Dear Mr. Bezos:
I noted with interest the contract providing for your acquisition of the Washington Post. (Go here for a PDF copy.) Whereas others have considered the substantive implications, I limited myself, as usual, to the drafting. I skimmed the contract and wasn’t surprised to conclude that it leaves something to be desired.
Why am I telling you this? Because of the intriguing contrast between, on the one hand, Amazon’s relentless search for efficiency and ease of use and, on the other hand, the suboptimal drafting on display in the Washington Post contract. (Indeed, my thought is that even if you never read this, my invoking your name would serve to highlight that contrast.)
Why should anyone care? Because if M&A drafting were put on a more modern footing, deal contracts would be clearer and easier to read, and shorter, so drafting and negotiating would take less time and be less expensive. And by eliminating the fog of traditional contract legalese, you reduce the chance of a dispute caused by contract uncertainty. Such disputes are depressingly routine.
So here are some quick comments regarding the contract. I’ve written at length elsewhere about each of the issues mentioned, in particular in my book A Manual of Style for Contract Drafting.
Categories of Contract Language
The verb structures are chaotic. To start with, consider “The Seller agrees to sell, and the Purchaser agrees to purchase …” Is that language of performance (with the sale happening at signing) or language of obligation? Given the context, it’s evident that it’s the latter, but why not use a verb structure that makes that clearer?
I saw several instances of “agrees [or agree] that.” For example, “Each party further agrees that service of any process …” But we know that the parties are agreeing to what’s in the body of the contract, so it’s redundant to say so.
Elsewhere, shall is used to express obligations (for example, “the Seller shall take or cause to be taken such actions as may be necessary …”), but will too is used to convey the same meaning (for example, “The Company will change its corporate name within 60 days …”). Using different verb structures to convey the same meaning results in murky contract prose.
Similarly, will is used in language of policy (for example, “The Purchaser will not acquire the Company’s interests in …”), but elsewhere shall is used to convey the same meaning (for example, “the Purchase Agreement shall become the binding agreement …”).
Consider the following sentence from section 4(b): “The Seller and the Purchaser shall agree to treat the Transactions as asset sales for U.S. Federal income tax purposes.” The parties have an obligation to agree? Courts generally hold that such obligations are unenforceable.
The contract doesn’t distinguish clearly between obligations and conditions. For example, section 13(b) provides that “All notices … shall be in writing …” So if a notice isn’t in writing, the other party can sue for breach? It would make more sense to state that if a notice isn’t in writing, it won’t be effective. In other words, make it a condition. Although in this context it’s unlikely to result in a dispute, blurring this distinction has given rise to much litigation generally, so it’s best to observe the distinction scrupulously.
It doesn’t make sense to impose an obligation on a nonparty, but that’s what the contract does. See section 12(a) (for example, “The Arbitrator shall within 15 days of the receipt of such materials render a decision …”).
Selected Usages
The contract uses two efforts standards, “commercially reasonably efforts” and “reasonable best efforts.” Does that reflect an attempt to state two different legal standards? That would be misguided, as U.S. courts treat all efforts provisions as meaning “reasonable efforts,” a conclusion supported by idiom and contract law. It would be clearer, and safer, to require only “reasonable efforts.”
The contract contains the standard redundancies “representations and warranties” and “indemnify and hold harmless.” They’re pointless and confusing, and they can cause mischief. See, for example, litigation over the meaning of “hold harmless.” It would be best to use a simpler and clearer formulation and address any directly any related issues.
Other redundancies aren’t hard to find: “governed by and construed in accordance with”; “plead or claim”; and so on. Eliminating them would make life easier for the reader.
The word willful is ambiguous, and it has given rise to some big-ticket M&A litigation. Nevertheless, it features in your contract: “Termination of this Letter Agreement shall not relieve any party from any liability for willful and material breach of this Letter Agreement prior to the date of termination.”
Use of a letter agreement rather than a traditional contract meant that your lawyers had no choice but to eliminate some of the sillier archaisms; they will likely appear in the definitive agreement. Nevertheless, one sneaked in: “IN WITNESS WHEREOF, the parties hereto have caused this Letter Agreement to be executed as of the day, month and year first above written.” Why include this sort of thing?
Structure
I see from the last sentence of section 3 that it’s intended that the definitive purchase agreement contain a “materiality scrape” provision. As I suggest in this 2008 blog post, materiality scrape provisions seem like a bit of ninja M&A dealcraft, but they make little sense.
Provisions that seek to exclude “double materiality” are based on a misunderstanding of how materiality works. (For more about that, see this blog post.) The parenthetical in section 6(b)(iv), the one that says “without giving effect to any limitation as to materiality set forth therein,” seeks to exclude double materiality.
Section 6(b)(iv) uses the following in two places: “except to the extent expressly made as of a particular date, in which case as of such date.” That’s a sign of confusion regarding the implications of using a reference point in representations. For more on that, see my book The Structure of M&A Contracts.
Why begin section 6(d) with “The Purchaser hereby covenants as follows”? Aside from the archaic stylings of “covenant,” I see two problems. First, obligations of the purchaser speak for themselves: they don’t need to be introduced as such, other than perhaps with a heading. And second, section 6(d) actually contains more than purchaser obligations; see “The parties shall …” and “The parties intend …”
“All Exhibits and Schedules annexed hereto or referred to herein are hereby incorporated in and made a part of this Letter Agreement as if set forth in full herein”? It’s unnecessary: if in the body of the contract you refer to an exhibit or schedule, necessarily that brings the exhibit or schedule within the scope of the contract.
Layout
Your letter agreement indulges in the sort of big blocks of verbiage that have made U.S. contract drafting notorious the world over. Section 1(a) weighs in at 22 lines, and section 6(c)(ii) is 29 lines long.
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Please note that I’m not suggesting that your lawyers are somehow less than titans of M&A, or that they’re not working hard to advance your interests. Instead, I’m suggesting that they, like all other M&A lawyers, are wedded to recycling precedent contracts that reflect less-than-optimal command of the building blocks of contract language and nuances of the structure of M&A contracts. That comes as no surprise, given the impediments to change at law firms (something I discuss in this article) and given the pressure to get deal documents prepared speedily. And anyway, why would lawyers want to change a system that has proven profitable for them?
I assume that lawyers at the law firm representing you, Cleary Gottlieb, did most of the drafting. It so happens that I critiqued their drafting of the merger agreement providing for Google’s acquisition of Motorola Mobility; see this 2011 blog post. That’s a coincidence—I’m not picking on them! But if I had had any illusions that the M&A bar is inclined to adopt clearer contract language, Cleary’s business-as-usual approach to drafting your contract would have disabused me of that notion.
So, Mr. Bezos, there you have it. I’m not expecting you to draw any conclusions from this quick analysis or do anything in response. But if you have some pocket change to spare and would like to commoditize M&A drafting, so that clients can instruct law firms to stop endlessly reinventing a substandard wheel, have your people call my people!
