneous and sequential pre-closing participant invest- ments); Hwang, Faux Contracts, supra note 17, at 1027–29 (discussing the nature of non-binding preliminary agreements). No. 1] CONTRACT REALISM AND FORMALISM 131 In contrast to informal agreements, formal preliminary agreements provide a straightforward objective manifestation of assent and simultaneously unambiguous evidence of an in- tent to be bound to something, but the real question is what are the parties actually bound to (i.e., an ultimate transac- tion? a commitment to negotiate in good faith? or merely a commitment of willingness to agree in the future—a so-called “agreement to agree”?)?81 In other words, do the parties intend to be bound as to substantive, definite, and enforceable con- tractual obligations (i.e., an agreement having reasonably def- inite terms where a court can determine the existence of a breach, if any)82 or merely intend to memorialize the progress of their negotiations to date? Preliminary agreements present three subsidiary issues: (i) does the particular preliminary agreement create any bind- ing obligations; (ii) if so, what are the parties’ obligations with respect to a definitive agreement in the future; and (iii) what remedies should be afforded to a non-breaching party in the event of a breach of a binding preliminary agreement. Tradi- tionally, these three issues are intertwined and the answers vary depending on how a particular preliminary agreement is categorized. As discussed below, extensive case law has evolved regarding such agreements, evidencing their common usage in complex multi-step contracting arrangements. The Second Circuit’s case law once again has proven highly influential in developing a basic taxonomy in thinking about such agreements. This approach builds upon a three-part framework laid out in a seminal federal district court decision in Teacher’s Insurance and Annuity Association v. Tribune Co. (“TIAA”).83 The court’s framework sought to balance the twin 81 See Murphy v. Inst. of Int’l Educ., 32 F.4th 146, 150–51 (2d Cir. 2022) (noting a distinction in caselaw between cases involving oral informal agree- ments where intent to be bound is critical and cases involving formal pre- liminary agreements where “the question instead is what kind of agreement did the parties make”). 82 See RESTATEMENT (SECOND) OF CONTRACTS § 33(2) (AM. L. INST. 1981). 83 670 F. Supp. 491 (S.D.N.Y. 1987) [hereinafter TIAA]; accord Murphy, 32 F.4th at 151 (“We subsequently adopted [TIAA’s framework] for analyz- ing preliminary agreements in [a 1989 decision], and we continue to apply 132 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 concerns of enforcement and non-enforcement that is, “to avoid trapping parties in surprise contractual obligations that they never intended” and “enforce[ing] and preserv[ing] agree- ments that were intended as binding, despite a need for fur- ther documentation or further negotiation.”84 Type I preliminary agreements, though characterized as preliminary, are in fact binding final agreements, even absent the ability of the parties to conclude an actual definitive agree- ment.85 This is so because the preliminary agreement is com- plete with respect to the essential terms of the intended final agreement or, at the very least, because courts are reasonably able to infer or supply any missing essential terms in the pre- liminary agreement.86 In other words, the absence of non-es- sential terms that might have appeared in a final agreement does not preclude a Type I preliminary agreement from being as binding as an intended final agreement, even though the final formal agreement is never completed.87 If a preliminary agreement falls short of a binding Type I preliminary agreement, the agreement is not binding as to the contemplated final arrangement, but it may nevertheless en- tail an enforceable contractual obligation to negotiate in good faith to resolve any open terms relating to a final agreement.88 this framework today.”). TIAA’s taxonomy is widely accepted. See Schwartz & Scott, supra note 16, at 664 n.7 (noting in particular TIAA’s pervasive influence with respect to the emergence of Type II agreement jurispru- dence). 84 See TIAA, 670 F. Supp at 497–98. 85 See Shann v. Dunk, 84 F.3d 73, 77 (2d Cir. 1996) (“[A] Type I [agree- ment] is where all essential terms have been agreed upon in the preliminary contract, no disputed issues are perceived to remain, a further contract is envisioned primarily to satisfy formalities.”). 86 Id. 87 See Vacold LLC v. Cerami, 545 F.3d 114, 124 (2d Cir. 2008) (“Agree- ments of this type render the parties ‘fully bound to carry out the terms of the agreement even if the formal instrument is never executed.’” (quoting Adjustrite Sys. v. GAB Bus. Servs., 145 F.3d. 543, 548 (2d Cir. 1998))). 88 See Brown v. Cara, 420 F.3d 148, 151 (2d Cir. 2005) (“[W]hile [a Type II] preliminary agreement is not enforceable as to the ultimate contractual goal contemplated in the document, it is enforceable as an obligation be- tween the parties to negotiate in good faith within the framework of the agreement.”); see also Cox Commc’ns v. T-Mobile US, Inc., 273 A.3d. 752, No. 1] CONTRACT REALISM AND FORMALISM 133 This represents the second category of binding preliminary agreement (i.e., so-called Type II).89 Such an agreement, though imposing a binding obligation, does not compel the eventual achievement of a binding final agreement, but rather merely requires each party to act in good faith to resolve open issues.90 Breach of an obligation to negotiate in good faith typ- ically affords recovery for less damages than for breach of a Type I agreement for the obvious reason that the outcome of any such negotiations is uncertain.91 Unlike either Type I or Type II preliminary agreements, an agreement to enter into discussions regarding a possible transaction is too general to be binding.92 These preliminary agreements are in the form of agreements to agree.93 They merely reflect a desire to enter into a binding contract in the future (e.g. a definitive agreement), but are not themselves binding because they lack essential terms necessary to an agreement’s enforcement, definite mutual obligations of 761 (Del. 2022) (“Type II agreements ‘do[ ] not commit the parties to their ultimate contractual objective but rather to the obligation to negotiate the open issues in good faith[.]’” (quoting SIGA Techs., Inc. v. PharmAthene, Inc., 67 A.3d 330, 349 & n.82 (Del. 2013) (SIGA I))). 89 See Shann, 84 F.3d at 77 (“Type II is where the parties recognize the existence of open terms, even major ones, but, having agreed on certain im- portant terms, agree to bind themselves to negotiate in good faith to work out the terms remaining open. In Type II agreements, the parties do not bind themselves to conclude the deal but only to negotiate in good faith to- ward conclusion within the agreed framework”). 90 Id. 91 See, e.g., Goodstein Constr. Corp. v. City of New York, 604 N.E.2d. 1356, 1360–62 (N.Y. 1992); Copeland v. Baskin Robbins U.S.A., 117 Cal. Rptr. 2d 875, 885 (Cal. Ct. App. 2002). But see SIGA Techs. v. PharmAthene, Inc., 132 A.3d 1108, 1131 (Del. 2015) (SIGA II) (explaining that expectation damages for a Type II agreement are established with reasonable certainty, “[w]here the injured party has proven the fact of damages – meaning that there would have been some profits from the contract,” even though proof of the amount of damages is established with “less certainty”). 92 See Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher, 417 N.E.2d 541, 543 (N.Y. 1981) (“Dictated by these principles, it is rightfully well set- tled in the common law of contracts in this State that a mere agreement to agree, in which a material term is left for future negotiations, is unenforce- able.”). 93 Id. 134 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 promise or performance,94 and ascertainable standards to in- form courts how to fill gaps that exist.95 This framework has been widely applied in decisions in the Second Circuit and other jurisdictions.96 Not surprisingly, the Second Circuit resorted to a multi-factor test that draws heav- ily on its multi-factored approach used to determine enforcea- bility of informal agreements in complex business negotia- tions.97 In the formal preliminary dealing context no less than informal contexts, “intention [to] create binding obligations” figures prominently.98 In the case of informal agreements, as noted, courts have gleaned intent not to be bound from the totality of facts and circumstances.99 In Type I agreement cases, courts appear to give greater scrutiny to what has been actually expressed by the parties. In addition, in such cases, the third factor, namely resolution of all essential terms, can be framed more concretely since the text of the preliminary agreement may give greater insight into the issues that re- main to be decided.100 94 See Tchrs. Ins. & Annuity Ass’n of Am. v. Trib. Co., 670 F. Supp. 491, 497 (S.D.N.Y. 1987) (“[I]f the agreement is too fragmentary, in that it leaves open terms of too fundamental importance, it may be incapable of sustain- ing binding legal obligation.”); Murphy v. Inst. of Int’l Educ., 32 F.4th 146, 151 (2d Cir. 2022) (“[T]here is a strong presumption against finding binding obligation in agreements which include open terms, call for future ap- proval[,] and expressly anticipate future preparation and execution of con- tract documents.” (quoting TIAA, 670 F. Supp. at 499, as quoted in Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 73 (2d Cir. 1989))). 95 See, e.g., Adjustrite Sys. v. GAB Bus. Servs., 145 F.3d 543, 545 (2d Cir. 1998) (affirming summary judgment for defendant that signed two- page agreement was merely an agreement to agree where many open terms remained to be negotiated). 96 See, e.g., Murphy, 32 F.4th 146; Adjustrite Sys., 145 F.3d 543; Vacold LLC v. Cerami, 545 F.3d 114 (2d Cir. 2008). 97 See Vacold, 545 F.3d at 124 n. 2 (providing multi-factor tests for Type I and Type II agreements). 98 Id. at 124 (quoting Adjustrite Sys., 145 F.3d at 548). 99 Id. at 127. 100 Id. at 124. No. 1] CONTRACT REALISM AND FORMALISM 135 A similar multi-factored approach is employed to deter- mine whether a Type II agreement exists.101 The relevant test uses five rather than four factors102 and focuses on a binding obligation to negotiate in accordance with an agreed upon framework rather than a binding commitment to an ultimate contractual objective.103 In addition to a new factor—the con- text of the negotiations—the other factors, some of which are modified, are evaluated from a different vantage point. The first factor focuses on an affirmative intent to be bound to ne- gotiate rather than whether there has been an express reser- vation not to be bound.104 This reflects the undisputed aspect of the Type II agreements, namely that such agreements pre- suppose the contracting process is incomplete (i.e., further ne- gotiation in good faith is needed before there is a binding agreement as to the intended object of a final agreement). As a result, the existence of open terms is characteristic (i.e., well-defined unresolved terms to be negotiated must exist) whereas the existence of essential open terms is inimical to the requisite definiteness required for a binding Type I agree- ment.105 101 The multi-factored approach in this area, as in the case of formation with respect to informal and formal preliminary dealings that constitute final agreements, necessarily suffers from the inherent ex ante unpredicta- bility of a facts and circumstances type inquiry. See Klass, supra note 18, at 1481 (agreeing with criticism leveled by other scholars that multi-factored tests are imprecise in determining whether formal preliminary agreements are binding). 102 See Brown v. Cara, 420 F.3d 148, 157 (2d Cir. 2005) (“(1) . . . the language of the agreement; (2) the context of the negotiations; (3) the exist- ence of open terms; (4) partial performance; and (5) the necessity of putting the agreement in final form, as indicated by the customary form of such transactions.”). 103 Id.; see also Vacold, 545 F.3d at124. 104 See Adjustrite Sys. v. GAB Bus. Servs., 145 F.3d 543, 548 (2d Cir. 1998) (“[Type II] preliminary agreement[s] . . . do[] not commit the parties to their ultimate contractual objective but rather to the obligation to nego- tiate the open issues in good faith in an attempt to reach the . . . objective within the agreed framework.” (quoting Tchrs. Ins. & Annuity Ass’n of Am. v. Trib. Co., 670 F. Supp. 491, 498 (S.D.N.Y. 1987))). 105 Compare id., with SIGA Techs. v. PharmAthene, Inc., 132 A.3d 1108, 1141 (Del. 2015) (SIGA II) (“Type I preliminary agreements are . . . 136 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 Type II agreements introduce two additional contractual issues beyond the basic formation issue. First, assuming there is a binding Type II agreement, how should courts determine whether one or the other party has breached its obligation to negotiate in good faith? The issue of breach is not an easy one, since, as courts have recognized, even good faith negotiations may not culminate in a final agreement.106 Thus, parties re- tain wide latitude in bargaining with respect to unresolved is- sues. However, the obligation to negotiate in good faith does carry with it, at the very least, certain negative covenants that “bar a party from renouncing the deal, abandoning the nego- tiation, or insisting on conditions that do not conform to the preliminary agreement.”107 In other words, even though Type II agreements do not ensure a final agreement, they carry sub- stantive bite in locking in certain essential terms of the final agreement that have already been agreed to.108 Second, if there is a breach of a Type II agreement, what is the appropriate measure of damages? In theory, any recovery should be less than recovery for a breach of Type I preliminary agreements because the obligation of the former is greater than the latter (i.e., a final agreement versus a still-to-be com- pleted negotiation). The general problem in Type II scenarios ‘created when the parties agree on all the points that require negotiation (including whether to be bound) but agree to memorialize their agreement in a more formal document.’” (quoting Vacold, 545 F.3d at 124)). 106 See, e,g., Empro Mfg. Co. v. Ball-Co Mfg., Inc., 870 F.2d. 423 (7th Cir. 1989) (holding parties to a Type II agreement not in breach merely be- cause no final agreement was reached); Venture Assocs. v. Zenith Data Sys., 987 F.2d 429 (7th Cir. 1993) (holding that a binding Type II agreement ex- isted, but remanding the matter for trial to determine whether the defend- ant breached its duty to negotiate in good faith). 107 TIAA, 670 F. Supp. at 498; see also SIGA Techs., Inc. v. Phar- mAthene, Inc., 67 A.3d 330, 346–47 (Del. 2013) (SIGA I) (affirming Chan- cery court determination that party breached duty to negotiate in good faith by insisting on “drastically different and significantly more favorable” terms than set forth in term sheet attached to preliminary agreement). 108 Of course, even this generalization can be overstated. As the obliga- tions with respect to further negotiation become more diffuse, one might encounter a horse-trading situation in which someone wants to renegotiate a settled essential term in return for concessions on as yet undetermined essential terms. No. 1] CONTRACT REALISM AND FORMALISM 137 lies in gauging what the resulting contract would have pro- vided had the negotiations proceeded in good faith. Common law principles generally preclude recovery of expectation dam- ages where the amount cannot be ascertained with “reasona- ble certainty.”109 As a result, in most jurisdictions considering a breach of a Type II duty to negotiate in good faith, expecta- tion damages are foreclosed and recovery is limited to reliance damages. Delaware is notable exception in this regard,110 alt- hough other courts have acknowledged the possibility of ex- pectation damages in such cases.111 Like contract surprise involving informal preliminary dealings, uncertainty as to applicable measures of damages (not so much the underlying facts relating to any calculation) for Type II breaches underscores one aspect of the contract surprise puzzle for formal preliminary agreements. The ex- tent of contractual damages involving a breach of good faith negotiation duty is murky at best, but such uncertainty is readily avoidable in the acquisition context through formal re- quirements relating to damages.112 The Delaware Supreme Court’s decision in SIGA Technol- ogy/PharmAthene litigation illustrates the practical effects of this uncertainty. The litigation arose out of a failed merger agreement between SIGA Technologies, the developer of an innovative drug therapy to treat smallpox, and PharmAthene, Inc., another biodefense research and development company with the funding to support this development.113 The merger 109 RESTATEMENT (SECOND) OF CONTRACTS § 352 (AM. L. INST. 1981). 110 Compare SIGA II, 132 A.3d at 1131, with Goodstein Constr. Corp. v. City of New York, 604 N.E.2d. 1356, 1360–62 (N.Y. 1992) (finding reliance damages proper remedy for breach of Type II agreement duty to negotiate in good faith and rejecting expectation damages as remedy because it would effectively make the preliminary agreement a final binding agreement); Copeland v. Baskin Robbins U.S.A., 117 Cal. Rptr. 2d 875, 885 (Cal. Ct. App. 2002) (similarly finding reliance damages as proper remedy and rejecting expectation damages for lack of knowing the existence or ultimate terms of final binding agreement). 111 See Fairbrook Leasing, Inc. v. Mesaba Aviation, Inc., 519 F.3d 421, 429 (8th Cir. 2008). 112 SIGA I, 67 A.3d at350-51; SIGA II, 132 A.3d at 1131. 113 See SIGA I, 67 A.3d at 334–39. 138 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 agreement had two supplementary features of great im- portance to the transaction: (i) a bridge loan from the prospec- tive buyer prior to closing which served as a financial lifeline for the seller, and (ii) a contingent good faith obligation to ne- gotiate a licensing agreement that backstopped the merger agreement, if for any reason the merger agreement was ter- minated.114 A License Agreement Term Sheet (the so-called “LATS”) appended to the merger agreement set forth the li- cense’s material terms and further stated that the terms were “non binding.”115 SIGA terminated the merger agreement af- ter the agreement’s drop dead date passed because the SEC failed to clear the requisite proxy materials necessary for a shareholder vote.116 SIGA’s actions appeared commercially self-interested in light of highly positive developments with respect to the drug therapy which vastly improved the com- pany’s prospects (thereby, making the company more valuable than at the time of the original agreement’s execution).117 Thereafter, SIGA balked at negotiating a licensing agreement in accordance with the terms of the LATS and instead pushed for a substantially more favorable arrangement.118 In its initial decision in the case, the Delaware Supreme Court affirmed a judgment that SIGA breached its duty to ne- gotiate in good faith.119 Although the LATS terms were non- binding, the court agreed with the lower court that incorpora- tion of the term sheet constrained SIGA’s behavior to negoti- ate in good faith.120 Because SIGA failed to honor these con- straints, it breached its duty to negotiate in good faith.121 The Supreme Court, however, reversed the chancery court’s deter- mination as to remedy.122 Given the chancellor’s finding that SIGA had preliminarily agreed to negotiate in good faith, and 114 Id. at 336–38. 115 Id. at 335–36. 116 Id. at 339, 346–347. 117 Id. 118 Id. at 339–40, 346–347. 119 Id. at 343–44, 347. 120 Id. at 345–46. 121 Id. at 347. 122 Id. at 351–52. No. 1] CONTRACT REALISM AND FORMALISM 139 that but for its bad faith, a license agreement would have been completed, the Supreme Court reasoned that the non-breach- ing party was entitled to recover expectation damages.123 The Supreme Court’s holding in SIGA I left open a signifi- cant issue regarding determination of expectation damages: determining lost profits with reasonable certainty rather than mere speculation. The reasonable certainty requirement nor- mally has precluded expectation damages under the prevail- ing law in most state jurisdictions.124 In its second decision after remand, a majority of the Delaware Supreme Court (over a vigorous dissent) affirmed the chancery court’s award of ex- pectation damages and elaborated on its views of an expecta- tion damages remedy for breach of a duty to negotiate under a preliminary acquisition agreement.125 Specifically, the court added considerable nuance to the traditional reasonable cer- tainty requirement. While adhering to a traditional reasona- ble certainty requirement as to the fact of damages (i.e., that there would be some quantum of lost profit), the court ex- pressly embraced a relaxed requirement in determining the magnitude of such lost profits, including the willfulness of the 123 Id. at 350–51 (“We now hold that where the parties have a Type II preliminary agreement to negotiate in good faith, and the trial judge makes a factual finding, supported by the record, that the parties would have reached an agreement but for the defendant’s bad faith negotiations, the plaintiff is entitled to recover contract expectation damages.”). 