When a set of representations is being made by more than one party, you can address that in the representations lead-in in one of two ways. First, you can have the parties make the representations collectively, as in The Sellers represent to the Buyer and Able, Baker, and Charlie represent to the Buyer. Second, if the representing parties are referred to by means of a collective defined term such as the Shareholders, you can say Each Shareholder represents to the Buyer.

The implications of having each member of a given group make a set of representations rather than the members of that group collectively depends on the nature of those representations. The representations might refer only to facts pertaining to the group member making the representations. For example, a shareholder might make representations regarding its ownership of shares being acquired, with each representation referring to that Shareholder. In the case of any such representations, the group member is making only representations as to itself and wouldn’t be liable for inaccurate representations made by any other group member as to that other group member. If that’s the nature of the representations, it’s appropriate to help flag that by adding to the lead-in the words as to itself, as in, for example, Each Shareholder represents to the Buyer as to itself.

Alternatively, each group member rather than the group collectively can make a set of representations even if the representations relate to more than just the representing group member. But in that case, saying, for example, Each Seller represents to the Buyer is functionally identical to saying The Sellers represent to the Buyer. It would be clearer to have the group members make the representations collectively, having the lead-in refer to an individual group member only when each group member is making representations only as to itself.

When more than one party is making a set of representations, it’s common practice for drafters to use in the representations lead-in the couplet jointly and severally. But joint and several applies to liability—it means that a given liability can be apportioned equally among the members of a group or can, to a greater extent or entirely, be laid at the door of one or more members of the group, at the discretion of whoever is apportioning the liability. In an acquisition agreement, the place to allocate liability among a group of parties is in the indemnification provisions. Doing so would render it unnecessary—in fact illogical—to have those parties also make their representations jointly and severally. And it follows that the representations lead-in isn’t the place to say that the members of a given group are severally but not jointly liable.

If the signing and closing are simultaneous, the contract would usually contain deal provisions, representations, indemnification provisions (unless the target is public), and boilerplate, as well as any post-closing obligations.

If the closing is scheduled to take place sometime after signing, the contract would typically also contain obligations to be performed before closing, conditions that have to be satisfied before the parties will be required to consummate the transaction, and termination provisions. These additional components greatly complicate matters. It would be unfortunate to use a deferred-closing structure for a deal that uses a simultaneous signing and closing—you’d spend time building an elaborate structure that ultimately not only proves to be useless but also adds confusing clutter.

In the early stages of any deal, it may be unclear whether the closing will be deferred. In that case, it may be that you have to draft for a deferred closing, so as to keep your options open—it would be awkward to convert a deal from a simultaneous-signing-and-closing structure to a deferred-closing structure. But if you find that you’re able to do a simultaneous signing and closing, I’d then strip down the contract accordingly.

I recall someone’s once suggesting that even with a simultaneous signing and closing, it’s best to use a deferred-closing structure because it’s useful to have the contract contain a list of closing conditions—in this context, that means a list of (1) anything that would have to be in place before the parties sign and (2) any items to be exchanged at signing. But you can incorporate that kind of list without imposing on the contract an all-out deferred-closing structure.

Any thoughts?

If a buyer wants to address in an M&A contract circumstances that are under the seller’s control—for example, whether the seller is in good standing under Delaware law—it would make sense to do so by means of a representation. If that representation turns out to have been inaccurate, either at signing or at closing, that would give the buyer a right to indemnification. By operation of the bringdown condition, that inaccuracy would also allow the buyer to walk, subject to any materiality qualification built into the bringdown condition.

If by contrast one is dealing with an action to be taken by the seller between signing and closing—for example, the seller’s giving the buyer and its representatives access to the seller’s premises—you’d address that by means of a pre-closing obligation imposed on the seller. Breach of that obligation would, like an inaccurate representation, give the buyer an indemnification claim and the right not to do the deal.

But a given issue might not be under the seller’s control. It might be under the control of someone else. Or perhaps it relates to general economic conditions—for example, what the market price of unobtanium is. It would be problematic to have the seller make a representation regarding such issues, as in At Closing the market price of unobtanium will be at least $10,000 per gram, given that the seller would be powerless to ensure that the representation is accurate. By the same token, it would be futile to impose on the seller a pre-closing obligation to ensure that circumstances over which it has no control are in effect as of the closing.

Instead, it would be more appropriate to have it be a condition to closing that those circumstances are in effect at the closing—The Buyer’s obligation to consummate the transaction contemplated by this agreement is subject to satisfaction of the following conditions: … that the market price of unobtanium is at least $10,000 per gram.

But you sometimes hear lawyers arguing that it would nevertheless be preferable to address in a representation or pre-closing obligation circumstances over which a party has no control, because then the buyer could sue for damages if the representation were inaccurate or the obligation had been breached. But that assumes that rather than recharacterizing it as a condition, a court would feel compelled to take such a representation or pre-closing obligation at face value—an uncertain proposition. It would be more logical to address this sort of risk allocation through the indemnification provisions or by providing for a breakup fee.

