As you probably know, Google and Motorola Mobility recently entered into a merger agreement providing for Google’s acquisition of Motorola. (Go here for a copy.)
If you’re interested in the deal terms, there are plenty of other places you could look. Me, I’m interested in the drafting—more specifically, the language and structure of the merger agreement. So I’ve prepared an outline of things that caught my eye; go here for a PDF copy.
Many of the points in my outline are minor, but clarity in drafting is in large measure a function of the cumulative effect of countless small decisions. The more wrong turns you take, the harder the reader will have to work, and the greater the risk of confusion.
So, what do I think of the Google–Motorola merger agreement? It’s a mediocre piece of drafting. It’s bloated and hard to read, and that takes a toll at every stage—drafting, reviewing, negotiating, and monitoring compliance. And there might be lurking in the verbiage some bit of confusion that metastasizes into a dispute down the road.
Mediocre? How can that be! After all, Google is represented by the prominent law firm Cleary Gottlieb—presumably they did the bulk of the drafting. Well, the Google–Motorola merger agreement is mediocre because all big-time M&A drafting—or at least all that I’ve seen—is mediocre.
That should come as no surprise, seeing as the language of mainstream drafting generally is dysfunctional. That’s due to a mix of factors. The root cause is that because any transaction will closely resemble previous transactions, drafting has become largely an exercise in regurgitation, with most contract language being given a pass. Also, law firms aren’t suited to the task of retooling and maintaining template contracts. (For more on these factors, see my article The New Associate and the Future of Contract Drafting; go here for a PDF copy.)
But in addition, most of the M&A luminaries I’ve approached have made it clear that they’re wedded to old habits and conventional wisdom. Perhaps what makes M&A drafting particularly resistant to change is that clients are less inclined to meddle when it comes to “bet the farm” work such as the Google–Motorola deal.
The way to fix M&A drafting would be to turn it into a commodity process. Google, if you want your M&A contracts to be free of shortcomings of the sort manifest in the Google–Motorola merger agreement, I suggest that you enlist some like-minded companies and form a consortium to create a rigorous set of document-assembly M&A templates. You could fund it with spare change retrieved from your couch. Judicious use of the carrot and the stick would get leading law firms to participate. The work could be done quickly and efficiently. The basic idea should be familiar to you—after all, this month Google Ventures invested in Rocket Lawyer, which aims to commoditize, in a much more rudimentary way, some basic consumer and small-business documents.
12 thoughts on “Shortcomings in the Drafting of the Google–Motorola Merger Agreement”
I take issue with pretty much all of your (admittedly minor) comments. Here’s an example of what I feel is a
misguided statement made in your .pdf: “With
respect to the Company’s representations, it’s clearer to refer to
disclosure-schedule exceptions within the applicable representations rather
than in the representations lead-in; see SM&AC ¶ 2.50.”
Often the merger agreement is negotiated before the disclosure
schedules are even available (which is always the case where the buyer sends the first draft). So it’s
not feasible at the beginning to know which reps are going to be qualified by
disclosures (other than any “listing” reps), and therefore
in order to trade drafts you’re not going to know where to insert the
qualification. And then what often
happens is that things are added to and removed from the disclosure
schedule. Things are discovered, or the
buyer refuses to allow a particular disclosure to be made. All the while the merger agreement is trading
hands. And the closure of the agreement
and the disclosure schedule naturally coalesce around a targeted signing
So the bottom line is that your point that it’s clearer to do it one
way (which I actually don’t agree with), it’s not at all practical and can
actually result in mistakes because someone on each side at 2 am in the morning
the day of signing will have to go through the process of ensuring the
references map to a disclosure (that is not the time to be making non-substantive
changes to the merger agreement). Besides,
a global cross reference in the lead in works and, from the seller’s
standpoint, is preferable because it allows reps in one section to qualify the
reps in another section even if not specifically called out.