124 See, e.g., Goldstein Constr. Corp. v. City of New York, 604 N.E.2d. 1356, 1360–62 (N.Y. 1992); Copeland v. Baskin Robbins, 117 Cal. Rptr. 2d 875, 883 (Cal. Ct. App. 2002). 125 SIGA Tech. v. PharmAthene, Inc., 132 A.3d 1108, 1130 (Del. 2015) (“[T]he standard remedy for breach of contract is based upon the reasonable expectations of the parties ex ante. This principle of expectation damages is measured by the amount of money that would put the promisee in the same position as if the promisor had performed the contract. Expectation dam- ages thus require the breaching promisor to compensate the promisee for the promisee’s reasonable expectation of the value of the breached contract, and, hence, what the promisee lost” (quoting Duncan v. Theratx, Inc., 775 A.2d 1019, 1022 (Del. 2001)). But see id., 132 A.3d at 1140 (Valihura, J., dissenting) (“Ordinarily, expectation damages are not awarded for the breach of a preliminary agreement due to difficulties in establishing such damages with sufficient certainty.”). 140 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 breach and even post-breach evidence.126 While the majority opinion offers justification for its approach, the more relevant consideration for purposes here is its expansion of the scope of uncertainty in calculating damages for breach of a Type II agreement. SIGA II itself illustrates how numerous factors at various stages of complex negotiations relating to an agreement to ne- gotiate introduce substantial uncertainty in the ex ante pre- diction of liability and resulting damages. While courts ex post may have very good reasons for imposing one measure of dam- age remedy over another, it seems dubious that parties can reliably predict ex ante which measure of damages will apply. Fundamental uncertainty regarding the appropriate measure of damages in this context provides some support for imposing a formal contracting requirement (as argued in Section IV.C) designed to diminish ex ante contractual opacity relating to the creation of and scope of such obligations. In short, formation opacity figures as a concern no less pressing as to formal preliminary agreements than as to in- formal agreements. As stated in TIAA, “[a] primary concern for courts in such disputes is to avoid trapping parties in sur- prise contractual obligations that they never intended.”127 The opacity problem for preliminary agreements is whether both parties accurately distinguish ex ante between the differ- ent types of binding and non-binding preliminary agreements. If they do not, then preliminary agreements will lead to con- tract suprise just as informal agreements do, albeit surprise of a different sort. Although both contracting parties have an ex ante under- standing that they have formally entered a preliminary 126 SIGA II, 132 A.3d at 1131 (“Where the injured party has proven the fact of damages—meaning that there would have been some profits from the contract—less certainty is required of the proof establishing the amount of damages. In other words, the injured party need not establish the amount of damages with precise certainty ‘where the wrong has been proven and injury established.’”). 127 Tchrs. Ins. & Annuity Ass’n v. Trib. Co., 670 F. Supp. 491, 497 (S.D.N.Y. 1986); accord Murphy v. Inst. Int’l. Educ., 32 F.4th 146, 151 (2d Cir. 2022); Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 72 (2d Cir.1989). No. 1] CONTRACT REALISM AND FORMALISM 141 agreement, they may not share the same understanding as to the type of preliminary agreement they have entered. Opacity arises in the case of binding preliminary agreements in that an agreement denominated as preliminary may be treated as an enforceable final agreement or as an agreement requiring negotiation in good faith. Because judicial analyses of these agreements turn on multi-factor tests similar to that used to analyze whether an informal agreement is binding, the par- ties lack bright-line certainty ex ante regarding the agree- ment’s contractual consequences for the parties. 128 Even in the case of agreements to agree, it is not always clear that what one party regards as an agreement to agree is nothing more. The common law’s multi-factor test accords great significance to the language of the preliminary agree- ments, but its application is frequently not resolved by express language, but by interpretive inferences regarding its signifi- cance.129 In short, although great weight is accorded to the language, it frequently falls short of shared certainty among the parties’ subjective intentions. Notwithstanding the com- mon law’s preference for standards that balance facts and cir- cumstances, perhaps a case can be made that, in certain cir- cumstances, formal requirements regarding the parties’ express language should be dispositive as to the contractual status of preliminary agreements. It is sufficient for purposes at this point in the argument to note that the formation opac- ity that arises in informal agreements has its corollary in the case of formal preliminary agreements: the contractual status of any formal preliminary agreement will likely be shrouded 128 In this regard, Type I agreements are analogous in some respects to informal agreements inferred from the conduct of the parties. At least one or the other participant in the Type I agreement almost surely may not fully appreciate the contractual implications of the Type I formal preliminary agreement. Otherwise, they would note regard it as merely “preliminary.” Accordingly, like informal agreements, Type I preliminary agreements are binding final agreements as to the Type I agreement’s ultimate intended objective. Thus, actual intent, as in the case of informal agreements, may not be dispositive in determining whether a binding final agreement has come into existence. 129 See RESTATEMENT (SECOND) OF CONTRACTS § 33 cmt. a & b (AM. L. INST. 1981). 142 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 in opacity in which one or the other contracting party may be- lieve that the signed agreement did not create any binding ob- ligation, or that if one did, it is unclear what type of obligation they have assumed. * * * While TIAA’s original classification scheme for formal pre- liminary agreements has proven influential, it has also elic- ited reservations both judicial130 and academic.131 This article advances a separate challenge: even if otherwise useful in many contexts, the scheme does not address the normative is- sue of whether an alternative contracting regime (i.e., the im- position of formal requirements) should be used to legisla- tively supplant the TIAA framework in the context of acquisition agreements. Obviously, Judge Leval in TIAA did not, and courts generally do not, have the luxury of formulat- ing tailored legislative solutions. Thus, the many judicial de- cisions that have considered these issues, and largely adopted or acquiesced to the TIAA approach, do not reflect any judg- ment about possible legislative alternatives, such as the one advanced here. As noted, TIAA’s approach, and indeed any al- ternative common law approach, shares a common contesta- ble assumption: a uniform approach to formal preliminary agreements should be pursued in all contracting contexts. Perhaps that is the problem. Part III explores the possibility that a different regime may be warranted in the contexts of corporate acquisition arrangements based on different 130 See IDT Corp. v. Tyco Grp., 918 N.E.2d 913, 915 n.2 (N.Y. 2009) (“While we do not disagree with the reasoning in federal cases [such as TIAA], we do not find the rigid classifications into ‘‘Types’ useful.”). The qualification from New York’s highest court is notable since TIAA involved the application of New York contract law, reflecting a prediction by federal courts of the correct statement of New York law. TIAA was subsequently quoted approvingly in a later phase of the same case. See IDT Corp. v. Tyco Grp., 15 N.E.3d 329, 332 (N.Y. 2014). 131 See, e.g., Schwartz & Scott, supra note 16, at 667. One caveat should be noted. The Schwartz and Scott critique is explicitly directed at TIAA’s Type II analysis. Id. at 675 (explicitly noting different preliminary dealing scenarios and limiting the critique to only one of the scenarios). No. 1] CONTRACT REALISM AND FORMALISM 143 features informing the costs and benefits of particular con- tracting requirements in the context of corporate acquisitions. C. The Relevance of Confounding Considerations in Contract Law and Corporate Law Affecting Creation of Binding Obligations As previously discussed, formation opacity is a potential effect of the common law’s primary reliance on inferences from contracting parties’ observed behavior (i.e., parties’ “manifes- tations”) to determine whether a contract has been formed.132 Not surprisingly, as discussed below, contract strategies to counter the common law’s perceived potential to mistakenly infer contract formation emerged whereby one or both parties sought to prevent formation absent an intent to contract ex- pressed in a formal agreement. Two formation prevention de- vices are reflected in pre-commitment negotiation or drafting strategies: (i) a disclaimer of intent to contract,133 and (ii) ex- press language contemplating memorialization of a fuller ex- pression of any final agreement.134 However, as discussed be- low, the common law constrains the ability of contracting parties to prevent contract formation through such pre-com- mitment devices.135 At the very least, the governing standards are notoriously fuzzy in practice. Another formation preven- tion device is embodied in statutory writing formalities, such as the Statute of Frauds or the U.C.C.’s approach to written modifications, which operate outside of the common law.136 Finally, corporate acquisition practice itself, aside from or in conjunction with formation prevention contract strategies, has evolved over the last forty years to provide additional sources of incremental protections against inadvertent 132 See supra notes 23–334 and accompanying text. 133 See RESTATEMENT (SECOND) OF CONTRACTS § 21 (AM. L. INST. 1981) (providing that disclaiming intent to be bound may prevent formation of contract). 134 See RESTATEMENT (SECOND) OF CONTRACTS § 27 (AM. L. INST. 1981) (explaining that circumstances may show agreements to be non-binding preliminary negotiations when contemplating memorialization). 135 See infra Sections III.C.1-.2. 136 See infra Section III.C.3. 144 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 contract formation.137 Thus, as discussed below, even though the effectiveness of these strategies is uneven, their potential availability is relevant in understanding why a more robust form of pre-commitment mechanism may be desirable to pre- vent inadvertent contract formation in the context of corpo- rate acquisitions. This subsection reviews the basic contours of contract anti-formation principles and corporate practice developments that discourage inadvertent contract formation. 1. Disclaiming Intent Disclaiming intent to be bound is a commonly employed device to forestall formation of contracts during negotiations but is hardly dispositive in all cases. For example, in rejecting the notion that real or apparent intention is legally necessary or sufficient to make an agreement legally binding, the Re- statement indicates that an explicit manifestation not to be bound “may prevent the formation of a contract.”138 There is obviously some comfort for contracting parties presented by recognition of this prophylactic principle. However, there are obvious cautionary aspects as well. The Restatement’s use of the modal verb “may” indicates that any protection is a possi- ble outcome and not dispositive. This principle is reflected in the analysis of preliminary dealings discussed above.139 The Second Circuit’s multi-fac- tored test incorporates disclaimer as the first element of the test. However, that discussion also highlights the uncertainty of disclaimer. For example, it is not clear whether disclaimer must be an express opt out or can also be inferred from the facts and circumstances. Moreover, problems can arise if a dis- claimer must be reiterated at each stage of the negotiation. Otherwise, the subsequent dealings (communications) short of an executive definitive agreement could be construed as a changed intent of the parties to move directly to a binding 137 See infra Section III.C.4. 138 RESTATEMENT (SECOND) OF CONTRACTS § 21 (AM. L. INST. 1981). 139 See supra text accompanying notes 35–48 (discussing Second Cir- cuit’s multi-factored approach to analyze enforceability of informal agree- ments). No. 1] CONTRACT REALISM AND FORMALISM 145 agreement, notwithstanding the fact that an executed agree- ment has not be attained. This problem is exemplified in cases involving unexecuted agreements.140 As discussed previously, some courts find an agreement in the face of an unexecuted agreement, while others have not.141 The seemingly divergent results reflect two contrasting perspectives: an unsigned writ- ten agreement evidences that the prior negotiations failed to culminate in a final binding agreement, or an unsigned agree- ment evidences a binding informal agreement among the par- ties that represents an inability of the parties to memorialize the agreement that was struck. While not always effective, a disclaimer can be very effec- tive in many contexts and this best exemplified by the practice relating to “TINALEA” clauses.142 One contracts scholar has indicated this device is typically effective.143 Indeed, the use of TINALEA clauses in the world of M&A practice is common- place and undoubtedly this is true the more explicit and 140 See supra note 46 (noting courts’ application of multi-factored test to unexecuted agreements with unpredictable results). 141 Id. 142 See Klass, supra note 18, at 1466. A TINALEA—This Is Not a Le- gally Enforceable Agreement—in some form is common to many types of formal preliminary agreements such as a letter of intent or memorandum of understanding. Id. 143 Id. at 1466-67 & n.82 (“In practice . . . U.S. courts refuse enforce- ment” in TINALEA clause commercial cases, although such clauses will not “always suffice to avoid legal liability.”). Of course, TINALEA clauses pre- suppose written communication of some sort between the contract parties, such as a preliminary agreement, draft, or cover letter. In addition, Klass’s assertion refers to situations where a TINALEA clause appears in a docu- ment that a litigant seeks to enforce. However, courts have employed anal- ogous forms of analysis in some situations to preclude formation where a litigant seeks to enforce a subsequent putative agreement arising from pre- liminary dealings after the original communications containing the TINALEA clause. See also, e.g., Chalker Energy Partners III, LLC v. Le Norman Operating LLC, 595 S.W.3d 688 (Tex. 2020) (holding that a No Ob- ligation clause in preliminary agreement functioned to make execution of a definitive agreement a condition precedent to enforcement of any transac- tion obligations). 146 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 emphatic the language of the disclaimer.144 Nevertheless, there are obvious instances where the use of a TINALEA qual- ifier does not prevent contract formation.145 The fundamental limiting factor for TINALEA clauses is that they speak at a specific point in real time and do not preclude subsequent ac- tions by the contracting parties that create a contractual obli- gation, notwithstanding a preexisting TINALEA clause. In this respect, the efficacy of TINALEA clauses can devolve into a situation analogous to use of a “no oral modifications” clause 144 One highly experienced deal practitioner offered the following model language for an acquisition TINALEA: The terms set forth in this letter do not constitute all of the essential terms upon which agreement must be reached by the parties in order to form a binding and enforceable con- tract, and no binding and enforceable rights or obligations in favor of either party hereto are intended to be created hereby. No correspondence, oral statements or course of con- duct between the parties shall alter the non-binding nature of this letter or the parties’ dealings, and either party shall be free at any time to terminate discussions or negotiations for any reason or no reason in its sole discretion (and neither party shall have any obligation to initiate or continue nego- tiations on any basis). A binding and enforceable contract between the parties shall only be created if a definitive writ- ten agreement is signed by both parties (and the execution and delivery of such a definitive written agreement by both parties shall be an express condition precedent to the for- mation of any contract between the parties, and the terms of any such contract shall be limited to the terms specifically set forth in such definitive written agreement. Glen D. West, Beware the Type II Preliminary Agreement, WEIL GLOBAL PRI- VATE EQUITY WATCH (Mar. 15, 2022), https://privateequity.weil.com/glenn- west-musings/beware-the-type-ii-preliminary-agreement/ [https://perma.cc/RBU9-FNNR]. 145 See, e.g., SIGA Tech., Inc. v. PharmAthene, Inc., 67 A.3d 330, 343 (Del. 2013) (SIGA I); (holding that though the attached licensing agreement contained a “not binding” notation, it nevertheless had binding effect as a preliminary agreement to negotiate in good faith); Cambridge Capital LLC v. Ruby Has LLC, 565 F. Supp. 3d 420, 444 (S.D.N.Y. 2021) (holding that a letter of intent containing a section captioned “Non-Binding Agreement” was a binding preliminary agreement to negotiate in good faith stated a cause of action.). No. 1] CONTRACT REALISM AND FORMALISM 147 (outside of Section 2 of the U.C.C.), which is generally recog- nized as unenforceable.146 2. Contemplating Memorialization A second common law principle relates to the significance of prior communications that contemplate memorialization of a definitive executed agreement. In comparison to an explicit disclaimer of intent to contract, contemplated memorializa- tion has never been regarded as having nearly the force of an explicit disclaimer of intent, which itself, as noted, may not itself prove dispositive. The Restatement (Second) affirms the limited significance of a memorialization-contemplated quali- fier in formal preliminary agreements where the parties ulti- mately fail to complete executed definitive agreement.147 Un- like the disclaimer of intent which “may prevent formation of a contract,”148 the Restatement rejects a manifestation con- templating memorialization of an agreement as overcoming sufficient manifestations of mutual assent, while noting “the circumstances may show that the agreements are preliminary negotiations.”149 This is illustrated by the ambivalence that courts attach to language that is “subject to” execution of a final agreement.150 Nevertheless, it is not unreasonable to be- lieve in such circumstances that one of the contracting parties 146 See infra notes 156–59 and accompanying text (discussing differing approaches to “no oral modification” clauses under common law and U.C.C.). 147 RESTATEMENT (SECOND) OF CONTRACTS § 27 (AM. L. INST. 1981). 148 RESTATEMENT (SECOND) OF CONTRACTS § 21 (AM. L. INST. 1981). 149 RESTATEMENT (SECOND) OF CONTRACTS § 27 (AM. L. INST. 1981). 150 See Glenn D. West, Contracting Accidentally Through Preliminary Agreement – A Writing “Subject to Contract” May or May Not Be a Contact, WEIL GLOBAL PRIVATE EQUITY WATCH (Mar. 8, 2017), https://priva- teequity.weil.com/europe/contracting-accidentally-preliminary-agree- ments-writing-subject-contract-may-may-not-contract/ [https://perma.cc/KH6V-PVD2] (noting divergent judicial approaches be- tween the U.S. ambivalent approach and England where “subject to con- tract” language is typically deemed sufficient to preclude formation of a binding agreement.). See also Texaco, Inc. v. Pennzoil, Co., 729 S.W.2d 768, 789–90 (Tex. App. 1987) (finding use of “subject to” in press release a part of the surrounding facts and circumstances regarding, but not necessarily conclusive of, the parties’ intent not to be bound). 