Delaware Chancery Court Addresses Confusion Caused by Indefinite Article

Via this post on the Delaware Corporate and Commercial Litigation Blog I learned of an opinion that the Delaware Court of Chancery issued last month. The case is Ion Geophysical Corp. v. Fletcher International, Ltd., C.A. No. 5050-VCP; go here for a copy of the decision.

Section 6(b) of a stock purchase agreement between ION and Fletcher laid out a notice procedure that would allow Fletcher, under certain circumstances, to increase the total number of ION common shares into which it could convert its preferred shares. The question was whether under that provision Fletcher could issue only one notice or more than one notice.

Here’s the language at issue:

(b) The aggregate number of shares of Common Stock issued, as of a particular date, upon conversion or redemption of, or as dividends paid on the Series D Preferred Shares owned by Fletcher and issuable pursuant to this Agreement shall not exceed the Maximum Number as of that date. The “Maximum Number” shall initially equal [7,669,434], or, in the event of a Change of Control, shall equal [9.75%] of the outstanding common stock of the Acquiring Person as of immediately after the consummation of the Change of Control, and may be increased upon expiration of a 65-Day Notice period (the “Notice Period”) after Fletcher delivers a notice (a “65-Day Notice”) to the Company designating a greater Maximum Number. A 65-Day Notice may be given at any time. From time to time following the Notice Period, Common Stock may be issued to Fletcher for any quantity of Common Stock, such that the aggregate number of shares of Common Stock issued hereunder is less than or equal to the Maximum Number.

Vice Chancellor Parsons held that “the plain language of § 6(b) unambiguously indicates that the parties intended that Fletcher could issue one or more 65-Day Notices under the Agreement.” In reaching that conclusion, he focused on use of the indefinite article a in the second sentence of section 6(a)—”a 65-Day Notice period” and “a notice.” He then considered use of “the Notice Period” in fourth sentence, and “at any time” in the third.

But I suggest that those usages have no bearing on whether the parties contemplated that Fletcher might deliver more than one notice. And Vice Chancellor Parsons ignored the one usage that does point to the prospect of more than one notice—persisting with the indefinite article a in the third sentence, “A 65-Day Notice may be given at any time.”

Strictly speaking, then, one could say that section 6(b) isn’t ambiguous. But that presumes that the parties were fully aware of the relatively subtle implications of the language they were using—a debatable notion. So I think it’s appropriate to describe this language as ambiguous, or at least dangerously unclear.

This case reminds me how unfortunate it is that as a rule, courts won’t admit expert testimony for purposes of determing whether contract language is ambiguous. (That’s something I discussed in this June 2009 AdamsDrafting blog post.) The caselaw shows that it’s unrealistic to expect semantic acuity of most judges.

But as always, I’m mostly interested in how this dispute could have been avoided. That’s easy—if the parties had contemplated the possibility iof more than one notice, it should have been specified in section 6(b) that Fletcher “may deliver one or more” notices. Presumably Fletcher’s lawyers drafted the stock purchase agreement. I imagine they had some tense conversations with their client once this dispute arose.

I wrote in this May 2007 AdamsDrafting blog post about another dispute in which this issue reared its head. It’s clear that I should include in the third edition of MSCD—still just a twinkle in my eye—a discussion of this confusion regarding whether the indefinite article a refers to just one item or to one or more items and how you resolve that confusion by using one or more.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

3 thoughts on “Delaware Chancery Court Addresses Confusion Caused by Indefinite Article”

  1. I agree that the indefinite in the third sentence is the most persuasive. “One or more” doesn’t quite work without more (“…after Fletcher delivers one or more notices…”?), but I think the clause needs to be restructured in any case. My first stab would be to say, after the second “Change of Control” reference, something like this:

    “Fletcher may from time to time increase the Maximum Number upon 65 days’ notice to the Company designating a greater Maximum Number. From time to time…”

    The clause should also be referenced back to the conditions allowing an increase, as it is misleadingly broad on its own.

    The judge also mentions the inclusion in the agreement of one of my pet dislikes – a boilerplate construction clause stating that terms defined in the agreement “include the plural as well as the singular”. A clause of this kind would make a nonsense of most agreements if applied throughout, yet it usually makes an appearance.

    • W: I agree that more often than not fixing this sort of problem requires some fiddling.

      I’m not a fan of “from time to time”; I prefer “on one or more occasions.” See MSCD 2.129-136.

      And I agree that a provision specifying drafting conventions of the sort mentioned by the judge is nonsense.


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