Lend Me Your Counsel

This article examines the practice of borrower-designated lenders’ counsel: a quirky transactional practice that helps fuel $1.7 trillion in deal volume every year. Private equity firms borrow money to finance mergers and acquisitions (M&A) transactions—but interestingly, they choose their lenders’ lawyers and pay the lenders’ legal bills, too. This widespread practice of borrower-designated lenders’ counsel, also called “designation,” is widespread in leveraged lending. This article shines a light on designation. It brings into the scholarly discourse practitioners’ publications and original interviews, illuminating the nuances of the practice, explaining the complex set of incentives and norms that have fueled it, and considering the many questions and avenues for new research that designation brings to the fore.

This article makes three contributions. First, drawing on practitioners’ literature and original interviews, we introduce a robust and nuanced description of the practice of designation. This practice occurs in the law’s peripheral vision, in the secondary borrowing transaction that supports many major M&A transactions. And while its impact on M&A may be profound, designation is deeply under-explored in the academic literature. Second, we explain why this practice arose and became dominant. Using interviews with both borrower- and lender-side counsel, we show how an intricate web of norms, law firm billing practices, lenders’ financial incentives, and even lenders’ rankings contribute to the practice of borrower-designated lenders’ counsel. We also discuss how law firms have made peace with the process via their own set of industry-wide norms that are meant to mitigate conflicts and divided loyalties. Finally, we discuss the implications of this practice for theory and practice, including transactional efficiency and attorney ethics.