148 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 may mistakenly subjectively believe that no binding agree- ment exists until a final agreement is reduced to writing. The other party (along with courts and contract scholars) may rea- sonably believe that a binding obligation exists based on the existence of independent manifestations of assent, notwith- standing the fact that parties contemplated reducing any final agreement to writing. There is alternative contractual argument that adds con- tractual teeth to preliminary agreement statements that indi- cate an agreement is subject to execution of a final agreement. Some courts have, in limited circumstances, viewed a state- ment of this sort as a condition to creation of a final agreement that is binding (i.e., a condition subsequent to the preliminary agreement and precedent to a binding final agreement).151 While such an approach has the practical effect of limiting the principle set forth in Restatement (Second) §27, the alterna- tive argument will hardly lend itself to a predictable outcome from a business planning perspective. First, this approach has only been rarely embraced by courts. Second, even if adopted, it is subject to the same problems of an express disclaimer to contract discussed above: such a disclaimer can be modified by waiver of the condition or by subsequent oral statement.152 151 See Energy Transfer Partners, L.P. v. Enterprise Products Part- ners, L.P., 593 S.W.3d 732, 740-41 (Tex. 2020) (“An agreement not to be partners unless certain conditions are met [such as, in the case presented, conditions requiring execution of a definitive agreement and receipt of each board’s approval] will ordinarily be conclusive on the issue of partnership formation [i.e., a binding agreement forming a partnership] as between the parties,” notwithstanding a statutory default in which “the parties’ intent with respect to the creation of a partnership is just one factor to be weighed with . . . others.”); see also, Atlantic Terra Cotta Co. v. Chesapeake Terra Cotta Co., 113 A. 156, 158 (Conn. 1921) (reiterating that offers conditioned on the execution of a final agreement for acceptance create a nonwaivable condition for creation of binding obligation). 152 See Energy Transfer Partners, 593 S.W.3d at 741 (requiring an ex- press waiver of a written final agreement condition). See infra note 157 (not- ing case law discussing oral waivers of no-oral-modification clauses). No. 1] CONTRACT REALISM AND FORMALISM 149 3. Statutory Formalities Statutory formalities are another well-known means of precluding inadvertent contract formation. Statutory defaults are generally more effective than contractual pre-commitment anti-formation strategies, but the existing array of statutory devices are hardly foolproof and operate selectively. Of course, statutory writing formalities are common fodder in the first- year law canon, such as the statute of frauds or the U.C.C.’s enablement of limitations on modification other than by means of writing. Statute of frauds enjoys a checkered repu- tation as an example of a statutory writing formality that op- erates in an erratic fashion that rightly causes most commen- tators to wince.153 Statute of frauds requirements, strictly speaking, are different from a signed written agreement re- quirement envisioned by the proposal here. Notably, an agree- ment satisfies a statute of fraud requirement with a signed writing evidencing the agreement (which may include a signed agreement but also other signed writings),154 rather than exclusively by means of a signed agreement requirement as proposed below. However, and more importantly, the cate- gories of agreements subject to statute of frauds requirements are commonly viewed as indiscriminately broad (encompass- ing many circumstances where informal contracting is the norm) and, therefore, the application of the statute’s require- ment is frequently viewed as arbitrary and unfair.155 Indeed, this aspect of the statute has fueled judicial skepticism toward liberal enforcement, and encouraged both judicial and legisla- tive exceptions to minimize the perceived shortcoming of stat- ute of fraud requirements. The SAAR+ proposal discussed be- low is far different from a general statute of fraud 153 See generally Joseph M. Perillo, The Statute of Frauds in the Light of the Functions and Dysfunctions of Form, 43 FORDHAM. L. REV. 39 (1974); Michael Braunstein, Remedy, Reason, and the Statute of Frauds: A Critical Economic Analysis, 1989 UTAH L. REV. 383 (1989). 154 See, e.g., Crabtree v. Elizabeth Arden Sales Corp, 110 N.E.2d 551 (N.Y. 1953). 155 See, e.g., C.R. Klewin, Inc. v. Flagship Properties, Inc., 600 A.2d 772 (Conn. 1991). 150 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 requirement in that compliance is both more stringent and more targeted. It is more stringent since the SAAR+ formality actually requires a signed agreement. It is also more targeted in that it would apply only to acquisition agreements (as de- fined in the model statute). This limitation reflects the judg- ment that writing requirements of the SAAR+ sort should be used sparingly for well-defined contracting contexts rather than as a general default. A closer analogy to the type of formal writing requirement envisioned by the SAAR+ proposal below is U.C.C. 2-209(2), a provision that statutorily enables parties to a commercial con- tract to require that subsequent modifications be amended only in writing.156 In this respect, the U.C.C. rejects the com- mon law approach which deems “no-oral-modification” clauses ineffective because they can be superseded by subsequent con- tracting behavior that evidences an intent to override no-oral- modification limitations.157 In contrast, the U.C.C.’s statutory 156 See U.C.C. § 2-209(2) (AM. L. INST. & UNIF. L. COMM’N 2022) (“A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as be- tween merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.”); see John E. Murray Jr., The Modification Mystery: Section 2-209 of the Uniform Commercial Code, 32 VILL. L. REV. 1, 4 n.15 (1987) (illustrating no-oral-modifications clause in commercial contract: “[t]he parties to this agreement hereby agree and un- derstand that this agreement may not be modified or rescinded except by an agreement evidenced by a writing, signed by these parties or by their duly authorized agents. Any modification that fails to meet this signed writ- ing requirement shall be null and void.”). 157 See WILLIAM D. HAWKLAND, LINDA J. RUSCH & LARRY T. GAVIN, HAWKLAND’S UNIFORM COMMERCIAL CODE SERIES § 2-209:2 (1982 updated April 2024) (“Section 2-209(2) explicitly rejects the common law rule that the parties could not bind themselves to making changes to an existing con- tract only through execution of a signed writing.”). For examples of the com- mon law approach, see, e.g., Gaia House Mezz LLC v. State Street Bank and Trust Co., 720 F.3d 84, 90 (2d Cir. 2013) (applying New York law that “any written agreement, even one which provides that it cannot be modified ex- cept by a writing signed by the parties, can be effectively modified by a course of actual performance” (quoting Rosen Tr. v. Rosen, 386 N.Y.S.2d 491, 499 (1976), aff’d sub nom. Rosen’s Tr. v. Rosen, 371 N.E.2d 828 (1977))); U.S. Neurosurgical, Inc. v. City of Chicago, 572 F.3d 325, 332 (7th Cir. 2009) (“[U]nder Illinois law, the terms of a written contract can be modified by a No. 1] CONTRACT REALISM AND FORMALISM 151 rule gives maximum protection to freedom from contract con- siderations where private parties explicitly opt for such an ap- proach.158 In other words, the U.C.C. provides a means for parties to opt in writing for a robust bright-line pre-commit- ment device to prevent inadvertent contract modification and any resulting contract surprise.159 The key takeaway is that the common law imposes signifi- cant obstacles to negotiated strategies that pre-commit to lim- iting the parties’ ability to prevent contract formation in an- ticipation of a written definitive agreement. As noted above, the common law approach may make sense in many contract- ing contexts where the business exigencies of a given arrange- ment cannot necessarily keep up with the demands for an an- ticipated written agreement. Nevertheless, statutory provisions such as U.C.C. §2-209(2) illustrate situations subsequent oral agreement notwithstanding contractual language to the contrary.”). 158 See Murray, supra note 1566, at 3 (noting the purpose of U.C.C. Ar- ticle 2 is to reflect factual bargain notwithstanding common-law technicali- ties that permit formation on other grounds). Comment 3 to §2-209 specifi- cally identifies the need to protect contracting parties from false allegations of oral modifications, but could have alluded more generally to various is- sues, including purely benign considerations, that contribute to formation opacity that contracting parties may seek to avoid. What is significant is that the U.C.C. provision allows the parties to opt for heightened formality in formation in certain circumstances in lieu of formation opacity. U.C.C. § 2-209 cmt. 3 (AM. L. INST. & UNIF. L. COMM’N 2022). 159 Of course, U.C.C. §2-209 is not without its own problems as subsec- tion (4) appears to allow non-written “waivers” notwithstanding a no-oral- modification clause. Compare Nutrisoya Foods, Inc. v. Sunrich, LLC., 626 F. Supp. 2d 985, 991 (D. Minn. 2009) (“Minnesota courts thus look to party conduct to determine whether it is reasonable for one party to conclude, based on the conduct of the other party, that a provision of the contract has been waived.”) with Arizona Retail Sys., Inc. v. Software Link, Inc., 831 F. Supp. 759, 764 (D. Ariz. 1993) (holding that assent to modifications of con- tracts with NOM clauses “must be express and cannot be inferred merely from a party’s conduct in continuing with the agreement”). As one commen- tator has noted: “[t]he choice of the word waiver in subsection[] (4) . . . is unfortunate. Courts and commentators have expended too much discussion on the vagaries of waiver . . . .” Beth A. Eisler, Oral Modification of Sales Contracts Under the Uniform Commercial Code: The Statute of Frauds Problem, 58 WASH. U.L.Q. 277, 300 (1980). 152 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 where society has recognized that parties should have greater leeway to govern the contract formation process by opting into regimes that give effect to formal contracting requirements re- quiring a written agreement. Such a result seems appropriate in situations where the benefits of such a requirement will likely exceed the social costs of the unexpected adverse conse- quences of inadvertent agreements. 4. Developments in Corporate Practice Wholly apart from contract prevention strategies, corpo- rate practice has evolved in such a way that the risk of inad- vertent contract formation is less likely to occur.160 As noted, corporate lawyers can make use of precautionary contracting devices to prevent informal acquisition agreements and fully binding preliminary acquisitions agreements, even if such ef- forts may not be foolproof.161 In addition, however, develop- ments in corporate practice re-enforce inadvertent contract formation devices making, for example, something like a mod- ern day Texaco decidedly less likely. While no attempt is made to compile an exhaustive list of such developments, here are a few to at least illustrate the interaction between corporate practice and contract formation in the acquisitions context. First, there has been a significant evolution in transactions arising in seller-orchestrated sales processes following the emergence of Delaware’s Revlon principle.162 Because such 160 Nothing said here should be confused with the goal of deal certainty and contractual commitment in executed definitive acquisition agreements. See, e.g., Ann M. Lipton & Eric L. Talley, Twitter v. Musk: The “Trial of the Century” That Wasn’t, 40 DEL. L. 8, 14 (2022) (explaining that, regardless of larger issues of corporate social policy, the case “seems like a resounding victory confirming contractual commitments”). 161 See supra notes 142–44 and accompanying text (discussing wide- spread awareness and use of TINALEA qualifiers). 162 Revlon is the canonical case with respect to a board’s fiduciary duty in selling a company. The court colorfully compared the board to “auc- tioneers charged with getting the best price for the stockholders at a sale of the company.” Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) . While the “auctioneer” principle has become corporate lore, the Delaware Supreme Court has over the years refined its analysis in many respects to emphasize the flexibility of approaches in market checks No. 1] CONTRACT REALISM AND FORMALISM 153 processes are highly orchestrated, the seller controls the dy- namics of contract formation.163 Not only do all phases of a sales transaction offer ample opportunity to disclaim the bind- ing nature of the negotiation and bidding process, but the very notion of a sales process (aside from transaction’s negotiation being subject to an exclusivity provision) is powerful circum- stantial evidence that no party could reasonably expect that a contract has been formed until a winner has been named. In addition, two corporate law developments have rein- forced the seller’s ability to forestall formation of a definitive agreement during negotiations involving a public company, even in the absence of any explicit TINALEA disclaimer. The widespread use of shareholder rights plans (known as “poison pills”) gives the target company’s board considerable time to impede the ability of a would-be buyer to complete an acquisi- tion requiring a shareholder vote because the poison pill ena- bles the target board to effectively block completion of any to ensure that the board (and ultimately shareholders) are able to maximize shareholder value. See C & J Energy Servs., Inc. v. City of Miami Emps.’ Ret. Tr., 107 A.3d 1049, 1053 (Del. 2014). Nevertheless, a competitive sales processes remains a well-established method of maximizing shareholder value. See, e.g., Dell v. Magnetar Glob. Master Fund, 177 A.3d 1 (Del. 2017) (in an appraisal proceeding, describing the transaction’s underlying com- petitive sales process); RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816 (Del. 2015) (affirming the holding that an advisor aided and abetted in a breach of fiduciary duty in connection with structuring the described competitive sales process). 163 See Dean W. Sattler & Christina M. Sonageri, Bid Process Letters, THOMSON REUTERS PRACTICAL LAW, https://us.practicallaw.thomsonreu- ters.com/4-504-5237 [https://perma.cc/X9RA-2JU5] (describing practice of seller using formal bid process letter to control on auction sales process); GUHAN SUBRAMANIAN, NEGOTIAUCTIONS: NEW DEALMAKING STRATEGIES FOR A COMPETITIVE MARKETPLACE 126–27 (2010) (canvassing strategies and de- sign for sale of businesses with respect to negotiated sales, sale by auction, and specifically defining a new term “negotiauction” as “a dealmaking situ- ation in which competitive pressure is coming from both across-the-tale competition and same-side-of the-table competition”). The pervasive emer- gence of deal strategies is firmly recognized in the world of financial eco- nomics. See generally Audra L. Boone & J. Harold Mulherin, Is There One Best Way to Sell a Company? Auctions Versus Negotiations and Controlled Sales, 21 J. APPLIED CORP. FIN. 28 (2009); Robert G. Hansen, Auctions of Companies, 39 ECON. INQUIRY 30 (2001). 154 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 unsolicited transaction. The result necessarily removes some of the artificial time pressure in responding to an unsolicited takeover proposal—time pressure that may contribute to a messy contract formation process such as existed in the Tex- aco case. Another factor that has altered the negotiating dynamic in corporate acquisitions since Texaco relates to the significance of fiduciary-outs in corporate acquisitions.164 Today, fiduci- ary-outs are commonplace and typically form an explicit con- dition in formal definitive acquisition agreements.165 The en- forceability of informal agreements or formal preliminary agreements deemed to be final agreements would appear to be subject to the condition that a superior proposal has not inter- vened (again, a factor that was present in Texaco). Do developments in corporate practice eliminate the con- tracting problem of formation opacity at issue here? The an- swer is clearly no, though in some circumstances it probably 164 William T. Allen, Understanding Fiduciary Outs: The What and the Why of an Anomalous Concept, 55 BUS. LAW 653, 654 (2000) (“A fiduciary out typically provides that if some triggering event occurs (often the receipt of a defined “Superior Offer” and sometimes the receipt from the corpora- tion’s outside lawyers of an opinion to the effect that the board must as a matter of fiduciary duty do an act that the contract forbids or must not do an act the contract requires), then the doing of that act (or the refraining from doing a required act) will not constitute a breach.”). At the time of Tex- aco, fiduciary outs were not well understood and were a contested issue in corporate law. Compare Jewel Cos., Inc. v. Pay Less Drug Stores Nw., Inc., 741 F.2d 1555 (9th Cir. 1984) (holding merger agreement could be exclusive under California law and foreclose board consideration of superior proposal from another bidder), with ConAgra, Inc. v. Cargill, Inc., 382 N.W.2d 576 (Neb. 1986) (holding that the board’s fiduciary duties permitted the board to abandon merger agreement with first bidder in favor of a superior pro- posal from a second bidder). 165 See Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003) (controversially underscoring the requirement for an effective fiduci- ary-out and holding that a board “had no authority to execute a merger agreement that subsequently prevented it from effectively discharging its ongoing fiduciary responsibilities”). Of course, Omnicare itself (at least as an extreme affirmation of the legal necessity of fiduciary-outs) is not with without its critics. Compare Sean Griffith, The Omnipresent Specter of Om- nicare, 38 J. CORP. L. 753 (2013), with Travis Laster, Omnicare’s Silver Lin- ing, 38 J. CORP. L. 795 (2013). No. 1] CONTRACT REALISM AND FORMALISM 155 lessens its frequency of appearance in acquisitions (i.e., it is hard to imagine a Texaco situation arising today). Neverthe- less, formation opacity and contract surprise will still remain in other situations, such as negotiated transactions involving private companies. In any event, there is a more fundamental contract-theoretic lesson to be had. The proposal discussed be- low reveals a frequently overlooked flaw in unswerving reli- ance on common law principles where formalism might pro- vide a superior method for formulating a contracting regime. III. NORMATIVE THEORIES OF FORMAL PRELIMINARY AGREEMENTS AND THEIR INCOMPLETENESS Significant scholarship has focused on the so-called Type II preliminary agreements (i.e., agreements subject to a duty to negotiate in good faith or similar obligation) as well as non- binding preliminary agreements.166 This literature largely ig- nores binding informal agreements and Type I preliminary agreement (i.e., formal preliminary agreements that are bind- ing final agreements), types that result in inadvertent con- tract surprise. The scholarship on preliminary agreements implicating Type II issues considers the special character of such formal agreements that serve as an intermediate stage in a process that can culminate in a definitive agreement. While this literature, as described below, is useful in fleshing out the business purpose of such agreements, its theorizing and normative prescriptions are not persuasive in addressing the concerns raised here in two respects. First, normative eco- nomic analyses treat the Type II agreement issues in isolation unrelated to the contractual treatment of related preliminary dealings issues. In other words, the literature disregards the affinity between Type II legal issues on the one hand and legal issues relating to Type I preliminary agreements, non-binding formal preliminary agreements, and informal binding agree- ments on the other. This diverges from the common law’s in- tegrated perspective among different types of preliminary dealings. Second, normative prescriptions with respect to 166 See supra notes 15–16. 