I’ve looked for cases in which courts have recharacterized as a condition something that a contract refers to, illogically, as a representation or pre-closing obligation. So far I haven’t found anything, doubtless because no obvious search strategy presents itself. Relevant cases wouldn’t necessarily involve M&A. I’d be delighted if anyone could suggest any leads.

There are various Deal Points Studies; I’ve recently consulted the 2008 Strategic Buyer/Public Target M&A Deal Points Study and the 2007 Private Target Deal Points Study. (Because the Deal Points Studies can be accessed only by those who’ve joined the Committee on Merger and Acquisitions, I haven’t provided links.) Each study presents a statistical breakdown of how key provisions are treated in a sample of publicly available contracts.

The value of the Deal Points Studies is that they give me a much better sense of M&A drafting trends than I could get by doing my own rooting around on the SEC’s EDGAR system.

But bear in mind that the Deal Points Studies are descriptive rather than prescriptive—in some of the contracts in a given sample the drafters may have made use of a certain provision, but it doesn’t follow that that provision makes sense.

For example, both studies that I looked at show what proportion of the contracts in the sample contained a bringdown condition crafted so as to eliminate double materiality. It so happens that double materiality is a figment of practitioner imagination: it’s based on a misunderstanding of how materiality operates. It should come as no surprise that caselaw makes no mention of materiality. (For more on double materiality, see MSCD 8.48–51. It’s too convoluted a topic to describe here.)

So by all means consult the Deal Points Studies, but don’t adopt uncritically the provisions they describe.

A materiality scrape is a pro-buyer provision that specifies that when determining whether any given representation is inaccurate for purposes of the indemnification provisions, or determining the amount of damages arising from any such inaccuracy, or both (depending on how the materiality scrape is drafted), any materiality qualification is to be disregarded. The ABA’s 2007 Private Target Deal Points Study found that 22% of the 143 acquisition agreements in the study contained such a provision.

Materiality-scrape provisions present a number of problems. First, materiality qualifications necessarily are to be disregarded for purposes of determining the amount of damages arising from an inaccurate representation—nothing is accomplished by saying so. That’s because as a matter of logic a materiality qualification should be relevant only for purposes of determining whether a representation is inaccurate.

Materiality-scrape provisions are also problematic in that they could encompass provisions that would make no sense if stripped of materiality—for example, Since December 31, 2007, no MAC has occurred. They could also serve to automatically, and therefore problematically, render inaccurate representations keyed to schedules—for example, Schedule 4.2 contains a list of the Seller’s material contracts. So it would be best to draft materiality-scrape provisions so as to capture only materiality qualifications in the form of exceptions to representations.

But materiality-scrape provisions exhibit a more fundamental shortcoming. In any acquisition agreement that contains a bringdown condition that’s subject to a materiality standard—and that’s the vast majority of them—any materiality exceptions in the representations would serve only to limit the indemnification obligations of the representing party. (In other words, they wouldn’t be necessary to prevent the other party from walking from the deal because of a less-than-material inaccuracy in a representation.) Including a materiality-scrape provision would neutralize that one function.

It follows that it would be much more efficient instead to (1) eliminate both the materiality-scrape provision and all materiality exceptions to representations and (2) make any seller indemnification obligations subject to a basket. (A basket is a threshold, expressed as a dollar amount, that indemnifiable losses must reach before the seller becomes liable.)

The basket would constitute the seller’s sole protection against being subject to indemnification claims for relatively minor inaccuracies in its representations. The parties could devote their energies to negotiating the amount of the basket rather than wasting them on negotiating a bunch of materiality qualifications to the seller’s representations, then using a materiality scrape to make those qualifications disappear in a puff of smoke.

Here’s the lesson to be drawn from this: M&A contracts are intricate contraptions—pull a lever here and a trap door opens over there. Many drafters appear to have only a shaky grasp of the topic, as it’s easy to spot stuff in acquisition agreements that, due to how the logic works, is either redundant or makes no sense. Add to the list use of a materiality-scrape provision in a contract with a brindown condition subject to a materiality standard.

If you think I’m mistaken, I’d be interested to hear it.

I apply to this topic the same approach I bring to bear in MSCD. The manuscript provides specific guidance regarding what contract language you should use to accomplish a given aim and what contract language you should avoid. Also, it presents some of its analysis in the form of tables, with the aim of making that analysis clearer. And it doesn’t hesitate to depart from the conventional wisdom.

In working on the manuscript, I’ve enjoyed the contrast with MSCD: Clear contract language is, as a general matter, a function of the cumulative effect of countless separate decisions, most of them of modest significance when considered in isolation. By contrast, the structure of M&A contracts is more of a puzzle, with small changes having dramatic consequences.

