With some trepidation, I now tiptoe into law-and-economics territory. Specifically, how standards for statements of fact and preclosing obligations in mergers-and-acquisitions contracts relate to standards for conditions to closing.
Widgetco and Acme (both private companies) enter into a contract under which Widgetco would acquire Acme. The contract provides for a delayed closing. Acme makes a statement of fact in the contract that before closing is found to have been inaccurate. Or Acme breaches a preclosing obligation. In either case, Widgetco has a remedy, whether it’s a remedy available under law or an exclusive remedy under the contract (presumably indemnification). Statements of fact and preclosing obligations express the economic bargain of the parties, so Widgetco might have agreed to exclude from the scope of one or more statements of fact or preclosing obligations that which is trivial.
But another issue is how the inaccurate statement of fact or the breached obligation relate to the conditions to closing stated in the contract, specifically the bringdown condition and the compliance-with-obligations condition.
What’s at stake in the conditions to closing is whether the deal gets done. Because of the remedies available to Widgetco, it wouldn’t make sense for the inaccurate statement of fact and the breached obligation (as applicable) to constitute grounds for not closing unless they put at risk something more than the economic bargain of the parties, namely the entire rationale for the deal. The inaccurate statement of fact and the breached obligation should give Widgetco an out only if they’re of a sort that could be characterized as a dealbreaker.
So that’s my proposition: in negotiating statements of fact and obligations, the party benefiting from them might be willing to ignore trivial stuff, but when it comes to the bringdown condition and the compliance-with-obligations condition, it’s appropriate to ignore everything except that which is a dealbreaker.
Conspicuously absent from this summary is any mention of how these concepts are expressed in a contract. That, friends, is intentional.
I’d be pleased to hear from those who think about this sort of stuff.
Ken:
I get the big distinction you are making. But the word “trivial” sounds a little too minuscule to me. Since I’m not coming up with a better one, this is a pretty lame criticism. I think, though, that your point here is related to one that you have made before that a one of the good economic mechanisms for dealing with the trivial stuff is to have a deductible on liability. (That’s awkwardly phrased because I’m trying to follow suit and talk about the economics, not the contract language.) With that notion of triviality, I’d not object to the characterization of it as trivial.
Chris
Thanks, Chris. This is actually a piece of a broader analysis. Let’s see how far I get.
Buyers in smaller deals generally want greater flexibility in walking away, and so I think I’d see my clients in that group as not willing to give it up – and the sellers in those deals are not usually in such a good position as to demand that extra bit of finality. Buyers also see that brinksmanship as giving them some edge in negotiating the right approach to handling the [trivial/non-dealbreaker-level] matter – price adjustment, special indemnity, etc.
Investors at that same price point also like the additional leverage.
For much larger deals, though, sellers (especially in the current market) have a lot more leeway to give terms rather than take them. A decently drafted form acquisition agreement implementing your proposal wouldn’t be rejected out of hand. At those sizes, company officers are more likely to understand the game they’re playing, the lawyers are certainly repeat players, and the bankers know how “certainty of closing” has value to all concerned. Buyers might prefer explicitly providing for increased certainty of closing by handling the [trivial/non-dealbreaker] matters in an explicit (and economically rational) way rather than saying “trust us” or risk being told “eat it and close or we walk.”
(Can we use the M-word in comments, at least?)
Thanks; interesting.
Let’s save the M-word for another time!