156 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 Type II agreements ignore the potential comparative ad- vantages of an alternative legal regime encompassing a fuller range of preliminary dealings in a specific contractual context, such as acquisition agreements. The primary economic anal- yses seek to explain how courts should incorporate an eco- nomic analysis into decisions relating to Type II agreements, but do not address the possibility of using different formal re- quirements for contracting in the context of preliminary deal- ings in acquisitions. In this respect, the discussion in this Sec- tion lays the groundwork for showing that an alternative legal regime (in particular, the SAAR+ proposal) provides a supe- rior approach to the broader topic of binding preliminary deal- ings of all sorts, albeit in the narrower context of corporate acquisitions. A. Functional Theories of Formal Type II Preliminary Agreements Modern legal scholarship has recognized the doctrinal challenge presented by formal preliminary agreements that serve as an intermediate step toward execution of a definitive agreement. Professor Charles Knapp was one of the earliest commentators to lament the common law’s “fail[ure] to deal adequately” with situations involving partial agreement in preliminary dealings.167 He urged courts to reconsider exist- ing doctrines and show greater receptivity toward enforce- ment of “contracts to bargain,” as he characterized a signifi- cant class of preliminary agreements.168 Within a generation, Professor Farnsworth provided an extensive reconsideration of the topic and concluded that the existing canon of common law principles, if “imaginatively applied,” was up to the task of bringing clarity and predictability to the area.169 167 Knapp, supra note 15, at 673. 168 Id. Knapp’s exploration of the topic coincided with a related theme, namely precontractual liability (i.e., liability for promises that precede con- tract formation), that had garnered much attention in the wake of the then- recently decided Hoffman v. Red Owl Stores, Inc., 133 N.W.2d 267 (Wis. 1965). 169 See Farnsworth, supra note 15, at 220. Farnsworth stands alone from other modern commentators as seeing a grand unity in the common No. 1] CONTRACT REALISM AND FORMALISM 157 Leaving aside disagreement on particular issues, Knapp and Farnsworth agree on several overarching points that are worth emphasizing. First, preliminary agreements reflect con- tractual complexity in some business contexts that requires contract creation as a multi-step process rather than the sim- ple acceptance-and-offer model of contract formation.170 Sec- ond, Knapp and Farnsworth are in a rough consensus that common law doctrinal innovations offer a sufficient means of addressing these legal policy issues.171 Notably, however, nei- ther explored the possibility that an approach other than the common law might work to redress the contracting issues identified. Third, the reasoning underlying both Knapp’s and Farnsworth’s analyses are heavily case-laden and fact-specific common law explications of the contracting process.172 This early scholarship does not reflect the TIAA synthesis described above, though it clearly anticipates it in some re- spects.173 Knapp and Farnsworth appear to differ in emphasis regarding the binding nature of what would come to be known as Type II agreements. Specifically, Knapp argued for the binding nature of “contracts to bargain,” a core feature of the TIAA synthesis with respect to Type II agreements; in law’s approach to preliminary dealings, and thus is not fairly criticized as focusing on one area of preliminary dealings to the exclusion of others. 170 See Knapp, supra note 15, at 685 (defining contract to bargain as an intermediate stage between contract and non-contract where parties have agreed on some terms but delayed agreement on others); Farnsworth, supra note 15, at 219, 257–58 (explaining that where negotiations involve gradual piece-meal process, preliminary agreements serve to memorialize status of intermediate steps features of incomplete negotiations, prevent misunder- standing, and facilitate further negotiation). 171 See Knapp, supra note 15, at 679 (suggesting that the common law “should attempt to adjust the existing rules to accommodate to the facts of business life” with respect to contracts to bargain); Farnsworth, supra note 15, at 220 (arguing that common law doctrines “imaginatively applied” pro- tect parties). 172 See generally Knapp, supra note 15; Farnsworth, supra note 15. 173 See supra Section II.B. (describing TIAA’s three-part test for pre- liminary agreements). 158 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 contrast, Farnsworth advanced a more guarded position with respect to his term “agreements to negotiate.”174 Recent legal scholarship provides theoretic frameworks to inform thinking on legal doctrine with respect to binding Type II agreements. An overarching theme in this literature is the need to explain why contracting parties resort to such devices. Having a functional perspective on the purpose of such agree- ments arguably should shape how society addresses such ar- rangements as a matter of legal policy. There are two influen- tial articles, one by Alan Schwartz and Robert E. Scott and the other by Albert H. Choi and George G. Triantis, that pro- vide differing economic accounts of preliminary agreements. While their economic focus differs, they agree on a central starting point with respect to binding Type II preliminary agreements—determining that such agreements serve to se- quence the process for reaching a final definitive agree- ment.175 However, they sharply differ on how Type II agree- ments should be treated. 174 Compare Knapp, supra note 15, at 676, 685 (arguing that contracts to bargain create a robust “duty to go forward with the contemplated trans- action”), with Farnsworth, supra note 15, at 267 n.209 (favoring the term “agreements to negotiate” over “contract to bargain”), 279 n.264, 283 n.279 (expressing reservations regarding Knapp’s non-countenance of negotiating with others or “changing one’s mind” in the context of agreements to nego- tiate). Schwartz and Scott rightly recognize TIAA’s synthesis of the binding nature of Type II agreements as its novel and pathbreaking contribution. See Schwartz & Scott, supra note 16, at 664–65, 667 (describing TIAA’s ap- proach as a “new rule” which “requires parties to [certain] preliminary agreements to bargain in good faith over open terms” and concluding that the rule is “deficient” and not justifiable). 175 See Schwartz & Scott, supra note 16, at 665 (“Parties make a pre- liminary agreement because they cannot write a complete contract at the outset: they function in a complex environment in which a profitable project can take a number of forms, and just which form will work, if any, is un- known at the start.”); Choi & Triantis, supra note 16, at 456–59 (describing structure of multistage contracting and use of preliminary agreements to memorialize sequenced negotiations). Both of these leading articles also do not dispute that formal preliminary agreements that are fully complete with respect to their essential terms or whose open terms are amendable to gap filling should be fully enforceable. Schwartz & Scott, supra note 16, at 664; Choi & Triantis, supra note 16, at 445–46. As discussed below, the sequen- tial character of the contracting process also figures prominently in the No. 1] CONTRACT REALISM AND FORMALISM 159 For Schwartz and Scott, a primary goal for a common law standard governing such agreements is to protect the reliance interest of each contracting party in making interim invest- ments (simultaneous or sequential) during the pendency of the preliminary contact period (i.e. before execution of a defin- itive agreement).176 The preliminary agreement enhances mutual confidence with respect to a counterparty’s perfor- mance as part of the interim investment sequencing process and with respect to an ultimate transaction, if value enhanc- ing.177 For Schwartz and Scott, the centrality of reciprocal simultaneous or sequential investments of the contracting parties leads to their criticism of TIAA’s use of a duty to nego- tiate in good faith as the key contractual liability issue in Type II agreements. In their view, the primary goal for courts should be protection of the reliance interest, rather than an open-ended obligation to negotiate in good faith, because, if the reliance interest is protected, parties’ self-interest will lead to bargaining that maximizes the parties’ joint surplus from any transaction, including in some cases, abandoning transactions that are no longer viable.178 The Schwartz and Scott analysis, while rigorous and so- phisticated, is not entirely persuasive because the critical con- cept—investments—is imprecise.179 The Schwartz and Scott analysis is strongest when the investments at issue directly benefit business operations of a proposed venture, such as rationale for non-binding preliminary agreements. See infra text accompa- nying notes 1828–183. 176 See Schwartz & Scott, supra note 16, at 667. 177 Id. at 676–80. 178 Id. at 667. 179 Schwartz & Scott first introduce the concept of investments seem- ingly generically, but shift to “reliance investments,” a seemingly narrow sense of investments. See, e.g., id., at 667, 668. Reliance investments in turn appear to relate back to so-called “simultaneous investments” and “sequen- tial investments,” that is “investments . . . needed to make a project success- ful.” Id. at 666 n. 11. Schwartz & Scott at times seem to narrow the scope of their analysis of preliminary agreements to only situations where “early investment accelerates the realization of returns.” Id. at 666. This narrow consideration does not reflect the broad universe of motivations that may inform preliminary agreements. 160 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 providing funding for a counterparty or making a capital con- tribution to a new venture. However, such scenarios may not be implicated in many preliminary agreements, including cor- porate acquisition agreements. Legal transaction costs, such as due diligence and negotiating formal documents, are deal process investments that parties expect to incur as part of reaching a final agreement in a complex business transaction. The Schwartz and Scott analysis does not explain the role of such costs in preliminary agreements or how they should fig- ure normatively in a contract analysis of preliminary agree- ments. Deal process investment primarily appears to advance each parties’ self-interest in acquiring information and con- trolling risk (i.e., avoiding the risk of unanticipated deal con- sequences), while perhaps secondarily signaling to the coun- terparty a desire to conclude a transaction. As information is revealed following a preliminary agreement (such as internal information relating to the counterparty), the two contracting parties’ interests and expectations may diverge, causing one or the other party to reassess the transaction and their rela- tive commitment to its completion. Making deal process in- vestments, alone, does not appear to provide a way to ascer- tain contract intent with respect to a preliminary agreement. Nevertheless, deal process investments are especially im- portant in the context of acquisitions transactions where transaction engineering considerations figure prominently.180 Like Schwartz and Scott, Choi and Triantis explore com- mon law standards governing Type II preliminary agree- ments.181 While they essentially agree that preliminary agreements serve a sequencing process for negotiation of de- finitive preliminary agreements,182 their analysis differs from 180 See Ronald J. Gilson, Value Creation by Business Lawyers: Legal Skills and Asset Pricing, 94 YALE L.J. 239, 241–42 (1984) (considering law- yers’ creation of value, as well as their cost, in corporate acquisitions). For a practical example, bid processes in competitive transactions contemplate that the bidder absorb the costs of their own deal process investments. See supra note 16. 181 See generally Choi & Triantis, supra note 16. 182 Id. at 440. No. 1] CONTRACT REALISM AND FORMALISM 161 Schwartz and Scott in at least two fundamental respects. First, they believe that a duty to negotiate in good faith should be the focal point for liability in a Type II agreement.183 In their view, protection of reliance interests alone (that is, forms of reliance arising between the signing of a preliminary agree- ment and execution of a final agreement) is likely to have an incomplete role in explaining preliminary agreements or sig- nificantly influencing contract parties’ behavior.184 A good faith standard effectively serves to regulate negotiations dur- ing the preliminary agreement period from diverse confound- ing forms of opportunistic behavior.185 Second, Choi and Triantis assert that where the duty to negotiate in good faith is decisive in enforcing Type II agree- ments, a reliance measure of damages alone may be inade- quate and should also include expectation damages when pos- sible.186 In their view, the appropriate measure of remedy should incentivize the contracting parties to adhere to the standard of liability, which in Type II agreements is the duty to negotiate in good faith (i.e., behavior tied to value enhanc- ing rather than value claiming (opportunistic) behavior), something that implicitly would not occur if the Schwartz and Scott reliance-only duty-neutral approach were adopted. Ac- cording to Choi and Triantis, common law limitations govern- ing expectation damages, such as foreseeability and reasona- ble certainty, may be appropriate to guard against excessive contract recovery.187 Choi and Triantis ultimately provide a more robust eco- nomic account of Type II agreements than Schwartz and Scott. Notably, their analysis emphasizes the importance of 183 Id. at 459, 470. 184 Id. at 442 (“By focusing on the protection of reliance, legal scholar- ship leaves unexplained a number of important features in preliminary agreement in practice and the courts.”); Id. at 455 (“We believe that, while the goals vary across contexts, reliance protection by itself is in fact not usu- ally the driving force.”). 185 Id. at 442, 482. 186 Id. at 479–80. 187 Id. at 476–77. 162 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 the intrinsic flexibility of the duty to negotiate in good faith.188 This attribute raises a potential challenge to the SAAR+ pro- posal that seeks to diminish formation opacity in preliminary dealings in the acquisition context. However, as we will return to later, there is a potential economic difference between stra- tegic vagueness in the meaning of relatively well-defined con- tract obligation and vagueness (strategic or otherwise) regard- ing (i) the existence of a binding contract obligation, or (ii) the scope of open-ended incomplete contract obligations. Choi and Triantis do not argue that expectation damages will always or even typically arise from a breach of a Type II agreement, and they even suggest that it may be more effi- cient for parties to negotiate around the prospect of expecta- tion damages, if they so choose.189 Such an approach is conso- nant with the SAAR+ approach discussed in Part IV. Economic accounts of binding preliminary agreements do not exclude other behavioral factors that may influence the use of preliminary agreements, whether binding or non-bind- ing.190 Contract scholars and economists have long recognized that parties sometimes deliberately enter into non-binding 188 The intrinsic flexibility of the standard encourages parties to be- have and draws on insights from prior work involving strategic vagueness in acquisition agreements. See generally Albert Choi & George Triantis, Strategic Vagueness in Contract Design: The Case of Corporate Acquisitions, 119 YALE L.J. 848 (2010). 189 See Choi & Triantis, supra note 16, at 480. 190 See id. at 445 (“Even without legal consequence, however, these agreements play important roles and may rely on forces other than legal enforcement, such as moral, relational, or reputational sanctions”); see also Faux Contracts, supra note 17, at 1040–42 (“In these situations, parties per- form their obligations, at least in part, out of ‘[a] fear of reputational or re- lational sanctions.’”). Of course, binding obligations and self-enforcing but non-binding obligations may be used in conjunction with one another. See id. at 1042–48. See generally Ronald J. Gilson, Charles F. Sabel & Robert E. Scott, Braiding: The Interaction of Formal and Informal Contracting in Theory, Practice, and Doctrine, 110 COLUM. L. REV. 1377, 1384 (2010) (the seminal articulation of the relationship between formal and informal con- tracting whereby “contacting parties can and do agree on formal contracts for exchanging information about the progress and prospects of their joint activities and . . . . thereby support[] the informal enforcement of the par- ties’ substantive performance.”). No. 1] CONTRACT REALISM AND FORMALISM 163 agreements.191 In agreements that are non-binding, parties willingly forego recourse to legal enforcement as a means to induce counterparty performance in accordance with their ob- ligations. One reason for entering a non-binding agreement is that the agreement may be amendable to self-enforcing mech- anisms, like reputational consequences. The prospect of a tar- nished reputation or adverse consequences in future dealings with the same party makes persons amenable to fulfilling their immediate obligations because they view the situation from the perspective of long-term, rather than immediate, self-interest. Professor Hwang in a series of articles has worked through this type of analysis and gathered data from practitioners as it relates to preliminary agreements in merger negotia- tions.192 In her view, non-legal factors account for the wide- spread use of preliminary agreements in the context of corpo- rate acquisitions. These non-legal factors contribute to deal momentum—progress in the multi-step process intended to lead to a final agreement. Each step of the sequential, multi- step process validates the participants progress toward the goal of a binding agreement. Thus, an interim and prelimi- nary non-binding “faux” agreement serves as a validating step that not merely marks progress, but contributes to the likeli- hood of progress in succeeding steps toward a final agree- ment.193 Hwang’s self-enforcement theory of non-binding prelimi- nary acquisition agreements has many persuasive aspects. It accords with the fact that parties frequently sign agreements which are expressly described as non-binding, evidencing the fact that parties’ value and deliberately opt for agreements 191 See generally Scott, supra note 167. This phenomenon is discussed in the economic literature on deliberately incomplete contracts where par- ties rationally refrain in some circumstances from conditioning the perfor- mance of counterparties on verifiable performances metrics. See, e.g., B. Douglas Bernheim & Michael D. Whinston, Incomplete Contracts and Stra- tegic Ambiguity, 88 AM. ECON. REV. 902 (1998). 192 See generally Faux Contracts, supra note 17; Deal Momentum, su- pra note 17. 193 See Faux Contracts, supra note 17, at 1056, 1060–64. 164 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 that will have no legal effect.194 Accentuating the non-binding nature of many preliminary agreements leaves open the ques- tions of when and why binding preliminary agreements are used. Nevertheless, Hwang is insistent in reminding readers that there is nothing inconsistent with the existence of bind- ing and non-binding preliminary obligations and, of course, the two are commonly used in tandem in real life.195 Presum- ably, parties resort to binding forms of preliminary agree- ments where they seek to make their respective obligations more definite and assured through recourse to legal enforce- ment. B. On the Incompleteness of Normative Theories of Preliminary Agreements The above commentators have focused their analysis within a common law framework, thereby, assuming in some form that a single regime of common law principles is the ap- propriate approach to address different forms of preliminary dealings in all contracting contexts.196 By accepting the suit- ability of common law principles in the context of acquisitions to resolve the binding nature of preliminary dealings, existing scholarship seemingly: (i) accepts a litigation-intensive re- gime to resolve formation and outcome opacity disputes;197 (ii) 194 Id. at 1056–67. 