Superfluous Recitals in Merger Agreements

Methinks that the recitals in the average big-time-M&A merger agreement are bloated. By way of example, below are the recitals from the August 31, 2009, merger agreement for Disney’s acquisition of Marvel. I’ve noted some big-picture comments in bracketed italics; I’ll spare you my many micro-level objections.

RECITALS

WHEREAS, the parties intend that, subject to the terms and conditions hereinafter set forth ["subject to" phrase occurs several times, but flawed logic—the intent precedes the contract, not the other way round], Merger Sub shall merge with and into the Company (the “Merger”) [appropriate topic for recitals], on the terms and subject to the conditions of this Agreement and in accordance with the General Corporation Law of the State of Delaware (“DGCL”);

WHEREAS, the parties intend that the Merger shall be immediately followed by a merger of the Surviving Corporation (as defined below) with and into Merger LLC (the ” Upstream Merger “) [appropriate topic for recitals], on the terms and subject to the conditions of this Agreement and in accordance with the Delaware Limited Liability Company Act (the ” LLC Act “);

WHEREAS, the parties intend that the Merger be mutually interdependent with and a condition precedent to the Upstream Merger and that the Upstream Merger shall, through the binding commitment evidenced by Section 5.18 , be effected immediately following the Effective Time (as defined below), on the terms and subject to the conditions of this Agreement and in accordance with the LLC Act, without further approval, authorization or direction from or by any of the parties hereto [too much information for recitals, and anyway covered in the body of the contract];

WHEREAS, the Boards of Directors of Parent and the Company each have determined that a business combination between Parent and the Company is advisable and in the best interests of their respective companies and stockholders and accordingly have agreed to effect the Merger provided for herein upon the terms and subject to the conditions set forth herein [standard feature of merger-agreement recitals, but is unnecessary, given that authorization is addressed in board consents and in representations in the merger agreement; if this is in effect PR intended for shareholders, that function is better served by the proxy statement];

WHEREAS, simultaneously with the execution and delivery of this Agreement and as a condition and inducement to Parent’s and Merger Sub’s willingness to enter into this Agreement, Parent is entering into a voting agreement with the Company and certain stockholders of the Company (the “Voting Agreement”) [if this is a condition to entry into the merger agreement, I'd expect to see that stated in the body of the contract; simpler just to say in the recitals that the parties have entered into the voting agreement]; and

WHEREAS, it is intended that the Merger and the Upstream Merger, considered together as a single integrated transaction for United States federal income Tax purposes along with the other transactions effected pursuant to this Agreement, shall qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the ” Code “) [omit, as (1) covered in the body of the contract, in obligations relating to tax treatment, and (2) is misleading, as I gather that it's settled law that intent of the parties doesn't control the tax consequences of their actions; instead, when referring to the merger for first time say that it's structured as a reorganization].

NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and subject to the conditions set forth herein, the parties hereto agree as follows [as always, a joke]:

Posted in Uncategorized | 11 Comments

  • http://www.andlaw.eu mark anderson

    Agreed.

    But please indulge a little micro-quibbling with their text, where it refers to terms and conditions.

    1. Why bother distinguishing between terms and conditions?
    2. If they are going to bother, be consistent. Is it “subject to the terms and conditions”, or “on the terms and subject to the conditions” (in paras 1, 2 and 3) or “upon the terms and subject to the conditions” (para 4)? Or “subject to the conditions” (no mention of terms, final para)? And are they “hereinafter set forth”, or “set forth herein”, or just “of this Agreement”?

    Whoever drafted this agreement clearly didn’t care about language or drafting.

  • http://www.ontechnologycontracts.com/ D. C. Toedt

    In some cases, the authors may have been planting hot-button “key words and tricky phrases” in the documentary record, for possible sound-bite use in litigation or administrative proceedings.

  • creditderivativesguru

    Isn’t that redundant — aren’t all recitals superfluous? The recitation of adequate consideration is in the NOW THEREFORE paragraph.

    I started life as an associate at a firm where the corporate forms contained no recitals, and I have continued that practice. If it is important enough, make it a rep/war; if not, omit or make it a definition (which seems to be the purpose from what I read above).

  • Ken Adams

    Guru: You misunderstand the function of recitals. As explained in chapter 1 of MSCD, they serve to set the scene for the reader. In a transaction of any complexity, they can be very useful.

    Only in the rarest of circumstances would you need to explain in the recitals what constitutes the consideration. But whatever the circumstances, the NOW THEREFORE language you point to is, as a matter of black-letter contract law, utter nonsense.

    Ken

  • Kazu

    As to recitals being superfluous, in California, our Evidence Code section 622 provides, “The facts recited in a written instrument are conclusively presumed to be true as between the parties thereto, or their successors in interest; but this rule does not apply to the recital of a consideration.”

  • Ken Adams

    Kazu: That’s useful to know, but the futility of the traditional recital of consideration is so clear that I didn’t even bother discussing it in this post. I’m more interested in the other stuff. Ken

  • http://www.ontechnologycontracts.com/ D. C. Toedt

    Thanks Kazu – I added that to the choice-of-law cheat sheet for California.

  • Joyce Morrison

    I avoid recitals completely if possible.

  • Ken Adams

    Joyce: See my comment responding to creditderivativesguru. Ken

  • Jack

    In states where the Secretary of State’s staff is overly afflicted with life guard syndrome, recitals are helpful in making sure your documents are accepted for filing. For the same reason, even though the satisfaction of statutory requirments may need to be addressed in the body of the contract, reciting or at least summarizing them can be helpful in getting them past civil servant gate keepers.

  • Jeffrey

    Personally, I view recitals as extraordinarily useful and helpful, if carefully drafted (particularly if written in plain English). Any written agreement serves multiple objectives. Beyond listing who will do what, and what happens if any of that isn’t done, an agreement, if thoughtfully drafted, can be a useful tool for helping parties understand aspects of the relationship both prospectively and retrospectively. The recitals can set the context, provide some history, and tee up the meat of the agreement. A little legal reminiscing and foreplay can be quite effective.