I’m currently discussing with West Legalworks the notion of doing a series of webinars on this topic or publishing the manuscript as a booklet, or both. And I’m contemplating devoting more of my energies to doing in-house M&A seminars. With that in mind, I thought I’d run by you one of the more interesting topics—as of what date, or dates, should the seller make its representations?

Any set of representations is preceded by an introductory phrase, or “lead-in.” Here’s the lead-in I recommend:

The Seller represents to the Buyer as follows, as of the date of this agreement and as of the Closing:

The wording of the lead-in raises a number of different issues, but what’s relevant for this post is that the recommended representations lead-in states that the seller is making the representations as of the date of the agreement and as of the closing. Review of contracts filed on the Securities and Exchange Commission’s EDGAR system indicates that although some drafters opt for that approach, others prefer not to state when the representations are being made and so use a lead-in such as this one:

The Seller represents to the Buyer as follows:

The latter approach results in the representations being made as of the date of the agreement but not as of the closing—the buyer wouldn’t be able to bring a claim for indemnification based on inaccuracy of the representations as of the closing, because no representations had been made as of the closing. Through the bringdown condition, the buyer might be able to use inaccuracy of any representation as a reason not to close, but that wouldn’t allow the buyer to recover damages.

Consistent with this, Kling & Nugent’s Negotiated Acquisitions of Companies, Subsidiaries and Divisions, at § 14.02[6], states that “If a representation is not true at closing (but was true at signing), the representing party cannot be sued for it; the other party can merely refuse to close.” But it goes on to say that “This can be resolved in the buyer’s favor if the indemnification provisions are properly drafted or if the representations (either each one or a general representation) provide that the situation as represented is true at signing and ‘at Closing, will be true.’”

But it would be awkward to address this issue through the indemnification provisions, given that it’s standard for indemnification provisions simply to refer to indemnification for inaccurate representations without addressing when those representations were made.

As for including the time of closing as a reference point in a representation, that wouldn’t result in the representation’s being made as of the closing but it presumably would provide the buyer a basis for claiming damages for inaccuracy as of the closing. But if you instead use the version I recommend as your representations lead-in, you would draft more concisely, as you wouldn’t need to include the closing as a reference point in each representation. It would also reduce the awkwardness of having the seller represent at signing as to circumstances at closing.

It’s standard for acquisition agreements to provide for the seller to deliver at closing an officer’s certificate regarding satisfaction of the conditions to the buyer’s obligation to consummate the transaction. Any given officer’s certificate might simply refer to the conditions in question by section number, or it might track their wording. But having the seller deliver an officer’s certificate at closing isn’t equivalent to having the seller make its representations as of the closing. If the officer’s certificate were incorrect, in that a representation that had been accurate as of the date of the agreement was inaccurate at closing, it’s not clear that the officer’s certificate would entitle the buyer to bring a claim for indemnification that it would not otherwise be entitled to bring under the agreement, as opposed to bringing, say, a claim for fraud.

This is something that Jim Freund discusses in § 5.3.2 of Anatomy of a Merger. He notes that if a representation is made only as of the date of the agreement and circumstances have changed by the time the closing occurs, then “although the purchaser might well have a rescission remedy and other rights under Rule 10b-5 (as well as personal claims against the fraudulent officer and the negligent attorney), the purchaser’s right to indemnification under the agreement is questionable—since the representation was true when made, and the lawyer’s opinion, the officer’s certificate, and the reiteration of representations are all merely closing conditions serving a different purpose in the overall scheme of things.”

The Model Asset Purchase Agreement, published by the American Bar Association’s Section of Business Law, attempts to circumvent this problem. It includes representations lead-ins that are silent as to when the representations are being made, which means that the representations are being made only as of the date of the agreement. So it provides for indemnification in the event of inaccuracy of any representation contained in a certificate delivered by the seller and the shareholders to the effect that their representations are sufficiently accurate to satisfy the bringdown condition. But besides being unorthodox, this arrangement seems contrived—it’s not clear that a certificate to the effect that a condition has been satisfied itself constitutes a representation.

Again, the simpler and clearer alternative would be for the representations lead-ins to state that the representations are being made as of the date of the agreement and as of the closing.

One shortcoming of my recommended form of lead-in is that it’s a little awkward to refer to the seller’s making now representations that it will in fact be making in the future, namely representations as of the closing. It would be more accurate to phrase my recommended version as follows: The Seller represents to the Buyer as of the date of this agreement, and will be deemed to have represented to the Buyer as of the Closing, as follows. But given the added complexity, in practical terms this alternative formulation doesn’t represent an improvement.

So that’s a taste of my analysis of the structure of M&A contracts. I’d be interested to hear what you think. And should I continue working to turn my manuscript into a booklet and a series of webinars?