195 Id. at 1065–66 (providing real life examples where binding and non- binding agreements bundled together). 196 See generally Schwartz & Scott, supra note 16; Choi & Triantis, su- pra note 16. This is not relevant to Hwang’s approach because her focus is non-binding agreements in the acquisitions area. See Faux Contracts, supra note 17 at 1048–56. Her persuasive discussion of non-binding agreements relies heavily on contrasting such agreements with binding agreements. By emphasizing the role of non-binding agreements, Hwang attests to the over- riding concern of practitioners in avoiding binding preliminary agreements in a wide variety of acquisitions contexts. Indeed, Hwang herself levels a related incompleteness criticism with respect to Schwartz & Scott and Choi & Triantis. See Deal Momentum, supra note 17, at 382 (“[N]either explana- tion addresses why parties often behave as though non-binding agreements are binding.”). 197 See Schwartz & Scott, supra note 16, at 671 (proposing to investi- gate “how contemporary American courts treat reliance investments made No. 1] CONTRACT REALISM AND FORMALISM 165 assumes that the contracting parties reliably (or efficiently) attempt to assess formation and outcome uncertainty with re- spect to preliminary dealings;198 and (iii) further assumes that behavioral bias will not affect assessment of these issues.199 These are obviously contestable assumptions that mask a serious shortcoming in the analyses. There is no consideration of alternatives outside the bounds of common law principle. Specifically, there is no consideration of solutions built around formal contracting requirements. However, such a criticism may not be entirely fair because there are always many other policy possibilities and it would be unreasonable to expect an earlier commentator to anticipate a particular, yet unformu- lated, policy alternative. Part IV advances such an alternative proposal. Specifically, it urges a different contracting regime in the context of corporate acquisitions because the risk of con- tract surprise is readily avoidable. For now, it is worth noting merely that the existing literature above does not specifically address or anticipate such a policy alternative. Another limitation to the normative economic theories re- lating to Type II preliminary agreements can be fairly leveled. The Type II normative theories are incomplete in an im- portant respect. They do not purport to explain why the com- mon law invokes loosely related legal doctrines (i.e., analogous before the parties have written a complete contract” [i.e., at the preliminary agreement stage] through an empirical study of a robust sample of cases decided between 1999-2003). 198 See Choi & Triantis, supra note 16, at 443 (characterizing the cen- tral problem of preliminary agreements as “provid[ing] the means by which the parties can efficiently allocate selected risks of changed circumstances,” and accordingly optimal agreement must balance between “goals of promot- ing efficient specific investment, discouraging value-claiming activity, and efficiently sharing exogenous risks” and the need “to respond to previously unforeseen contingencies”). 199 See, e.g., Christine Jolls, Cass R. Sunstein & Richard Thaler, A Be- havioral Approach to Law and Economics, 50 STAN. L. REV. 1471, 1501–05 (1998) (discussing the presence and effect of self-serving bias in understand- ing failed negotiations); Russell Korobkin, Behavioral Economics, Contract Formation, and Contract Law, in BEHAVIORAL LAW & ECONOMICS 116 (Cass R. Sunstein ed., 2000) (discussing effect of status quo bias on parties’ pref- erence for contract terms and validation in laboratory psychological experi- ments). 166 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 multi-factored tests) to resolve disputes with respect to vari- ous types of preliminary dealings within a coherent frame- work of principles when the economic reliance rationales ad- vanced with respect to Type II agreements and Type I agreements are not also equally applied. Why should a reli- ance rationale be given exclusive emphasis in the Type II con- text but not the Type I or inadvertent informal agreement con- text?200 While not a source of logical inconsistency per se, it should nevertheless count as an explanatory weakness and argument for some caution before adopting normative pre- scriptions based on that type of explanation. The deliberate sequencing characteristic of Type II agree- ments, as discussed above, reflects various concerns: (i) the desire to conserve and order deal process investments (infor- mation search, time, legal costs, etc.) in the negotiation pro- cess before concluding a final agreement; and (ii) building mu- tual assurance regarding a bargaining process consistent with the contracting parties intentions (which admittedly in the Type II context may include assurance with respect to trans- actional investments (simultaneous and sequential) intended to maximize joint surplus during the preliminary agreement period). These concerns reflect deliberate intentional efforts shared by contracting parties to sequence the negotiation pro- cess leading to a final agreement. In binding Type I agreements and binding informal pre- liminary dealings, any shared deliberate design to sequence and continue negotiations is judicially foreclosed (i.e., there is a judicial determination that a final agreement objectively came into being notwithstanding the fact that one or both par- ties subjectively believed that further negotiation would take place). In each case, a binding contract comes into existence before a definitive agreement has actually been executed. In the case of a Type I agreement, the parties’ deliberate effort to sequence the negotiations (i.e., by characterizing the agree- ment as preliminary) is superseded as a matter of law (i.e., a determination imputing a final agreement). In the case of binding informal preliminary dealings, there is a judicial 200 See supra Section III.A. discussion. No. 1] CONTRACT REALISM AND FORMALISM 167 determination that negotiations have sufficiently crystallized to warrant finding an agreement. Accordingly, the overarching rationale for finding that ei- ther Type I preliminary agreements or informal preliminary dealings are binding is tied to reaching a consensus as to the parties’ shared contracting intent. This rationale may encom- pass reliance-based investments in the process, but the latter hardly seems a necessary feature for attaining shared contrac- tual intent. Contractual principles represent a pragmatic way to resolve the issue of shared contractual intent. Presumably, the common law favors an objective-oriented approach, be- cause in most circumstances such an approach polices bar- gaining behavior in contracting, including complex business dealings. Contract formation principles in the context of pre- liminary dealings appear designed to deter feckless bargain- ing or bad faith by one party and protect the legitimate con- tractual expectations of the other party when confronted by such behavior. On an efficiency theory of contracts, society should favor enforcing bargaining conduct that compels par- ties to adhere to promises reasonably viewed as part of a com- pleted bargain (whether informal dealings deemed binding or formal Type I preliminary agreements) and, indeed, probably especially in complex business dealings where parties exhibit calculative economic behavior.201 Under the common law, parties in complex business trans- actions are allowed to engage in robust non-binding bargain- ing up to point, marked by a fuzzy line, where such bargaining results in an enforceable agreement.202 This kind of intent 201 See, e.g., Alan Schwartz & Robert E. Scott, Contract Theory and the Limits of Contract Law, 113 YALE L.J. 541, 549 (2003) (arguing that because “firms are better able . . . to choose efficient terms and strategies,” courts in the regulation of business contracts should favor contract law principles that “let the preferences of firms control because firms can better pursue the [welfare maximization] objective that both [society] and firms share”). 202 See supra notes 66–71 and accompanying text (describing Tex- aco/Pennzoil litigation spurred by dispute over enforceability of informal preliminary dealings). The facts in Texaco illustrate different contractual perspectives on a fluid evolving situation. Similarly, the fact that courts reach different results on the enforceability of unexecuted final agreements 168 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 proxy rationale, especially in the case of complex business ne- gotiations, differs from the theoretical reliance rationale for Type II agreements, which gives primacy to parties’ reliance interest in sequencing investments as part of the negotiation process. The different categories of preliminary dealing in common law cases stem from how facts should be evaluated, at least at a subjective level, as to the necessity for further bargaining. In this respect, the divergence between Type II agreement cases and Type I preliminary agreements is partic- ularly notable as it is quite possible that classification of an agreement as either Type I or Type II may be a contested is- sue, but its resolution is not grounded in a rationale tied to the sequencing of investments during the parties’ bargain- ing.203 Perhaps the incompleteness argument here against theo- retical rationales based exclusively on reliance gives short shrift to a potentially powerful counterargument regarding the virtues of the common law’s penchant for multi-factored tests to resolve the kinds of formation and outcome opacity identified in this article across contracting contexts (as op- posed to the benefits of formal bright-line contracting require- ments in the acquisition context as argued here). Strategic vagueness as to the existence or type of contract and uncer- tainty regarding the scope of remedial consequences may ac- tually promote the integrity and efficiency of the negotiation process. To be sure, as Choi and Triantis have separately ar- gued, strategic vagueness may serve a beneficial purpose in the multi-step negotiation process characteristic of acquisition agreements where the costs of a negotiated resolution of un- certainty exceed the probability discounted benefits that would be achieved (i.e., “let’s just agree to disagree about this provides yet another example of the fuzzy line between in binding and non- binding agreements in complex agreements. See also supra note 6. 203 See, e.g., Vacold, Inc. v. Cerami, 545 F.3d 114, 132 (2d Cir. 2008) (majority finding a binding Type I agreement whereas dissenting opinion concluding that contractual dispute arose from a Type II preliminary agree- ment) (“Although there are important analytical differences between Type I and Type II agreements, policing the boundaries between the two is not always a simple task.”). No. 1] CONTRACT REALISM AND FORMALISM 169 detail and we will re-engage if during the course of perfor- mance the detail assumes unusual significance.”).204 However, resorting to a strategic vagueness argument as a justification for contractual opacity with respect to the status and scope of formal preliminary agreements is a potentially slippery slope that deserves closer scrutiny.205 Choi and Tri- antis themselves carefully lay out a variety of applicable con- ditions in arguing for the potential efficiency of contract vagueness in the case of definitive corporate acquisition agree- ments.206 At the very least, such an approach assumes that parties can assign reliable probabilities to known uncertain- ties and thereby enable contracting parties to achieve proba- bility-adjusted measures of risk to make rational value max- imizing decisions. However, this assumption seems doubtful in the case of formation uncertainty or other radical forms of outcome uncertainty, which could as likely be viewed as ex- hibiting so-called Knightian uncertainty.207 If these forms of uncertainty are more properly viewed as Knightian in nature, the uncertainty in this context would not appear to conform to a conventional strategic vagueness justification and, indeed, 204 Choi & Triantis, supra note 7, at 856 (stating article’s thesis that “vague terms made do a better job than precise terms in promoting the goals of contract design” with respect to critical contract provisions in acquisition agreements, especially in the case of provisions “that provide the buyer with options to terminate the agreement”). 205 I am not suggesting that the Choi and Triantis article, supra note 188, actually makes the strategic vagueness argument regarding contrac- tual opacity with respect to the status and scope of formal preliminary agreements. Rather, the point here is to interrogate the validity of invoking an analogous form of argument as to the general contractual opacity with respect to formal preliminary agreements. As discussed in the text, such an argument would stand on shaky ground. 206 Choi & Triantis, supra note 188, at 881–96 (including the seeming innocuous observation at 882 that “[t]he costs of vagueness are relatively well known”). 207 Cass R. Sunstein, Knightian Uncertainty (forthcoming in BEHAV. PUB. POL’Y) (preliminary draft Dec. 12, 2023 on file with SSRN), https://pa- pers.ssrn.com/sol3/papers.cfm?abstract_id=4662711 [https://perma.cc/85F5-TB5V]. Knightian uncertainty occurs when individ- uals cannot assign probabilities to imaginable outcomes and poses a chal- lenge for decision theory and regulatory practice. Id. at 1. 170 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 seem undesirable in two respects. First, it is not clear that there is a mutually agreed upon benefit in deliberately avoid- ing their resolution, whereas a bright-line approach would re- move the uncertainty. Second, there is no reason to believe that courts are better suited to decide the issues than the par- ties in all contexts. As noted in earlier discussion, the contrac- tual status of preliminary agreements is frequently equivocal for courts. A determination of the appropriate remedy for breach of an agreement with an otherwise inherently equivo- cal status can only be less tractable. In contrast, forcing par- ties to be clearer about status and scope ex ante is beneficial in at least two respects. It provides courts with a more admin- istrable yardstick in enforcing such agreements and simulta- neously provides reliable evidence of parties’ intent as to the preliminary agreement. Admittedly, there is no logical inconsistency in having dif- ferent economic rationales for different forms of preliminary dealing, each with its own contractual consequences. Never- theless, the divergent consequences, especially in complex business negotiations characterized by intensive negotiations, at the very least pose a question of whether in some contexts greater ex ante clarity of contractual consequences might be feasible and desirable. This issue is not addressed in current scholarship.208 Nevertheless, the review of this literature lays the ground for a comparative advantage argument for an al- ternative contractual regime (the SAAR + regime) in the con- text of corporate acquisitions. The next part presents such a proposal and makes an affirmative argument for its adoption. IV. THE CASE FOR FORMALISM IN BINDING PRELIMINARY ACQUISITION DEALINGS: THE SAAR+ PROPOSAL As the preceding sections have shown, the common law’s embrace of the objective theory of contract formation, and its 208 It is important to note that this Article does not directly challenge current normative scholarship with respect to Type II agreements or take a position with respect to the disagreement between Schwartz & Scott and Choi & Triantis. No. 1] CONTRACT REALISM AND FORMALISM 171 simultaneous discounting of subjective intent to contract as an element of formation gives rise to contract surprise prob- lems in preliminary dealings: specifically, (i) formation sur- prise (in the case of informal agreements); and (ii) a radical form of outcome surprise (in the case of formal preliminary agreements). The common law’s approach implicitly rests on a social cost-benefit calculus in which the social benefits of the objective theory of contract formation outweigh the costs of formation doctrines that do not strictly accord with the sub- jective expectations of both contracting parties. This Part of the Article describes an alternative approach to these prob- lems in the context of acquisition agreements: the SAAR+ pro- posal. As discussed below, the argument is context specific. Although the problem of contract surprise is pervasive to pre- liminary dealings, the relative social costs and benefits of in- troducing greater formality with respect to specific types of agreements can reasonably be expected to increase the costs of contracting while reducing the costs of errors of mistakenly imputed agreements. However, there does not appear to be any reason to believe that these costs vary in fixed proportion to one another or that they are of the same relative magnitude in different transactional contexts. If the costs and magni- tudes do in fact vary across contexts, the argument for in- creased contracting formality narrows considerably. The question is not whether increased formality on average is op- timizing with respect to preliminary dealings generally, but rather whether increased formality in specific contexts is ap- propriate based on the characteristics of that contracting con- text. This Part makes the narrower argument for greater for- malism in preliminary dealings in the context of corporate ac- quisition agreements. As reflected in the preceding sections, disputes regarding the enforceability of preliminary dealings in corporate acquisitions (both (i) preliminary dealings that create inadvertent informal agreements, and (ii) formal pre- liminary agreements whose nature and scope are uncertain) occur not infrequently with outcomes that are difficult to pre- dict. As argued below, the SAAR+ proposal in this context promises to deliver social benefits in terms of clarity of 172 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 obligations that outweigh the social costs arising from its con- tracting requirements. The Part is in three sections. First, it argues that the con- tract surprise problem identified is best addressed through a proposal tailored to the corporate acquisition context. Second, it describes the SAAR+ proposal designed to eliminate the problems of formation contract surprise in inadvertent acqui- sition agreements and to mitigate the problem of outcome con- tract surprise in formal preliminary agreements. Finally, it addresses practical issues in implementing a SAAR+ pro- posal. A. Reassessing the Costs/Benefit Calculus of Opacity in Acquisition Preliminary Dealings This subsection presents the basic argument for the SAAR+ proposal with respect to acquisition agreements: con- tract surprise (due either to contractual opacity at formation or to severe forms of outcome uncertainty) is largely avoidable in this context at modest social cost. In short, in this context, the social costs of opacity in formation or outcome (which are a source of contract surprise) are outweighed by the social ben- efit of clarity achieved through a formal writing requirement embodied in the SAAR+ proposal discussed in Sections IV.B and IV.C. 1. The Challenge of the Common Law’s Contract Surprise Problem in Corporate Acquisitions As discussed in Part II, formation opacity inheres in com- mon law principles and contributes to contract surprise in pre- liminary dealings. This inherent feature in the common law reflects the laws’ effort to resolve the tension between, on the one hand, types of formation and outcome surprise (i.e., sur- prise arising from circumstances where a contracting party believes no legally enforceable contract exists and seeks free- dom from contract) and, on the other, contract frustration (i.e., frustration that would ensue if counterparties could walk away from binding contractual promises). Underlying these concepts are different transactional participant No. 1] CONTRACT REALISM AND FORMALISM 173 perspectives—one protecting reasonable contractual expecta- tion at the risk of surprise and the other protecting freedom from contract by preventing inadvertent surprise arising from unintended agreements in negotiation or agreements prelim- inary to a final agreement. The common law incorporates principles that balance the risk of contract surprise against the risk of contract frustration and that necessarily incorpo- rate some degree of opacity in formation: reasonable infer- ences from objective manifestations generally trump the sub- jective intent of the individual participants.209 This approach explains why the common law has a well- established orientation that favors contract formation without formal writing requirements.210 The common law generally is less sympathetic to the harm caused by subjective contract surprise arising from inadvertent contract formation than the harm from contract frustration suffered by a disappointed pu- tative contracting party from reasonable belief that a contract had been concluded.211 The common law’s discounting of inad- vertent contract surprise in the absence of a writing require- ment rests on a number of factors: (i) unnecessarily impeding contract formation with writing formalities increases the costs of contracting both directly (in terms of legal costs involving docu- mentation) and indirectly (in terms of more laborious and time-consuming processes); (ii) formality requirements may, as a practical matter, be harmful in contracting situations where the 209 See supra notes 26–32 and accompanying text. 210 See RESTATEMENT (SECOND) OF CONTRACTS § 19 (AM. L. INST. 1981) (allowing manifestation of assent by written or spoken words, or actions); see also 1 CORBIN ON CONTRACTS § 3.8 (2023) (explaining acceptance may be construed from words or conduct). 