This might be of interest to anyone who has followed the litigation between United Rentals, Inc. and the RAM entities. (Click here for my previous post on the subject.)
In addition to addressing customary deal structures for buyouts of public companies, Professor Coates offered in his report some thoughts on customary practices of M&A lawyers:
26. … One of the ways that the parties commonly economize on time and costs is not to attempt to review every provision of every related agreement every time a new change is made, particularly when documents are in the final stages of negotiation. Rather, they rely on succinct but legal terms of art to achieve what is, in essence, “editing” of the entirety of a document with minimal change. Among the terms of art customarily relied upon are phrases such as “subject to” or “notwithstanding.” These phrases allow the parties to specify that one phrase or provision will take precedence over others, and thus avoid the need to attempt to synthesize every provision of every related agreement that is or may be partly or wholly in conflict with the provision in question.
27. Another reason that such legal drafting techniques are used is that they reduce the amount of blacklining and editing that must be reviewed by numerous parties who must approve and sign off on the final documentation. If, for example, drafters can add a single sentence that contains the phrase “subject to” or “notwithstanding,” the various interested parties (banks, bank lawyers, managers, target lawyers, investment banks, their lawyers, buyout sponsors, their lawyers, co-investors, their lawyers, etc.) can simply look at the one sentence to see the meaning of the change. If, on the other hand, a sentence is added while other sentences are modified or deleted to reflect the meaning of the new sentence and eliminate any potential apparent conflicts, more blacklining, on more pages, will have to be reviewed and evaluated by each party. In my practice (as an occasional participant in contracting as a principal), I have on many occasions attempted to minimize the number of changes, and to minimize the number of pages on which marked changes would be made, and one way to do that would be to use “subject to” or “notwithstanding” terminology.
In this regard, Professor Coates could perhaps have achieved his clients’ needs if he had said, in essence, the following: “When in negotiating complex M&A agreements the parties agree to make a change that renders a given provision meaningless, in the interest of expedience it’s commonplace for that change to be incorporated by (1) leaving in the now-meaningless provision, (2) adding the new language, and (3) using one or both of the phrases notwithstanding and subject to to indicate that the new language takes precedence over the now meaningless provision.”
But instead, Professor Coates offered a more general analysis that I found confusing, and I suspect that it prompted confusion on the part of others who tried to understand it.
The Core Concept
It’s commonplace for a piece of writing to intentionally contain statements that conflict. That’s certainly the case in contracts. The phrases notwithstanding and subject to serve to indicate which statement takes precedence.
Here’s an example:
A. Acme shall pay the Employee a signing bonus of $1,000,000.
B. If the Employee’s last name begins with the letter “A,” Acme will not be required to pay the Employee any compensation other than the Employee’s annual salary.
These provisions are inconsistent. Let’s assume that section B takes precedence. You could indicate that in one of two ways: You could add to the beginning of section B “Notwithstanding section A.” Or you could add to the beginning of section A, “Subject to section B.” It would be redundant to add both. (Nevertheless, both phrases were used in the provisions at issue in this litigation.)
That’s a simple enough concept, but it’s not what’s expressed in Professor Coates’s report. From what I can tell, lurking in Professor Coates’s report are two distinct points.
“Notwithstanding Anything in this Agreeement to the Contrary”
First, when in the first paragraph quoted above he refers to avoiding the need to “review every provision of every related agreement every time a new change is made,” he might be alluding to use of the phrase notwithstanding anything in this agreement to the contrary.
In that it indicates that the provision in question trumps everything else in the agreement, that phrase does indeed apparently spare the drafter from having to figure out how that provision relates to others, if at all. Often it’s thrown in, as insurance, even if the drafter is unaware of any nexus with any other provisions.
So the phrase has expedience going for it, but I recommend that in general you avoid using it. To reduce the chance of a drafting error, and to make life easier for the reader, it would be best to determine whether the provision in question in fact needs to trump another provision and, if it does, to specify which provision.
As to whatever else Professor Coates might have been aiming at in the paragraph in question, I was confused by his saying that phrases such as notwithstanding and subject to “allow the parties to … avoid the need to attempt to synthesize every provision of every related agreement that is or may be partly or wholly in conflict with the provision in question.” If provisions are in conflict, I don’t see how synthesizing—did Professor Coates mean harmonizing?—them could be an alternative to flagging which takes precedence.
What a Reader Would Have to Read
Second, regarding the issue of economy (which Professor Coates addresses in the second paragraph quoted above), if you tack on to the front of a given sentence the phrase notwithstanding anything in this agreement to the contrary, then any reader could, to use Professor Coates’s phrase, “simply look at the one sentence to see the meaning of the change.” (As mentioned above, that expedience comes at a cost.)
But more generally, if section A begins “Subject to section B,” a reader would need to read both section A and section B to understand the meaning of section A. The same would apply if section B were to begin “Notwithstanding section A.”
The Relationship Between “Notwithstanding” and “Subject To”
Regarding blacklining economy (which Professor Coates addresses in the second paragraph quoted above), if one were adding section B, including in section B “Notwithstanding section A” would indeed allow you to make just one change. But if you were to add section B and then add “Subject to section B” at the front of section A, you’d need to make two changes.
Unless I were facing a deadline crisis, I’d always opt for adding subject to. That’s because notwithstanding undercuts, at a remove, some other provision in a contract. As a result, a reader might well read the provision being undercut without realizing that it’s trumped by another provision. Using subject to signals to the reader that if the reader wants to know the full effect of that provision, he or she would need to read the provision that trumps it.
Chancellor Chandler’s Response
Chancellor Chandler’s decision on Professor Coates’s report contained the following footnote (citations omitted):
Remarkably, in his report, Professor Coates appears to excuse practices that can only be described as inartful drafting as “one of the ways that the parties [to buyout negotiations] commonly economize on time and costs.” Professor Coates states that the parties, in contravention of basic principles of contract interpretation and drafting, use certain phrases (e.g., “subject to” or “notwithstanding”) so as to “avoid the need to attempt to synthesize every provision of every related agreement that is or may be partly or wholly in conflict with the provision in question.” Not surprisingly, disputes often arise precisely because of provisions that are “partly or wholly in conflict” with each other.
Chancellor Chandler could have focused simply on the notion that when M&A practitioners add to a contract a provision that renders another provision meaningless, it’s customary to retain the now-meaningless provision. But I suspect that the generalized and rather confusing nature of Professor Coates’s report lead Chancellor Chandler to say something debatable—that it represents poor drafting to use phrases such as notwithstanding and subject to to indicate which among two or more conflicting provisions takes precedence.
It would be unreasonable to think that one could draft and negotiate contracts without at some point needing to include provisions that conflict—that’s an invetable part of any kind of writing.
The drafter should accept that and instead focus on weeding out any conflict that’s avoidable (namely by deleting any meaningless provisions) and on expressing as efficiently and clearly as possible which provision takes precedence. I’ve offered some suggestions above. MSCD 9.30–9.38 offers some additional detail.
By the way, this post simply represents my attempt to determine how Professor Coates’s report relates to my understanding of notwithstanding and subject to. Given that his report represents the highest-profile discussion of these phrases that I’ve encountered in a while, I thought it worth looking into.