Using Defined Terms in the Recitals

Here’s a point that I don’t make in MSCD but will be sure to make in MSCD2: Don’t use in the recitals defined terms that are defined later in the contract.

The job of the recitals is to introduce the transaction. If you put in the recitals a defined term that’s defined later, you force the reader to go in search of the definition of that term. As a result, it takes longer to read the recitals. And you might end up with a mildly aggravated reader on your hands.

The agreement I refer to in the “Where to Put the Conditional Clause” post is guilty of this.

A reader would likely gloss over some of the defined terms that are included in the recitals of that agreement but defined later. For example, no reasonably sophisticated reader would wonder what “Effective Time” and “Closing Date” mean.

But what about “Business”? It, too, is used but in the recitals without being defined, and a reader who isn’t steeped in the transaction would probably like to know what it means. It’s defined in the definition section, but any reader who looks there for enlightenment would find the following definition: “‘Business’ shall have the meaning set forth in the Separation Agreement.” That imposes on the reader the further distraction of turning to the separation agreement, a form of which is exhibit A to the merger agreement.

And what about “the Merger”? It too is used in the recitals. The entry under “Merger” in the definition section points the reader to section 2.2(b). In other words, the reader has to turn to page 16 in the contract to know the identify of the parties to the merger!

Many readers would have received the merger agreement as part of a prospectus describing the transaction. But that’s irrelevant—you should always assume that any contract you draft will be read on its own.

By the way, this issue is different from the question of whether it’s OK to define terms in the recitals. Here’s what MSCD 2.56 says:

There is no reason not to define some terms in the recitals, but do not unduly clutter with definitions what should be a succinct introduction to the contract.