From my perspective as someone trying to figure out how to make contract language clearer, a welcome development in Delaware caselaw was what the Delaware Court of Chancery had to say about the phrase in all material respects. The case is Akorn, Inc. v. Fresenius Kabi AG, No. CV 2018-0300-JTL, 2018 WL 4719347, at *85 (Del. Ch. 1 Oct. 2018), aff’d, 198 A.3d 724 (Del. 2018) (here).
But that was only a first step toward understanding the significance of in all material respects. In this blog post, I explain that like material, the phrase in all material respects is ambiguous. The implications of that are exemplified by an extract from a recent merger agreement.
Akorn on the Meaning of In All Material Respects
In Akorn, the court first considered whether in all material respects expresses a standard that’s equivalent to the common law doctrine of material breach. Generally, nonperformance is considered material at common law “only when it goes to the root, heart, or essence of the contract; or is of such a nature as to defeat the object of the parties in making the contract; or, as it has sometimes been said, when the covenant not performed is of such importance that the contract would not have been made without it.” 14 Williston on Contracts § 43:6 (4th ed.). So it’s a high standard.
The court then said this (footnotes omitted):
Treatises on M & A agreements suggest a different purpose for including the phrase “in all material respects.” Drafters use this language to eliminate the possibility that an immaterial issue could enable a party to claim breach or the failure of a condition. The language seeks to exclude small, de minimis, and nitpicky issues that should not derail an acquisition.
Based on these authorities, the plain meaning of “in all material respects” in the Covenant Compliance Condition and the Ordinary Course Covenant calls for a standard that is different and less onerous than the common law doctrine of material breach.
To my knowledge, this was the first time a court acknowledged that material can express two different meanings. I had previously added to A Manual of Style for Contract Drafting a section discussing how material is ambiguous (and Akorn cites MSCD in a footnote to the second sentence of the first paragraph of the extract above). But after Akorn, I wasn’t satisfied with the analysis in MSCD. I realized that what the Akorn court had to say about the alternative meanings of material gave me something substantial to work with. I started a process of researching and writing that resulted in a law review article published in 2023—The Word Material Is Ambiguous in Contracts, Why That’s a Problem, and How to Fix It, 21 The Scribes Journal of Legal Writing 83 (2023–24) (here). I included the gist of that article in the fifth edition of MSCD.
In All Material Respects Means the Same Thing As Materially
My 2023 law review article explains that in all material respects means the same thing as materially:
In the Covenant Compliance Condition and the Ordinary Course Covenant at issue in Akorn, materiality was expressed with the phrase in all material respects. You can express the same meaning in one or two other ways, but commentary tends to limit itself to using in all material respects to express that meaning. To avoid attributing undeserved significance to in all material respects over other ways of saying the same thing, it’s best to recognize that one has a choice. When materiality relates to a noun (in this case, compliance), you have three alternatives, with the adverb materially being the simplest:
- is in all material respects in compliance with
- is in material compliance with
- is materially in compliance with
When materiality relates to an adjective (in this case, accurate), the one alternative is the adverb materially:
- is accurate in all material respects
- is materially accurate
It goes on to say this:
Given that in all material respects is wordier and more legalistic than materially, and given that materially always works, it would make sense for drafters and commentators to use materially and not in all material respects as the adverbial form of material.
Material Is Ambiguous
If in all material respects means the same thing as materially, that causes another shoe to drop: because material is ambiguous, it follows that materially and in all material respects are ambiguous too.
This isn’t the place to rehash my 2023 article. Instead, here’s the overview from article:
The caselaw on materiality has attracted much attention, but it has gone largely unacknowledged and unaddressed that material is ambiguous—it can be used to express alternative possible meanings.
This article attempts to remedy that inattention. It summarizes the meanings attributed to material in caselaw. It explains that material is not only vague but also ambiguous. It proposes that the alternative meanings of material are best expressed by nontrivial and dealbreaker. It demonstrates how the ambiguity of material creates confusion. It shows that the meaning that would be reasonable to apply to a materiality provision depends on where it occurs in the contract. It explains that drafters unhelpfully favor in all material respects over materially. It suggests how to use nontrivial and dealbreaker instead of material and how to define material if you wish to retain it instead of using dealbreaker. And it explains that you’ll look in vain for some shared understanding of what material means.
I remain the only commentator to say that material is ambiguous, but that shouldn’t be understood as suggesting that my arguments are fringe or fragile—I think they’re incontrovertible.
The Bringdown Condition in the Norfolk Southern Merger Agreement
That brings us to a recent merger agreement—the one providing for Union Pacific Corporation’s acquisition of Norfolk Southern Corporation (here).
More specifically, what’s of interest is the bringdown condition. (A bringdown condition allows one side to use inaccuracy in the other side’s statements of fact to relieve it of its obligation to close.) The following extract contains two different exceptions (emphasis added).
(i) The representations and warranties of Parent and each Merger Sub set forth in Section 4.2(a) and Section 4.17 shall be true and correct, at and as of the date of this Agreement and at and as of Closing, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date), in each case, except for de minimis inaccuracies; … (iii) the representations and warranties of Parent and each Merger Sub set forth in the first sentence of Section 4.1(a), Section 4.2(b), Section 4.3(a), Section 4.3(b) and Section 4.19 shall be true and correct in all material respects, at and as of the date of this Agreement and at and as of Closing, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date); … .
In Akorn, the court says in all material respects seeks to exclude de minimis issues, yet in the Norfolk Southern merger agreement, the bringdown condition uses “except for de minimis inaccuracies” and “in all material respects” as two different standards. The meaning of “except for de minimis inaccuracies” is clear—it expresses the meaning nontrivial. The drafters might have intended “in all material respects” to express the same meaning, but that would have been clumsy—courts generally assume that if a drafter uses a different word or phrase, they intended a different meaning. In the case of this merger agreement, that would leave the dealbreaker meaning as the only meaning to be applied to the ambiguous “in all material respects.”
At a minimum, the result is confusion.
Conclusion
Here’s where that leaves us: The words material and materially (including the variant in all material respects) are ambiguous. They express not only the meaning attributed in Akorn to in all material respects—the nontrivial meaning—but also the dealbreaker meaning. One can try to eliminate ambiguity by fiat, but ambiguity tends to be too messy, and too ingrained, for that to work. With that instance of in all material respects that’s an unlikely candidate to express the nontrivial meaning of material, the Norfolk Southern merger agreement exemplifies that.
So instead of trying to wish away the ambiguity of material, let’s be clearer. My 2023 article suggests how to do that.