Threesixty3: Thank you for the reminder that it can be expedient to use a disclosure-schedule carve-out in the representations lead-in. Otherwise, I stand by my comments. I take your point about how a carve-out in the representations lead-in might favor the seller, but I made my comments from a position of neutrality.
And more generally, I can’t do anything with your observation that you disagree with pretty much all my comments. I’ve worked lo these many years to put together guidelines for clear and modern contract language, and in the process of doing so my readers have often set me straight. So I welcome any additional comments you wish to make, but first you might want to consult those passages in my books that I cite in my analysis of the merger agreement.
Hey Ken, let
me give you this analogy in terms of how I viewed your comments (I’m honestly
not trying to be snarky here). I build
you a $12.5 billion skyscraper. And you’re
now walking through the building with a clipboard citing “shortcomings” like
the sink on the 15th floor isn’t working right and there’s a scrape
in the paneling on the 27th floor.
I think your use of the word “shortcomings” is actually hyperbolic (and
I’m guessing you maybe used that to pick up some re-tweets, which I get). A true shortcoming is where there is a flaw in
the drafting. Everything you point out seems
to be based on “you could have said this better.” But that’s true with any legal contract. But you haven’t pointed to a single issue of
something that is wrong and places either party in legal jeopardy.
on one thing that warrants discussion as well, the supposed loose use of the
word “material” and the three standards of “efforts.” This
is actually quite intentional in these deals.
M&A lawyers purposefully leave things open to interpretation, like
what is “material” and what is “best efforts” or “reasonable efforts”. We have to.
We don’t know what will happen in the future so it’s by definition
impossible to figure out what is “material” and what isn’t. The merger
agreement has to breath with the events down the line.
By way of
example, if a buyer said to me “I want to define material in the agreement as anything
over $3,000,000,” I would never accept it.
You could have the target later lose a $5 million/year customer and the
buyer says “that’s material, I’m out.”
But what it misses is that even though you maybe lost a $5 million
customer, you picked up a $4.5 million customer on the same day or maybe there
were some huge cost savings realized because the margins sucked on sales to
that customer. This is an over
simplified example, but it goes to show that both parties agree that something “material”
has to happen to trigger rights, but the parties have to wait and see what
happens to see whether or not. That’s
not a shortcoming, it’s actually necessary and a reasonable approach. The same is true of the efforts
standard. Neither party knows what is
going to happen in terms of a government challenge. So they use words that can exist relative to
the facts at the time.
Threesixty3: Thank you for continuing the dialogue—I suspect
many readers share your skepticism.
I don’t buy your opening analogy. The entire deal may be a
$12.5 billion skyscraper, but what Cleary Gottlieb constructed is a prefabricated shack—it bolted together parts from other deals and caulked over the gaps. That’s what law firms do for any deal, regardless of its value. So it would be silly of me to be deferential.
It’s entirely appropriate for me to use the word “shortcoming”
to apply to drafting that’s less clear than it should be. And I think you don’t appreciate the cumulative effect of countless ostensibly minor drafting flaws. They’re like sand in a gear mechanism—they make the entire process less efficient. And sometimes they cause the engine to blow up unexpectedly—A Manual of Style for Contract Drafting, and this blog, are full of examples of disputes that arose from suboptimal attempts to articulate the deal.
If I were to redraft the Google–Motorola merger agreement,
it would be drastically clearer and significantly shorter. I’m not about to do that, but the appendix to my book contains
something comparable—“before” and “after” versions of an M&A
golden-parachute termination agreement. And see this
May 2011 blog post for my dissection of part of a model M&A confidentiality agreement. And although it doesn’t relate to an M&A contract, this February 2011 blog post contains “before” and “after” versions of an extract of a master professional services agreement.
If an organization were to overhaul its contracts consistent
with the guidelines in MSCD, the benefits would be
And you misunderstand my points regarding efforts standards and material. Sure, they’re vague—it’s nice to be precise, but when the future is sufficiently uncertain, vagueness may be your best bet. But I’ve written at length about the problems posed by suggesting that there’s a spectrum of efforts standards. I’ve also written at length about how material is not only vague, it’s also ambiguous. Those are the issues I’m alluding to when I critique how those concepts are handled in the Google–Motorola
But many transactional lawyers aren’t aware of those issues.
