More Davidoff-Ribstein-Lipshaw on the Cerberus-URI Case

Steve Davidoff over at M&A Law Profs Blog has more on this opinion, about which I posted several days ago, and with Larry Ribstein’s first and second posts, we may have now beaten the three-headed dog of hell to death. But not quite.

I want to address Larry’s suggestion that Chancellor Chandler has issued a warning to lawyers using “notwithstanding” and “subject to” clauses in complex agreements not to do so because they create ambiguities that effectively require the court to go beyond the document to things like the “forthright negotiator” doctrine. That argument depends on the following thought process actually occurring in the mind of a lawyer about to propose a change to an agreement: “Chancellor Chandler in Delaware has suggested that it is inartful drafting to have a syntactical and grammatical correct overriding of a provision where the content of the two provisions is contradictory. Rather than handle the deal-making problem in this way, which is NOT ambiguous, but merely Rube Goldberg-esque (linguistically speaking), I should confront the other side head-on with the issue, recognizing that we may have a purer document. In doing so, I have decided that the risk of this issue being screwed up by a court in the event of litigation weighs more than the risk of doing something to cause the deal not to close (e.g., triggering further discussion of the provision, losing a face-saving way of resolving a disagreement, causing another round of revisions in a time-sensitive environment, etc.)”

It’s an interesting situation where theory, I think, has to give way to practice. My casual empiricism says lawyers make that calculation doing deals all the time, in one form or another, but that the conclusion is almost always to let either difficult construction or even ambiguity stand for fear of wrecking the deal. (That’s the gist of John Coates’ expert report.) If I were to resort to behavioral psychology and economics, I’d suggest that risk aversion accounts for the ex ante choice – between taking the present deal and the risk of either losing the deal or having an adverse outcome in litigation, we select the certainty of doing the deal – and hindsight bias accounts for the ex post analysis.

In my day, I negotiated some of the most arcane and difficult risk splitting provisions possibly in the history of contract drafting – for example, multiple overlapping indemnification buckets for different kinds of risks like environment, patent, product liability, and so on – all on the thesis that getting cash for the business now outweighed the risk that we somehow had either royally screwed up the contract, or that some unknown liability would come crashing down on us in the future. Most deal lawyers never want to look at an agreement once the deal is closed, because as I’ve said, you pays your money and you takes your chances, and just hope to hell that it all works out.

Or as one of the finest deal lawyers I ever knew, my former boss and later colleague at AlliedSignal, Martin Cohen, used to say, when you are selling a business, the best insurance against lawsuits is that the buyer succeeds wildly with it.

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1 Response

  1. A.J. Sutter says:

    A couple of observations:

    1. Most deals don’t get litigated, thank goodness. I agree that getting the deal closed is more important, and a better bet.

    2. When I was on the in-house side of M&A deals for Applied Materials, I nonetheless felt that my clients (i.e., the business folks) had a right to be able to understand the agreement, since they were going to be held responsible if the acquisition were to fail. I was using several of the major Silicon Valley firms at the time, and I insisted that they write the agreements in a more straghtforward manner, instead of providing a draft that had so many patches and ad hoc clauses accrusted to it over the course of many previous deals that it looked like some contraption from the Beverly Hillbillies. One young partner from one of the largest such firms had the gall to tell me that contracts were for the lawyers and that businesspeople only needed term sheets. He later recanted, and the other firms were quite cooperative all the way. I don’t recall that we necessarily had zero tolerance for “notwithstandings,” but we smoothed out most of the convolutions and corrugations. Sticking up for your client goes beyond haggling over the entity’s legal rights — lawyers should also think of the brains (and rear ends, metaphorically speaking) of the individuals on the team.