I’m grateful to stalwart readers Steven Sholk and Mike Wokasch for contacting me about the Bear Stearns merger agreement. (Click here to go to a PDF copy.)
This deal raises all sorts of policy issues, but we at AdamsDrafting say to heck with the big picture—let’s look at the drafting angle! I offer below some random impressions derived from ten minutes spent skimming through the agreement.
The Good News
- Hey, they used an index of defined terms! And they didn’t clog up the works by putting a big definition section at the front of the body of the contract.
- And they used a ragged-right margin.
The Bad News
- “Merger Agreement” would have been fine as a title: including “plan of merger” in a title accomplishes nothing, as discussed in this post. Besides, the DGCL uses the phrase “plan of merger” only twice, and in a way that suggests that it was inadvertent.
- Not all defined terms are included in the index of defined terms. I noticed in passing that “Guaranty” appears to be missing.
- Above the recitals is the heading WITNESSETH. With a space between each letter. That tells you that the battle for clear drafting was lost before it even began.
- What’s with all those shalls in the recitals?
- The lead-in contains a traditional recital of consideration. The fact that you can find them in 98.2% of all contracts doesn’t make them any less useless.
- Ah, intending to be legally bound. Sigh.
- Whoever drafted this agreement has a terminal case of the shalls.
- Section 1.7 seeks to impose obligations on Bear Stearns officers and directors. But they’re not party to this agreement; it would make more sense to address the matters in question in a condition rather than an obligation.
- Because they dispensed entirely with a definition section, some of the provisions are clogged with integrated definitions of snore-bore defined terms. See for example section 3.4. They would have been better off sticking those definitions in a definition section placed at the back, with the boilerplate.
- Section 6.10 says that in certain circumstances, “each of the parties shall in good faith use its reasonable best efforts to negotiate a restructuring of the transaction.” It would have been more accurate and vastly more concise to simply require the parties to negotiate in good faith. And what’s more, in some jurisdictions an agreement to use efforts to agree is unenforceable.
That’s all I have time for, I’m afraid. I invite you to chime in.
8 thoughts on “The Bear Stearns Merger Agreement—It’s Not a Thing of Beauty”
How about the variations of “provided that?” There are easily a half dozen variations used throughout the contract: “provided, however, that”, “provided, further, that”, “provided that,” some with underlines, some without, some preceded by semi-colons, some with comma-and, some without any punctuation, etc.
Mike: Yes, I noticed that. I saw a provided, further, that and looked upstream for provided, however, that, but didn’t see it. Of course, all such formulations should be put out of their misery. Ken
I certainly can’t blame anyone for wanting this document to look as plain-vanilla as possible. The fact that there was something on paper that looked familiar to tradesmen working in such an historically difficult moment in time was probably comforting to them. I know you’re trying to break us all of ingrained habits, but I’d cut them some slack on the occasional reversion to them in this case. The pressure must have been tremendous—the world was watching!
Scott: You’re correct, and in my post I tried to convey the notion that this transaction would certainly not have been the occasion for someone to take a stand for drafting purity! That said, I’m not sure that WITNESSETH could ever be described as “plain vanilla.” Ken
Enjoy your insight – Just in case you haven’t seen this from today’s NYT re the bear deal.
“JPMorgan and Bear were prompted to renegotiate after shareholders began threatening to block the deal and it emerged that several “mistakes” were included in the original, hastily written contract, according to people involved in the talks.
One sentence was “inadvertently included,” according to a person briefed on the talks, which requires JPMorgan to guarantee Bear’s trades even if shareholders voted down the deal. That provision could allow Bear’s shareholders to seek a higher bid while still forcing JPMorgan to honor its guarantee, these people said.
When the error was discovered, James Dimon, JPMorgan’s chief executive, who was described by one participant as “apoplectic,” began calling his lawyers at Wachtell, Lipton, Rosen & Katz to seek a way to have the sentence modified, these people said. Finger pointing over the mistakes in the contracts began as bankers blamed the lawyers and vice versa.”
David: Thanks for pointing that out. As I keep saying, filling your contracts with archaisms, redundancies, and otherwise bloated prose greatly increases the chances that you’ll screw up. Ken
Another problem with the Witnesseth clause is that such a clause is justified, if at all, by setting forth recitals of fact. The agreement’s Witnesseth clause, however, contains no meaningful factual recitals. This is a missed opportunity for the draftsman.
Under California law, for example, the facts recited in a written instrument are conclusively presumed to be true as between the parties (and their successors in interest), but this rule does not apply to the recital of consideration. Evidence Code §622. A similar rule obtains in many other jurisdictions, sometimes under an estoppel argument.
Surely there were some facts that would have been useful for JP Morgan to have treated by a court as true in the event of litigation between it and Bear Stearns. How about the facts that the agreement was drafted on short notice, that JP Morgan was acting at the request of the Fed, or that JP Morgan did not have the benefit of conducting due diligence?
Of course, expensive NY law firms probably wouldn’t want to recite at the outset of an agreement that their work product might be imperfect. So a delicate way of stating it would be needed.
But isn’t it conceivable that some such recitals might be useful in litigation? Take, for example, the claim that a sentence was “inadvertently included” in the agreement by mistake. Might not suitable recitals as to the circumstances of putting this agreement together help in a claim of mistake by JP Morgan?
I don’t know much about the transaction, but I suspect that there were a number of useful factual recitals that could have been made, and in the event of litigation between the parties, those recitals could avoid the expense of proving facts that everyone would have agreed on at the time of signing the contract.