Making Mischief with “May” in Litigation Involving the Merger of JPMorgan and Bear Stearns

If I argue that a particular contract usage can create confusion, it’s nice when I can point to a court opinion that inadvertently confirms as much.

So I was delighted when cousin Joshua Stein sent my way one such opinion, 383 Madison LLC v. The Bear Stearns Companies, Inc., a 2008 New York Supreme Court slip opinion (here). It involves contract language that uses the word may.

In the 2008 merger agreement providing for JPMorgan’s acquisition of Bear Stearns, it was stated that if the merger didn’t go through, JPMorgan would be given, instead of a break-up fee, an option to purchase the building at 383 Madison Avenue. (Obviously, the merger did take place.)

That prompted the owner of the land, 383 Madison LLC, to sue, claiming that the option in the merger agreement was inconsistent with the right of first offer that Bear Stearns granted 383 Madison in the ground lease for the property.

But the ground lease provided for the following exemption from the right of first offer:

Notwithstanding anything to the contrary contained in Section 16.2(a), Tenant shall in no event be obligated to give to Landlord any Sales Notice or to otherwise comply with the provisions of Section 16.2(a) in the event that Tenant shall determine to sell, transfer or otherwise dispose of its interest in this Ground Lease to (i) any entity into which or with which Tenant may be merged, consolidated or combined or any entity which shall purchase all or substantially all of the assets of Tenant; ….

The owner of the land argued that the exemption would apply only if Bear Stearns merged with the purchasing entity. The court disagreed, holding that because this provision referred to an entity “with which Tenant may be merged” (emphasis added), “the safe harbor provision is applicable even to those situations where a potential merger is contemplated, and it is not contingent upon the actual occurrence of a merger.”

I suggest that the court’s analysis is fatally weak.

What we’re dealing with here is use of “may” in a restrictive relative clause. MSCD offers as an example, in table 17 (on page 96), If Acme sells Assets to one or more Buyers that Roe may introduce to Acme. In this context, may means “might,” and it’s extraneous, as nothing in that sentence suggests any certainty that Roe will in fact introduce buyers to Acme.

That’s the use to which may is put in the exemption in the ground lease. The meaning conveyed is “any entity into which or with which Tenant merges, if it does merge.” But use of “any” in the original makes it clear that the notion of a merger occurring is entirely hypothetical. The “may” is extraneous.

Could the “may” convey some other meaning? Not any meaning that makes sense.

One could argue that “may” does indeed mean “might,” but with the language at issue in effect meaning “any entity into which or with which Tenant could conceivably be merged.” That would be nonsense: Bearn Stearns could conceivably have merged with any number of entities.

Or one could argue that “may” in fact conveys discretion. But for that to work, the language at issue would have to be in the passive voice, with the by-agent dropped. In the active voice, it would read “any entity into which or with which __________ may merge Tenant,” with the blank acting as a placeholder for what was the missing by-agent in the original. As a matter of M&A mechanics, it doesn’t make sense to refer to someone (presumably Bear Stearns’s shareholders) having discretion to cause Bear Stearns to merge, and it really doesn’t make sense to refer to them as having discretion to merge Bear Stearns into a particular entity.

So the only conceivable meaning conveyed by “may” in the language at issue is a meaning that renders that “may” extraneous. It follows that the judge got it wrong—the owner of the land had the better argument.

So what lessons are to be drawn from this?

First, the phrase “may be merged” is widely used—it occurs in more than 1,700 contracts filed on the SEC’s EDGAR system in the past year. So there’s lots of potential for this use of may to create confusion. The fix is simple: stop using may like this!

Second, I wonder what kind of expertise the owner of the land had on hand when arguing for its meaning. None, I suspect. When a contract dispute hinges on this sort of nuance, you’d be advised to get yourself an expert.

And third, on a personal level, thinking about this issue made me realize that MSCD‘s treatment of it is inadequate. You can expect a beefed-up analysis in the fourth edition, with pride of place being given to 383 Madison LLC. Although it will doubtless make him cocky, my thanks go to Joshua Stein for giving me this lead.

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.

11 thoughts on “Making Mischief with “May” in Litigation Involving the Merger of JPMorgan and Bear Stearns”

  1. 1. Ken, I think you meant that 383 Madison LLC, not Bear Stearns, argued that the exemption applied only if the merger was actually consummated. See the slip opinion at 6, first full paragraph.