211 See RESTATEMENT (SECOND) OF CONTRACTS §19 (3) (AM. L. INST. 1981) (“The conduct of a party may manifest assent even though he does not in fact assent.”); see also 1 WILLISTON ON CONTRACTS § 4:2 (4th ed.) (“As long as the conduct of a party is volitional and that party knows or reasonably ought to know that the other party might reasonably infer from the conduct an assent to contract, such conduct will amount to a manifestation of as- sent.”). 174 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 commercial or market realities require speed (e.g., re- current and high-volume transactions that are market- sensitive in the context of commercial practice);212 and (iii) allowing contract formation absent written agree- ments imposes greater integrity in negotiation by hav- ing the means to credibly commit to one another short of a written agreement and, to some extent, discourage renegotiation of settled matters.213 Moreover, other common law doctrines serve to mitigate the harshness of inadvertent formation surprise in terms of formation (such as the requirement of definiteness)214 or mon- etary damage limitations (such as requirements of causation and reasonable ascertainment of damages), diminishing con- cerns about inadvertent contract formation.215 These considerations clearly put the burden of persuasion on the proponent of a formal writing requirement, such as the SAAR+ proposal discussed below. At the outset, this creates a challenge for any writing requirement proposal. It must over- come the problem of overbreadth (i.e., namely the suggestion that the common law should embrace writing requirements 212 These consideration are frequently ascribed to the motivation un- derlying the drafting of Article 2 of the Uniform Commercial Code. See, e.g., Ingrid Michelsen Hilinger, The Article 2 Merchant Rules: Karl Llewellyn’s Attempt to Achieve the Good, True, The Beautiful in Commercial Law, 73 GEO. L. J. 1141, 1151 (1985) (“Article 2 merchant rules represented Llewel- lyn’s attempt to create simpler, clearer, and better adjusted rules for com- mercial transactions.”). 213 See Craswell, supra note 2, at 491–94, 536–39 (discussing how find- ing contractual commitment promotes efficient reliance and its relevance to preliminary agreements). 214 Compare id. (exploring how the concept of reliance colors various contract formation doctrine), with Eisenberg, supra note 33, at 1179 (criti- cizing uncritical acceptance of expression rules embodied in common law contract formation doctrines because “little if any attention has been di- rected to the soundness of most expression rules”). 215 See, e.g., RESTATEMENT (SECOND) OF CONTRACTS §§ 350–52 (AM. L. INST. 1981) (detailing, in order, “avoidability as a limitation on damages,” “unforeseeability and related limitations on damages,” and “uncertainty as a limitation on damages”). No. 1] CONTRACT REALISM AND FORMALISM 175 generally). As to the overbreadth challenge, the SAAR+ rests on a simple assertion: acquisition transactions provide a dif- ferent context that warrants a special writing requirement, if such a requirement can be appropriately fashioned.216 This kind of argument for a formal writing requirement is not en- tirely novel, and examples exist in business contexts without doing violence to the common law’s general reluctance to em- brace writing requirements.217 One could imagine other possible challenges to the com- mon law’s general willingness to enforce unwritten bargained for promises. For example, in contrast to the common law, courts could give dispositive effect to written contractual lan- guage that disclaims an intent to contract or that contem- plates memorialization in a fuller final argument. Giving ef- fect to such language would preclude formation of any binding informal agreements inconsistent with such expressions of in- tent.218 Such an approach, however, would be more far 216 Nothing in this Article should be construed as seeking to undermine the common law’s well-established general tradition of enforcing non-writ- ten agreements. 217 See supra note 156 (discussing U.C.C §2-209(2) “no-oral-modifica- tion” (which allows parties to a sales contract to pre-commit to a require- ment that any modification be by signed writing)); see also DEL. CODE ANN. tit. 8, § 251(b) (West 2020) (as in most jurisdictions for long-form domestic and foreign mergers, requiring that a merger agreement be pursuant to a “executed” agreement); see also N.Y. LTD. LIAB. CO. LAW § 102(u) (McKinney) (unlike the majority of jurisdictions, requiring that operating agreements for LLCs (including all terms) be in a writing); 15 U.S.C. § 80a–15 (requiring that an investment management agreement between an investment adviser and a registered investment company be in writing, a requirement moti- vated by regulatory policies). These types of requirements reflect the intui- tion expressed in the quotation opening this Article that in complex busi- ness dealing, use of written documents accord with norms of legal practice. Finally, the common law’s parol evidence rule (which adopts a doctrinal as- sumption that privileges fully integrated written agreements over prior ex- trinsic evidence or contemporaneous oral statements) evidences the com- mon law’s own recognition that written agreements are sometimes useful in ascertaining the parties’ contracting intent. See generally Steven J. Burton, ELEMENTS OF CONTRACT INTERPRETATION 69–71 (2009). 218 This appears to be the tack taken by one commentator in asserting without further development. See Crump, supra note 787, at 7 (“If a docu- ment expressly says that it is not a contract, or that it requires a definitive 176 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 reaching than what is proposed here. Indeed, such an ap- proach would imply the wholesale rethinking of the premises underlying Sections 21 and 27 of the Restatement (Second) of Contracts,219 an undertaking not suggested here. Instead, the threshold consideration for the SAAR+ writ- ing requirement lies in showing that contracting in the corpo- rate acquisition context is different and warrants a distinct approach, even if such an approach in other contexts is not preferred. It is that task to which the article now turns. 2. Corporate Acquisitions Represent a Distinctive Contracting Context At a practical business level, corporate acquisitions exhibit a distinctive character not shared by many other contracting contexts. These factors include: (i) definitive acquisition agreements are complex and frequently entail a multi-step ne- gotiation process in which the parties’ expectations may be overly optimistic relative to the actual progress in resolving unresolved issues; (ii) parties are customarily represented by experienced sophisticated deal counsel both because of the high stakes and complexity in acquisition transactions; (iii) the duration of the process until closing makes them suscep- tible to the unanticipated external developments on the par- ties’ respective bargaining positions and, thus, parties are cog- nizant of the special importance of deal certainty throughout the process.220 written agreement before anything within it binding, it ought not to become a contract.”) 219 See RESTATEMENT (SECOND) OF CONTRACTS §21 (AM. L. INST.1981) (“Neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract.”); RESTATEMENT (SECOND) OF CONTRACTS §27 (AM. L. INST. 1981) (“Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof; but the circumstances may show that the agreements are preliminary ne- gotiations.”). 220 These three propositions are routinely affirmed by commentators. See, e.g., Stephen J. Choi, Mitu Gulati, Matthew Jennejohn & Robert E. No. 1] CONTRACT REALISM AND FORMALISM 177 The contract formation process leading to a definitive ac- quisition agreement is a multi-step process that addresses many fact-specific issues shaped by the bargaining dynamics between buyer and seller.221 The process of contract creation is multi-stepped, not only because of the number of issues in play, but also because the interdependence of issues may itself strongly argue for a sequenced process for resolution. Some issues must be resolved before it is meaningful to address oth- ers (e.g., it would not make much sense to negotiate a material adverse event clause until there is a rough agreement on price and deal structure).222 Moreover, as in all acquisitions, there are informational asymmetries that favor the seller.223 In a negotiated transaction, the negotiations provide an oppor- tunity, beyond due diligence by itself, to elicit counterparty information either directly or inferentially in the negotiation process, thereby resulting in the revelation of relevant Scott, Contract Production in M&A Markets, 171 U. PENN. L. REV. 1881, 1885 (2023) (“The M&A market often involves large, sophisticated parties with the resources and, on occasion, the motivation to craft bespoke con- tracts.); Choi & Triantis, supra note 188, at 853, 857 (“[T]hese contracts in- volve sophisticated parties and large financial stakes” and “contract design is complicated by uncertainty in exogenous conditions: market forces, polit- ical developments, consumer tastes, and so on.”); Jeffrey Manns & Robert Anderson IV, The Merger Agreement Myth, 98 CORNELL L. REV. 1143, 1151 (2013) (“Lawyers are at the forefront of drafting the acquisition agreement” which is “the product of extensive negotiations tailored to the particulars of the transaction.”). 221 See Faux Contracts, supra note 17, at 1056, 1063 (“M&A deals are always completed in stages” and reporting the importance of building relia- ble counterparty reputation at the “earlier stages of a multi-stage transac- tion”); see also Choi & Triantis, supra note 16, at 456–61 (in discussing the structure of multistage contracting, using repeated use of deal transactions as quintessential illustration). 222 See Deal Momentum, supra note 17, at 17, 25 (describing that the use of preliminary agreements in dealmaking practice lends itself to two alternative theories: use to “resolve complexity and uncertainty” and use, even where non-binding, to “resolve enough uncertainty” to create deal mo- mentum “push[] the deal forward”). 223 See Sean J. Griffith, Deal Insurance: Representation & Warranty In- surance in Mergers & Acquisitions, 104 U. MINN. L. REV. 1839, 1840 (2020) (in explaining the function of reps and warranties in acquisition agree- ments, noting the seller’s informational advantage relative to the buyer). 178 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 business information (i.e., buyers will be able to whittle away at the informational asymmetry in the course of negotia- tions).224 Corporate acquisitions for contract purposes requires con- siderable specialization and representation by sophisticated deal counsel. It is apparent that corporate acquisition con- tracting is regarded by legal academics as a specialized field entailing unique contracting considerations.225 Moreover, M&A practitioners routinely raise cautionary warnings re- garding the unintended consequences in terms of inadvertent informal agreements or formal preliminary agreements aris- ing from common law contract principles.226 Widespread aca- demic and professional recognition of the specialized nature of corporate acquisitions validates the intuition that contracting 224 See id. at 1842 (“[R]eps impose liability to induce efficient disclo- sure. The liability risk generated by the reps is the engine driving the ex- change of information in the deal.”). 225 Scholarship in the area is legion. See Choi et al., supra note 220 (discussing issues of contract production relating to trade-off between use of customized and standardized terms in merger and acquisition contracting context); Guhan Subramanian & Annie Zhao, Go Shops Revisited, 133 HARV. L. REV. 1215, 1220 (2020) (canvassing the proliferation of go-shop pro- visions in merger agreements and noting the origins of the practice); Grif- fith, supra note 223, at 1842–43 (discussing use of deal insurance in connec- tion with acquisition agreement’s representations and warranties to overcome inherent information problem between buyer and seller); Fernán Restrepo & Guhan Subramanian, New Look of Deal Protection, 69 STAN. L. REV. 1013, 1016 (2017) (noting thirty-year evolution in deal practice relating to termination fees and other forms of deal protection features such as match rights, new generation intangible asset lock-ups, and side agree- ments); Manns & Anderson, supra note 220, at 1143 (2013) (empirical study casting doubt on whether financial markets “respond in an economically significant way to the deal-specific legal terms of M&A agreements”); Choi & Triantis, supra note 188, 856-81 (describing contract design issues in ac- quisition agreement provisions protecting buyer’s deal optionality); John C. Coates IV & Guhan Subramanian, A Buy-Side Model of M&A Lockups: The- ory and Evidence, 53 STAN. L. REV. 307, 310 n.2 (2000) (giving contractual definition of lock-up provisions in acquisition agreements). 226 See, e.g., Faux Contracts, supra note 17, at 1052–56 (describing in- terviews of deal lawyers evidencing well-established practice with respect to ensuring preliminary agreement are non-binding rather than binding); see also supra notes 144, 150 (discussing articles from M&A practitioners). No. 1] CONTRACT REALISM AND FORMALISM 179 in the context of corporate acquisitions differs from run-of-the- mill contracting contexts. Moreover, in acquisitions, the con- tracting parties routinely are represented by sophisticated counsel who are well-suited to signal the onset of binding com- mitments. The transaction costs of formality in contracting will not be significantly affected by a formality requirement since attorneys are quite capable of memorializing an agree- ment when an agreement in fact exists and the memorializa- tion reflects a fraction of the total legal costs incurred in such a transaction. Finally, the widely recognized importance of deal certainty (or deal finality) at the final stages of an acquisition suggests (by its contrast to preliminary dealings) why formation clarity at a preliminary stage is of unusual importance in the acqui- sition context.227 Deal certainty is important in a final agree- ment because each party recognizes that counterparties may encounter strong incentives to abandon the transaction in the interim before closing, leaving the abandoned party out of luck. Sellers undoubtedly worry about buyer’s remorse (i.e., the buyer desire to walk away from the deal after signing be- cause in hindsight it may appear that the buyer overpaid in the acquisition).228 On the other hand, the buyer will seek to guard against seller wanderlust (i.e., the tendency of sellers to want to nix the current deal if a better one is available).229 Preliminary agreements likely lack this close scrutiny on pre- serving deal certainty because the participants assume there is not a final transaction. In the presence of formation opacity, however, there is an unstated risk that the deal participants will view their respective commitments to a deal differently, especially without clear terms governing termination, increas- ing the costs of mistakenly-attributed finality in preliminary dealings. Developments in corporate practice all point toward par- ticipant desire for clarity and precision in the formation pro- cess. As previously noted, modified competitive auction 227 See Restrepo & Subramanian, supra note 225, at 1017–19 (discuss- ing the importance of deal protection as a means of securing deal certainty). 228 See id. 229 See id. 180 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 processes have proliferated in the wake of Revlon and market practices that recognize the benefit of competition in the sale of companies.230 As part of this trend, market norms favoring greater formality in contracting have arisen. Written bid pro- cess letters routinely preclude formation contract surprise. The seller controls each stage of the process, including the doc- umentation, and the participating bidders understand that they are engaged in a winnowing process where inadvertent agreements by the seller are not reasonably inferred.231 The prevailing market norm in acquisition sales processes pro- vides an informal indication of participant preference for for- mality in contracting in this context. Notice that this prefer- ence is not altered by the fact that some contracting parties, specifically bidders, may ultimately be disappointed by the outcome of the process. The bidder’s disappointment does not stem from formation surprise in contracting, but rather on the failure to secure the proposed transaction on the bidder’s terms (a result that is entirely consistent with the social ben- efits of contracting). Another way of thinking about differences between corpo- rate acquisitions and other contracting contexts is the absence of features that may favor a regime that tolerates opacity in formation. Informal contracting seems appropriate in contexts where the trade-offs in terms of costs and benefits are non- obvious with respect to contract formation surprise through inadvertence and offsetting contract surprise caused by for- malities that obstruct contract formation. Agreements among friends and neighbors, modification to contractor arrange- ments, or at-will arrangements all appear to be situations where the cost-benefit trade-offs based on the formality or 230 See supra Section II.C (discussing modern practices used to prevent risk associated with contract formation opacity in corporate acquisitions). 231 A prospective buyer is aware that preliminary dealings are part of a carefully delimited sales process and the success of any participant will depend on providing superior value to the seller relative to other prospective buyers. In such a setting, a competing buyer must largely acquiesce to seller’s form of agreement and requirements relating to ancillary agree- ments, such as financing commitments, as a condition for successful partic- ipation in the sales process. No. 1] CONTRACT REALISM AND FORMALISM 181 informality of agreements seems to favor informality to save on the transaction costs of contract formation. Similarly, many contracting situations, such as commercial transac- tions, may involve significant routinization and frequency.232 Others may involve contracting terms (such as spot prices or interest rates) that are market-sensitive.233 These situations create a need for reliable informal contracting, even though there will be instances of contract surprise due to inadvert- ence. In contrast, acquisition agreements involve inherently complex context-specific issues and will turn on non-transi- tory long-term valuations based on an estimate of the acquisi- tion’s ability to generate or contribute to future going concern value of the acquiror. Such determinations rest on business judgment about long-term factors and embedded costs. Unlike the business need in ordinary commercial transactions to lock in the parties’ position in real-time so that the counterparty can enter transactions rapidly in response to fluctuating mar- ket conditions, the business need to lock-in the parties’ posi- tions does not stem from the practicalities of such transac- tions; parties may want to lock in the deal for reasons of self- interest, but the transaction itself does not require heavy re- liance on informal contracting. 3. The Cost of Opacity Outweigh Its Benefits in Preliminary Acquisition Dealings While the factors above suggest that contracting in the cor- porate acquisition context is distinctive in nature from many other contracting contexts, it is necessary to consider whether those differences on balance warrant a different approach to a formal writing requirement, and specifically whether such factors likely affect the social costs and benefits of contracting requirements that require increased formality. Thus, the case for a SAAR+ depends on showing in the acquisition context that the costs of avoiding contract surprise are relatively low 232 See supra note 3. 233 See, e.g., Tchrs. Ins. & Annuity Ass’n of Am. v. Trib. Co., 670 F. Supp. 491 (S.D.N.Y. 1987) (involving a commitment letter in financing). 182 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 while the benefits of clarity through enhanced formal require- ments are correspondingly significant. As to the first factor, the inherent contracting complexity of acquisitions suggests that the risk of contracting surprise and the costs of mistakenly inferring a binding final agree- ment are likely high. As previously noted, negotiations in the acquisition context are typically viewed as a multi-stage pro- cess in an informationally complex environment. Core issues relating to pricing and financing typically must be resolved before subsidiary issues such as representations and warran- ties, termination conditions and fees, and covenants even begin to make sense. Indeed, this understanding of the nego- tiation process is borne out by what is observed in such pro- cesses. The back and forth suggests a recognition that parties do not share a common understanding of when the multi-stage negotiations have reached a stage of a binding commitment, except when the deal is signed. In such circumstances, parties frequently explicitly insist on reciting the non-binding charac- ter of any negotiations to achieve clarity between participants’ psychological commitment to a deal and the onset of partici- pants’ joint legal commitment. The inherently multi-stage process makes it more difficult to discern when the line be- tween contract formation and mere negotiations in acquisi- tions has been crossed relative to other contracting contexts, and, consequently, the expectations of the contracting parties are more likely to diverge regarding when the line has been crossed. In other words, the likelihood of legitimate contract surprise seems relatively high absent a bright-line relating to formation or outcome. The costs of the contract surprise seem to exceed contract frustration concerns because, notwithstanding the need for multiple steps in the negotiating process, there are obvious self-interested reasons that both parties will seek deal cer- tainty and press to complete written agreements when a bar- gain has been struck. From the buyer’s perspective, knowledge of negotiations can excite the interests of compet- ing buyers, raising the prospect of a bidding contest and a re- sult contrary to the buyer’s interest. On the other side, sellers typically are anxious to resolve the status of acquisition No. 1] CONTRACT REALISM AND FORMALISM 183 transactions because the possibility of a transaction may be unsettling for employees and customers. In the case of a public company, where share price is a function of market-sensitive material information, the imperative for speed is all the greater, as prices fluctuate depending on rumors and the risk of insider trading liability increases with material develop- ments in the dynamic process leading to a final agreement. Similarly, once a seller has made a decision to sell, or at least explore a sale, there is an obvious incentive to move on from a business which does not figure in the seller’s long-term plans. Unlike recurring commercial transactions that may war- rant streamlining the legal process to avoid unnecessary de- lays in formation, cumbersome formality requirements, and the advice of lawyers, acquisition transactions invariably will involve lawyers. Where lawyers will be involved routinely, the incremental costs of formal requirements are likely to be small. The parties have sought to include counsel in contem- plation of working toward a final written agreement. The fail- ure to attain such an agreement does not arise from a formal- ity requirement so much as an inability of the parties to strike a mutual agreeable bargain. Moreover, because acquisition transactions will involve sophisticated counsel on both sides of the transaction, typical concerns in consumer contracts re- lating to contracts of adhesion are simply not implicated by the formality requirements proposed here. In addition, parties have adequate incentives in the acqui- sition context to negotiate a binding formal agreement where a contract is genuinely sought by both parties.234 Bright-line formal requirements to formation bring about socially benefi- cial clarity while parties are otherwise well-situated to protect their interests through private ordering. In other words, the risk of mistaken contract surprise likely far exceeds the risk of mistaken contract frustration. Formality in contracting pri- oritizes eliminating contract formation surprise due to inad- vertence, reflecting a judgment that such surprise does not serve a useful purpose (i.e., one that from a policy perspective 234 The significance that deal certainty has assumed in such transac- tions evidences the strong incentives of parties to conclude a transaction. 184 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 should not be protected) in the acquisition transaction con- text. Under the existing common law regime, in contrast, even very sophisticated contracting parties in corporate acquisi- tions cannot necessarily prevent contract formation, merely by formally disclaiming an intent to reach a final agreement (since any such disclaimer is always subject to fluid oral mod- ification), or by explicitly stating that a final agreement is con- templated (since the requisite mutual assent for a binding agreement may be found to have occurred before completion of the contemplated final agreement).235 The common law ap- proach unnecessarily discounts protection from contract in corporate acquisitions where risk of mistakenly imputed con- tracts is fairly high and adequate means of protection from contracting abuses would otherwise exist, making formality requirements a reliable mechanism for ascertaining true con- tractual intent. Admittedly, a formality requirement arguably makes it more difficult for one party to lock in a beneficial deal, as a matter of stealthy bargaining tactics, but this kind of cost as a matter of social policy is not worthy of protection. As noted above, requiring a formal written agreement will generally not increase the underlying transaction costs at the margin of a genuine intended agreement (i.e., materially increase the costs of an agreement where a bargain has been struck). Even assuming that a formality requirement may lead to games- manship about signing up a deal (thereby, allowing one or the other party to evade obligation while considering alternative opportunities), it is hard to see how opting for a fact-based de- termination regarding formation serves as an efficient or ef- fective means of policing would-be unfaithful counterpar- ties.236 Finally, formal contracting requirements have a judicial administrative benefit. They shift the burden of resolving con- tract formation issues from courts to the contracting parties. 235 See supra Section II.C. 236 See Faux Contracts, supra note 17, at 1060–64 (discussing practi- tioner perception of reputation of negotiating parties as repeat players as well as within the context of a single deal). No. 1] CONTRACT REALISM AND FORMALISM 185 In many contexts, it makes sense to impose this burden on courts, where the need for informal contracting is high and courts offer a relatively efficient mechanism for resolving dis- putes. Nevertheless, in the acquisition context, application of a facts-and-circumstances approach to preliminary dealings adds to litigation costs and likely produces more defensive ne- gotiations strategies rather than fostering unambiguously constructive negotiations at an earlier stage. Because con- tracting parties are well-equipped in the acquisition context to both signal and recognize the onset of binding commit- ments, courts are relieved of this obligation, significantly re- ducing the risk of needless and high-stakes judicial errors. * * * The preceding discussion makes the case for rethinking common law principles that contribute to opacity in prelimi- nary dealings in the context of corporate acquisitions. A for- mal writing requirement in the case of preliminary dealings essentially provides clarity as to intent to contract and such clarity has the tangible benefit of diminishing contract sur- prise, especially in circumstances characterized by multi-step negotiations that contribute to contract opacity, both in for- mation and outcome. In the context of corporate acquisitions, the benefits of a formal writing requirement likely exceed the costs arising from its imposition, assuming a feasible formal requirement can be formulated. The following subsections provides a concrete illustration of such a requirement for cor- porate acquisitions—the SAAR+—that both eliminates con- tract surprise with respect to informal acquisition agreements and substantially mitigates outcome surprise in formal pre- liminary agreements, all without significant altering the rel- ative costs of contracting in the acquisition context. B. The SAAR+ Proposal The SAAR+ proposal narrowly addresses the problem of contractual opacity in preliminary dealings in the context of corporate acquisitions. The requirement has two distinct fea- tures: (1) a writing requirement as to the transaction, and (2) 186 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 a default remedies requirement that parties can contract around in writing. The first feature addresses the issue of in- advertent contract formation in informal agreements and the latter feature, when supplemented by the basic writing re- quirement, brings clarity to formal preliminary agreements. 1. Eliminating Formation Surprise in Informal Acquisition Agreements The SAAR+ proposal’s core requirement would impose an executed written agreement requirement as a condition to en- forcement of any acquisition agreement. In other words, en- forcement of acquisition agreements would require the parties to explicitly and formally express an intent to contract in the context of acquisitions. As shown above, formation opacity serves little material benefit in the context of corporate acqui- sitions. Unlike other contracting contexts, a bright-line formal writing requirement does not have the disadvantage it could in other contexts. As a useful illustration of the effects of such a requirement, the outcomes in cases like Texaco and Turner Broadcasting would be reversed. In Texaco, there never was an integrated signed agreement of either a definitive or pre- liminary agreement.237 Similarly, in Turner Broadcasting, the draft definitive agreement was never executed.238 The SAAR+ proposal described here would need legislative action to effectuate.239 The principal technical challenge posed by such a requirement lies in formulating a workable proposal for implementation. As noted in the appendix, there are two issues that stand out. First, there would be a need to define an acquisition agreement in a way that segregates such agree- ments from other agreements. As explained, the article bor- rows from the Hart-Scott-Rodino Act’s definition of an acqui- sition used for purposes of antitrust clearance. Although serving a very different purpose in the contracting context, the definition serves an analogous function to the concept’s func- tion in the antitrust context. 237 See supra text accompanying notes 56–65. 238 See supra note 46. 239 Draft text for the proposal is appended in the appendix. No. 1] CONTRACT REALISM AND FORMALISM 187 Second, the definition must be distinguishable from other ancillary agreements that may separately accompany an ac- quisition or be embedded in its terms. This becomes especially important with respect to the second feature of the SAAR+ proposal, namely the remedy limitation in the acquisition agreement with respect to acquisitions, absent a written opt- out. The SAAR+ would treat ancillary undertaking as severa- ble from the acquisition agreement and not subject to any ex- plicit remedy limitation. 2. Mitigating Outcome Surprise in Formal Preliminary Agreements The source of formation surprise in informal agreements is apparent. The absence of formality creates the potential for divergent expectations regarding the formation of a contract between the transaction participants. Formal preliminary ac- quisition agreements eliminate the problem of informality as a source of contract formation surprise precisely because only executed formal written agreements will be binding. Never- theless, as has been discussed, an analogous opacity problem lurks in binding formal preliminary acquisition agreements (which in some cases may include letters of intent, memo- randa of understanding, or even term sheets). Here, the avoid- able contract “surprise” or uncertainty does not arise so much from the inadvertent consequences of negotiations, but rather the effect of a preliminary agreement in binding the partici- pants to a definitive agreement. As noted above, formal preliminary agreements are a form of deliberately incomplete agreement.240 They are incomplete in several respects. First, they are incomplete in stating what will be the outcome of future negotiations (i.e., they are delib- erately incomplete due to the many unstated terms of a con- templated definitive agreement that will necessarily follow). Second, they are potentially incomplete or opaque in explicitly informing the court of what type of preliminary agreement is contemplated—a binding Type I agreement, a binding Type II agreement, or merely a non-binding agreement to agree. 240 See supra note 191. See also text accompanying notes 79-80. 188 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 The SAAR+ proposal does not afford the same easy fix to the problem of contract surprise in formal preliminary agree- ments that its formality requirement achieves in the case of inadvertent informal acquisition agreements. Indeed, the SAAR+’s formality requirement serves little purpose in the case of formal preliminary acquisition agreements, other than foreclosing oral modifications of the formal preliminary agree- ment, since by definition such agreements are signed written agreements. As noted, formal preliminary agreements are de- liberately incomplete and the deliberate incompleteness gives rise to a different type of contract surprise relating to outcome and scope uncertainty rather than formation uncertainty. Nevertheless, the common element in the two scenarios is con- tract surprise occasioned by the equivocal intent of the con- tracting parties. The second feature of the SAAR+ addresses the outcome and scope uncertainty problem inherent in formal preliminary agreements. Specifically, the SAAR+ would supplement the agreement formality requirement with a second provision, a default remedy limitation (making reliance damages the de- fault remedy for breach of a formal preliminary acquisition agreement), unless the parties have provided otherwise in their formal agreement. On first blush, the SAAR+’s second feature may seem unrelated to outcome uncertainty occa- sioned by formal preliminary agreements, as it does not ap- pear to resolve the nettlesome issue of intent presented by such agreements.241 However, this feature incentivizes par- ties to clarify the scope and termination consequences in the formal preliminary acquisition agreement itself.242 The 241 See supra Section II.B. 242 See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Con- tracts: An Economic Theory of Default Rules, 99 YALE L.J. 87, 92 (1989) (seeking to provide “a more complete explanation of the current diversity of defaults”). The proposed open-ended default rule is certainly not a majori- tarian default rule in the sense that it merely incorporates “what [contract- ing parties] would have contracted for.” Id. at 91. Nor does it appear to be majoritarian in the sense of an approximation of the “what the majority of contracting parties would want” in the acquisition context. Id. Indeed, a scholar like Hwang would likely assert that a majority of contracting parties would probably favor a no-damages default rule as many such agreements No. 1] CONTRACT REALISM AND FORMALISM 189 default rule essentially requires an objective statement of in- tent in order to deviate from the default.243 An expressed intent to override the default rule as to meas- ure of damages would mitigate the lurking problem of intent in acquisition agreements (i.e., how and in what ways is the preliminary agreement binding?). Under SAAR+, parties can agree that the preliminary agreement protects more than a mere reliance interest, such as protecting an expectational in- terest (or alternatively provide a liquidated amount approxi- mating that value). Similarly, a preliminary acquisition agreement can provide an alternative measure of damages less than the actual reliance measure of damages either by precluding monetary damages or simply stating that the agreement is non-binding.244 While there is no requirement to may be no more than agreements to agree. See Faux Contracts, supra note 17. Accordingly, the default rule here probably should be viewed as a mild form of penalty default rule that ultimately rests on the rationale that “it is cheaper for the parties to negotiate a term ex ante than for courts to esti- mate ex post what the parties would have wanted.” Id. at 93. The penalty default does not reflect asymmetry in bargaining power among, or even unique informational advantages of, contracting parties in the acquisition context. Rather, it is an information-forcing default, much as the example invoked by Ayres and Gertner of the U.C.C.’s zero-quantity rule. The pen- alty default is structured, as discussed in the text below, to “give both con- tracting parties incentives to reveal information” ex ante by explicitly invit- ing parties to contract around the rule’s default. Id. at 97. Information regarding whether a preliminary agreement is intended to be binding or non-binding, and if binding, in what sense, is difficult to discern ex post and is invariably clouded by the contracting parties’ hindsight bias and oppor- tunism in response to changing deal realities. See generally Ian Ayres & Robert Gertner, Majoritarian v. Minoritarian Defaults, 51 STAN. L. REV. 1591 (1999). 243 See cf. Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597, 598 (1990) (“The principal task of the law of commercial contracts is to set default rules for commercial actors and other repeat players who presumably, are quite capable of bar- gaining for customized alternatives. The conventional assumption, there- fore, is that in such commercial environments it is more important for the law to be certain than to be right.”). 244 To the extent that some jurisdictions give effect to non-binding clauses, it would not alter the status quo. However, jurisdictions are not entirely uniform in this approach and so it would bring greater certainty of 190 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 spell out remedies under the preliminary acquisition agree- ment, to the extent that the remedy is expanded or eliminated, parties must express that intent with clarity and precision. This expressed intent will shed light on the nature of the bar- gain that the parties have struck. Even where parties do not bargain around the default, courts at the very least would con- tinue to focus on the equitable factors that they do in analyz- ing damages in breach of a Type II agreement: what did the parties reasonably expect in good faith and the actual degree of reliance by either party with respect to the agreement. The structure of the default rule substantially erodes the importance of the distinction between classification of prelim- inary agreements as Type I or II agreements.245 The parties’ expressed intent as to damages provides strong evidence re- garding which type of binding preliminary agreement is con- templated at the time of contracting —Type I or Type II. The parties’ acceptance of reliance damages as the appropriate measure of damages clearly counsels against classifying the agreement as a Type I agreement and even suggests that su- perfluous nature of such an exercise. In other words, rather than relying on courts to discern the contracting intent of the parties as to the creation of a Type I or II agreement, the SAAR+ proposal forces the party to provide objective evidence of the parties’ contracting intent with respect to the prelimi- nary agreement. Moreover, parties will not merely signal what type of preliminary agreement is intended (i.e., Type I, II, or non-binding), but will likely clarify the circumstances when damages are warranted and/or specify limits on dam- ages.246 outcome. THE RESTATEMENT (SECOND) OF CONTRACTS § 21 is characteristic of this equivocation as a general rule. The default rule would shift the control- ling principle to a bright-line standard in the case of preliminary acquisition agreements. 