    2. The court’s reasoning, at pages 6-7, is actually fairly persuasive. Obviously, the business purpose of the exemption was to give Bear Stearns the flexibility to negotiate an M&A transaction without having to give 383 Madison LLC a 45-day right of first offer. In hindsight, the exemption gave Bear Stearns more flexibility than 383 Madison’s lawyers apparently anticipated. If 383 Madison had wanted to limit the exemption to an actual, consummated M&A transaction, presumably it could have used “is” instead of “may be,” as the court noted at page 6.

  2. Must confess it took several readings to get the facts straight, and maybe I still haven’t done so. But it looks as if the drafters of the ground lease meant to say that the Tenant (Bear Stearns) had to give the Landlord (383 Madison) a right of first offer before the Tenant conveyed its interest in the ground lease to a nonparty UNLESS the conveyance was (1) to a party into which or with which the Tenant merged before the conveyance or (2) to a party that had acquired all the assets of the Tenant before the conveyance.

    Apparently the Landlord argued that the Tenant, by agreeing to convey the Tenant’s interest in the ground lease to JPMorgan if the merger didn’t happen, at that moment breached the duty of first offer.

    The court disagreed, holding that conveyances that were free of the first offer duty consisted not just of conveyances (1) to entities into which or with which the Tenant had already merged before the conveyance, but also conveyances (2) to entities into which or with which the Tenant might possibly merge in the future after the conveyance.

    If that restating of the main point is correct, then I agree, Ken, that the court may have got it wrong and expanded the category of exempt conveyances far beyond the intent of the Landlord and Tenant at signing. (Still, the result may have been right on another ground.)

    It was a surprise to see you opine about the merits of the case when you usually go agnostic and limit yourself to seeing how the case could have been avoided by different drafting. (In this case, the exemption should have specified that it applied only to conveyances that took place after a merger.)

    It was also a surprise that the Lease didn’t have a provision to the effect that “no conveyance not complying with [the first offer duty] will be valid, and any attempt at a conveyance not complying with [the first offer duty] will be a breach of this lease that entitles the Landlord to [specify relief].”

    How’s London?

    • AWB, under US practice, a tenant would not “determine” to sell, etc., its interest in the Ground Lease to a company with which it had already merged. The term “determine” implies that the tenant has a choice. That’s not the case in a merger transaction under the law in many (most?) U.S. jurisdictions — the surviving company automatically succeeds to ownership of the assets. That lends further support, I would think, to the court’s view that the exemption applies to prospective mergers.

    • I’m not getting into the merits of the case, I’m simply pointing out the implications of the verb structure used. In other words, (1) drafters routinely and pointlessly use “may” in restrictive relative clauses, (2) that’s what the drafter of the language at issue died, and (3) the court gave a meaning to that “may” that’s indefensible. As regards what the parties actually intended, that’s not of immediate interest.

      How’s London? Very much like Long Island, because so far all I’ve done is sit in my hotel room blogging! Now I get to spend the day in meeting rooms, so whatever the outside world has to offer will have to wait.

  3. Can’t seem to get onto the website with the case report, but I am guessing that the contemplated sequence of events was:

    (1) Tenant is about to sign agreement (3P Agreement) under which it will assign [etc] lease to 3P.
    (2) Before signing 3P Agreement, T must offer same terms to Landlord

    BUT the obligation to offer same terms to L doesn’t apply if the 3P Agreement is one which, _if signed_, will result in the merger of T with 3P or the acquisition of T by 3P.

    Looking at the specific language that you quote, ie “any entity into which or with which Tenant may be merged, consolidated
    or combined or any entity which shall purchase all or substantially all
    of the assets of Tenant”:

    (a) this is inconsistent for using “may” for the merger bit, but “shall” for the purchase bit.
    (b) a possible quick fix of the quote wording would be to say:

    “any entity that, if the [assignment] is executed, will (i) merge, consolidate or combine with the Tenant, or (ii) purchase all or substantially all of the Assets of Tenant.”

    This formula (the drafting of which could be improved further) avoids both “may” and “shall”. My sense is that the “may” is attempting to address the conditionality (ie my “if the assignment is executed” point) in a rather lame way.

    • Mark:

      Perhaps another (somewhat stilted) version of the same idea would be to say, “any entity into which or with which Tenant is to be merged, consolidated, or combined.” The only benefit of this language over what you proposed is that it is easier for a traditional drafter to adopt. That’s not ideal, but it might be realistic.


  4. I just noticed that the “track changes” aren’t visible in the language I suggested above. My apologies. This is the version I intended to socialize: “…by (I) merger, consolidation or combination of Tenant with any entity or (ii) purchase of all or substantially all of the assets of Tenant by any entity;”


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