245 Thus, the SAAR+ approach to formal preliminary agreements intro- duces simplifying analytical benefits. It also sharply reduces the stakes in judicial determinations of whether preliminary agreements are binding or not binding. See also supra note 130. 246 Ex ante negotiation around a damages default does not appear to be infeasible in practice. Admittedly, there may be circumstances where so- phisticated parties do not negotiate around a default. See, e.g., Julian No. 1] CONTRACT REALISM AND FORMALISM 191 A notable design feature of the SAAR+’s default rule is its fixing the appropriate damages default. As proposed, the de- fault is reliance damages rather than either a no-damages de- fault or a default permitting expectation damages. As to the no-damages alternative, there already exists well-developed practice in the acquisitions context that preliminary agree- ments are generally non-binding (i.e., do not trigger contrac- tual liability).247 Accordingly, as noted above, a no-damages default would probably better approximate a majoritarian de- fault either in terms of what most parties would bargain for or what would be optimal in most situations.248 Reliance damages, however, seems preferable as a default to a no-damages default in two respects. As to one type of pre- liminary agreement, namely Type II preliminary agreements, reliance damages are actually the general common law meas- ure to ensure an enforceable obligation to negotiate in good faith.249 Language in an agreement suggesting an obligation to negotiate in good faith arguably sounds as if it is creating an enforceable obligation, consistent with some form of Nyarko, Stickiness and Incomplete Contracts, 88 U. CHI. L. REV. 1, 71-72 (2021) (exhaustive empirical study showing that parties fail to negotiate around dispute resolution clauses selected from drafting templates and not- ing its cautionary significance for default terms in contracts). However, damage limitations represent a price (rather than a non-price) term, pre- cisely the kind of default to which sophisticated parties are typically atten- tive. For example, termination fees in definitive acquisition agreements have become an accepted feature of practice. See generally Frank C. Butler & Peter Sauska, Mergers and Acquisitions: Termination Fees and Acquisi- tion Deal Completion, 26 J. MANAG. ISSUES 44 (2014) (documenting use and trends in termination fees); see also Restrepo & Subramanian, supra note 225, at 1016. 247 See Deal Momentum, supra note 17, at 282(“[P]arties commonly use non-binding preliminary agreements.”) (emphasis in the original). In such situations, parties are relying on the reputation of the counterparty to en- sure good faith in negotiation. See Faux Contracts, supra note 17, at 1064– 65. How then does the SAAR+ proposal significantly enhance the effective- ness of TINALEA (or non-binding) clauses in formal preliminary agree- ments? The simple SAAR feature effectively forecloses modification of the TINALEA in the formal preliminary agreement by means of oral agreement. 248 See supra note 241. 249 See supra notes 126-28. 192 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 remedy in damages. The reliance damages default forces the party seeking to prevent an enforceable obligation as an equi- table matter to objectively signal their intent to the counter- party that the preliminary agreement is non-binding.250 A sec- ond, less obvious reason, is to create greater symmetry between the SAAR+ approach (which views the issue from a contract formation perspective) and potential claims based on promissory estoppel.251 The SAAR+ proposal effectively elim- inates promissory estoppel claims, but in doing so, uses an ex- plicit default that treats closely related claims the same. Such an approach essentially discourages artful pleading by liti- gants that multiply causes of action arising out of the same set of facts. A reliance damages default is also preferable to a default that permits expectation damages. As previously noted, reli- ance damages are more common in the case of preliminary agreements, while expectation damages should generally ap- ply in cases of a breach of Type I agreements.252 The SAAR+ proposal opts for the less generous damage measure and im- poses the burden on the party seeking a more generous recov- ery to provide indisputable objective evidence of the parties’ intent in that regard. This seems appropriate where the core problem that the default rule seeks to overcome is the inher- ent ambiguity regarding the nature of a preliminary agree- ment. Moreover, an indeterminate recovery for agreements that do not result in a definitive agreement likely fuels high- 250 As noted above, parties could easily overcome the default and pro- vide for no damages if they chose in which case, a TINALEA clause may be provided in lieu of the reliance default. See supra note 142. In such a case, the parties are relying on the reputation of the counterparty to ensure good faith in negotiation. In addition, the SAAR+ proposal will make a TINALEA (or non-binding) clause more effective since it forecloses modification of the TINALEA by means of oral agreement. 251 See supra note 5, where the potential of the two types of claims to overlap was noted. Structuring the default around reliance damages would make promissory estoppel claims redundant. 252 This follows largely because in the case of Type II agreements there is seldom a reliable means of calculating expectation damages where mate- rial features of the final agreement remain unresolved. See supra notes 123– 26 and accompanying text. No. 1] CONTRACT REALISM AND FORMALISM 193 stakes litigation among transaction participants. Given the inherent indeterminacy of recovery, it is reasonable to opt for a default where courts are likely to be more accurate in calcu- lating reliance damages rather than expectation damages (i.e., out-of-pocket costs are more tangible than the prospects of expectation). The relative costs and benefits of a default damages rule for formal preliminary acquisition agreements argue in favor of the default rule. As in the case of the formal writing require- ment, the default rule will not materially increase the mar- ginal transaction costs of a preliminary agreement where there is genuine agreement between the parties. At that point, the parties have already incurred deal expenses relating to in- vestigating a transaction and preparing a preliminary agree- ment. The main practical benefit of SAAR+ is to impose a firm bright-line understanding of the interests negotiated and pro- tected by the preliminary acquisition agreement if breached. As noted above, where parties mutually do not intend to be governed by the default rule, it incentivizes parties to resolve their respective understandings with respect to damages at a much earlier stage of the multi-step sequence of negotiations and specifically before concluding a preliminary agreement. In other words, it incentivizes clarity as to remedy where the preliminary agreement does not culminate in a final definitive agreement. The default is not an impediment to a formal pre- liminary agreement, as the parties can accede to the default. The default rule structure is an impediment to a preliminary agreement only if we imagine that parties seek to agree to dis- agree about future remedies of their agreement. Of course, in that case, parties probably should not proceed and courts should not be drawn into the role of mediator for a fundamen- tal divergence in the parties’ respective views on remedies. In short, an inability to conclude an agreement under a SAAR+ regime would more likely stem from the lack of a genuine agreement about the proposed acquisition rather than the costs of the formalities themselves. C. Implementation of the SAAR+ Proposal and Its 194 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 Limits If there is one unifying theme of the SAAR+ proposal as applied to acquisitions, it lies in limiting the scope of judicial discretion in the context of preliminary dealings. Correspond- ingly, such an approach makes contracting parties much more responsible for explicitly documenting and necessarily clarify- ing their contract rights in such contexts. The approach advocated here prioritizes in the acquisition context the elimination of surprise in contract formation due to inadvertence relative to potential contract frustration aris- ing from any obstacles to formation created by greater formal- ism.253 By tilting the playing field toward formalism in the case of acquisitions, the SAAR+ balances the risk of surprise (the risk of being blindsided by obligations not deliberately undertaken) and frustration (the unexpected disappointment from the inability to enforce promises that lack the requisite degree of formality) differently than the balance struck at common law. Implicitly, the SAAR+ proposal rests on a judg- ment with respect to informal agreements that the benefits of avoiding costs arising from acquisition obligations not delib- erately undertaken exceed the potential costs in terms of pos- sible contract frustration. Moreover, as to formal preliminary acquisition agreements, a default rule as to remedies will force parties to clarify their respective actual intent rather than im- posing a burden on courts to discern intent from facts and cir- cumstances that frequently provide an imperfect rendering of the agreement. Even if one is persuaded that the SAAR+ proposal is better than the common law framework for dealing with preliminary dealings in the context of corporate acquisitions, the manner of implementing such a regime is not obvious. Contract law is jurisdiction-centric, meaning it varies in the United States across jurisdictions. Moreover, the SAAR+ proposal explicitly 253 Cf. Robert E. Scott, The Case for Formalism in Relational Contract, 94 NW. U. L. REV. 847 (2000) (assessing arguments for and against formal- ism in different types of contracts). See generally Frederick Schauer, For- malism, 97 YALE L. J. 509 (1988) (presenting argument intended to “rescue formalism from conceptual banishment”). No. 1] CONTRACT REALISM AND FORMALISM 195 takes the form of a positive law proposal. It must be imposed by statute which would require action by a state legislature. One more hurdle exists: corporate acquisitions are likely to be cross-jurisdictional in dimension, especially where the appli- cable law is not fixed by jurisdiction of incorporation. That is, the locus of any acquisition will seldom be confined to one state jurisdiction. In short, effective implementation of a SAAR+ regime to preliminary dealings could founder on the intractability of choice of law issues. And yet, the problem of intractability is not quite so difficult to overcome as it may appear on its face. There is a clear distinction between the problems of imple- menting SAAR+ in the case of formal preliminary agreements and informal agreements. Formal preliminary agreements of- fer the ability to use a choice of law clause, which would allow parties to opt into jurisdictions hospitable to a SAAR+ re- gime.254 The attraction of such a regime in well-known con- tract jurisdictions for corporate acquisitions, such as Dela- ware or New York, might spur adoption of such a regime in those states. The challenge is much greater with respect to informal ac- quisition agreements; informal acquisitions lack the formali- ties of governing law clauses and are likely to be governed by the situs of contracting. Today, especially with the prevalence of electronic forms of communication, the situs of any informal agreement is less subject to mutual control or to offer unilat- eral assurance protecting both contracting parties. Obviously to the extent that a SAAR+ were adopted pervasively, such as a uniform law proposal, the concern would disappear. But the prospect of a uniform law movement around the SAAR+ should be regarded as fanciful. Taking a more realistic approach, the clearest problem to displacing the common law as to informal acquisition 254 For a general discussion of interpretation of choice of law clauses, see Tanya J. Monestier, The Scope of Generic Choice of Law Clauses, 56 U.C. DAVIS L. REV. 959, 972-82 (2023) (noting that while courts across jurisdic- tions readily give effect to choice of law clauses in subsequent contractual disputes, judicial practice differs regarding whether choice of law clauses should also govern the assertion of non-contractual claims). 196 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 agreements would be presented by isolated adoption of the SAAR+ proposal by a few states. There are several possibili- ties how limited adoption of the SAAR+ proposal might nev- ertheless have a significant effect, even though no one possi- bility is entirely satisfactory. One approach might be to effect a choice of law selection through an ancillary preliminary agreement, such as a confidentiality agreement. Another pos- sibility for the SAAR+ proposal’s efficacy would be to link its implementation to jurisdiction of incorporation by making the contracting formality a requirement of agreements to merge involving entities incorporated in a particular jurisdiction, or even with respect to sales involving a controlling share of stock or of all or substantially all of a company’s assets. Such an approach, if linked to Delaware, would have far reaching application. This approach would essentially convert the ac- quisition contracting issues into an issue of corporate law. The proposal also poses a separate issue: Why limit SAAR+ only to preliminary dealings with respect to acquisition agree- ments? There are two responses. First, much of the argument for the proposal is that it is contextually appropriate in the context of acquisition agreements, whereas ordinary common law formation principles are certainly appropriate in other contexts. Those other contexts are exemplified by contracting situations where informal contracting is the norm. One has to think only of employer-employee or residential contractor-cus- tomer situations (among many, many such situations) to real- ize why a wholesale rejection of common law principles would not make a whole lot of sense. Similarly, use of the SAAR+ default seems unjustified without regard to context. Formal preliminary agreements involving sophisticated counsel is not well-established uniformly across the myriad of business con- texts where such agreements may be used. For example, pre- liminary agreements, letters of intent, and term sheets nego- tiated by business persons alone may make perfect sense in many commercial contexts. Second, and this reverses the focus of the question, this ar- ticle takes no position on whether there might be contexts that are more analogous to acquisition agreements in the way that they are structured. For example, complex financing tied to No. 1] CONTRACT REALISM AND FORMALISM 197 real estate projects might be similar (leaving aside existing statute of frauds requirements that may already apply). The issue, however, is ultimately beside the point. The applicabil- ity of a SAAR+ regime to other contract contexts in no way suggests not proceeding with a SAAR+ proposal in the context of acquisition agreements. V. CONCLUSION The legal status of preliminary dealings, including prelim- inary agreements, present challenges under existing common law standards. However, these challenges stem not from any fundamental misformulation in common law standards. In many contexts, these principles appropriately balance the costs and benefits of contractual uncertainty regarding for- mation and scope. Rather, the problem stems from whether the same common law standards are necessarily equally suit- able in all contracting contexts. This article shows that an al- ternative contracting regime with respect to preliminary deal- ings in acquisitions imposing greater formal requirements is likely to produce better legal outcomes where the costs of the added formality are dwarfed by the benefits of ensuring closer alignment between the parties’ actual contracting intent and the legal consequences of their bargaining behavior. APPENDIX A - MODEL STATUTORY LANGUAGE FOR SAAR + PROPOSAL a. No action shall be brought upon an acquisition agree- ment, unless the promise, contract or agreement upon which such action is brought, is in writing and signed by the party to be charged therewith. b. No action shall be brought upon a preliminary acquisi- tion agreement, unless the promise, contract or agree- ment upon which such action is brought, is in writing and signed by the party to be charged therewith. c. In an action for breach of a preliminary acquisition agreement, a party shall only be entitled to recovery of 198 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024 reliance damages or restitution, unless another meas- ure is expressly provided for in the preliminary writing (including liquidated damages), not to exceed a rea- sonable approximation an expectation measure of damages. d. In an action for breach of a preliminary acquisition agreement, the court shall give conclusive effect to lan- guage in the agreement that it is not binding. e. As used in this section, unless the context otherwise re- quires— 1. Acquisition agreement The term “acquisition agreement” shall be construed to mean and include all writings that fully and fi- nally contemplate the specification of rights and ob- ligations of parties where a company is to acquire, directly or indirectly, ownership or control of an- other company, where the minimum transaction value is equal to or greater than $5 million, through i. an acquisition of shares; ii. an acquisition of assets or assumption of lia- bilities; iii. a merger or consolidation; or iv. any similar transaction. 2. Preliminary acquisition agreement The term “preliminary acquisition agreement” shall be construed to mean and include all agreements be- tween parties that intend to subsequently contem- plate an acquisition, as described in SPAA § (d)(1), subject to the final negotiation of material terms. Comments: 1. Preliminary writing requirement: Subsections (a) and (b) deal with the requirement that any final agreement, complete or incomplete as to its terms, between corporations in the context of an No. 1] CONTRACT REALISM AND FORMALISM 199 acquisition must be signed by the party whom en- forcement is being sought against. The language of these subsections stems from an existing Massa- chusetts statute of frauds provision, which emu- lates the standard statute of frauds language across jurisdictions. See M.G.L. ch. 259, § 1. However, un- like the statute of frauds, the SPAA requires both that the writing be signed and also evidence the terms of the agreement. This requirement is limited to causes of action for breach of contract and should not preclude tort actions. 2. Remedies: Upon a finding that a preliminary ac- quisition agreement has been breached, a court should employ a reliance measure of damages as a default in the absence of any enforceable remedy provision in the written agreement. If the prelimi- nary agreement includes a provision providing that the remedy for a breach is a liquidated measure of damages, it will be limited to the expectation meas- ure of damages for the proposed transaction. 3. Definitions: The definition of “acquisitions” is modeled on statutory language found in federal se- curities law, the Hart-Scott-Rodino Antitrust Im- provements Act of 1976 (“HSR”). Additionally, the HSR contains a minimum transaction threshold. See 15 U.S.C. § 18a. The minimum transaction threshold of the SAAR is significantly lower than the threshold of the HSR as it better serves the stat- ute’s purpose of conforming to business realities and fulfilling the intent of the parties to the acqui- sition. 200 COLUMBIA BUSINESS LAW REVIEW [Vol. 2024