That’s because they’ve learned drafting by doing. They’ve grown accustomed to regurgitating precedent language, and in the absence of rigorous guidelines, they’ve made do
with urban legends. As a result, “everyone thinks his own fart smells sweet”—see this May 2011 blog post.
I generally agreed with almost all your comments on the agreement, and I strongly agree with the general principle that a well-drafted contract takes up less lawyer time and is less likely to end up disputed.
Regarding the efforts point, I don’t really see how, in a commercial contract between commercial parties, there can possibly be a difference between “reasonable efforts” and “commercially reasonable efforts”, so if it is deliberate I think it is misguided. On the other hand, if I were commenting on a draft from the other side that included both, I would not delete “commercially”, because I think the risk of anything undesirable resulting from it is very low. And if that is the case, it is wrong to create a discussion and a cost that isn’t necessary. It’s just an annoyance.
Such items are the responsibility of the party that prepares the first draft, in my view. But for the person commenting on it, to assess what is substantive and what can be left still represents additional time and cost.
W: Use of both “reasonable efforts” and “commercially reasonable efforts” is presumably just another relic of copy-and-pasting from different contracts. But routine for disgruntled contract parties to read something into such differences, so unlike you, I would make a point of asking that one or other standard be used, not both. If the other side wants to discuss that change, all the more reason to insist on it: they might have some odd ideas regarding what the contract actually provides, and that could lead to a dispute down the road. Ken
Another great blog post (and agreement analysis), Ken, thanks!
I am trying to follow your example although clients and opposing counsels tend to be reluctant. Opposing counsels prefer their copy and paste templates instead of thinking individual agreements through (that only works if you limit your agreements to a reasonable size) and clients expect to get a lot of barely comprehensible legal language for their money …
Ken – I agree with some, though not all, of your criticisms. I realize that you organized your comments on a clause-by-clause basis, but nonetheless you appear equally aggrieved by three fundamentally different issues: (1) careless or inconsistent use of terminology (e.g., the different “efforts” formulations) that creates needless ambiguity and potentially provides colorable support for an otherwise frivolous litigating position; (2) redundancy, excessive use of the passive voice and meaningless “legalese”, which make the document cumbersome but don’t cause any substantive problems; and (3) stylistic matters (use of “Section”, for example), as to which you disagree with the drafters but others (myself included) may not.
When we comment on a document opposing counsel has drafted, we should always fight to correct errors falling in category (1), but objecting to issues in categories (2) and (3) can appear pedantic and is likely only to sour the atmosphere, potentially harming our clients’ interests in the process. The best solution is to remember the mistakes and make sure we don’t repeat them when we are called on to do the drafting.
There are many reasons for sloppy drafting: cutting and pasting clauses from different templates, the involvement of several drafters, each with his or her own style (and templates) and the fact that some of the drafting ends up being done under pressure of time, possibly in the early hours of the morning, often by less experienced lawyers without the self-confidence or drafting skills to depart from the firm form. Contrary to what others have said here, good drafting takes time. It’s quicker and easier to string together some well worn boilerplate that to craft clear and concise language. And in complex corporate transactions, there is rarely time to throw away the template and start from scratch. With all due respect, I am not convinced that document assembly will work for transactions like Google. A better approach would be for the larger firms to hire people such as you as consultants to take their forms apart and put them back together again, without the pressure of an imminent closing deadline. Most firms, apparently, are not up to the task themselves.
Andrew: Yes, my comments were prompted by different concerns. But note that some problems falling within your category 2 (for example, mishandling the categories of contract language) could result in a dispute.
I’m not inclined to tag certain drafting decisions as being “stylistic” and therefore immune from comment. If I understand correctly, you give as an example using a capital S in “Section” for purposes of cross-references. But that’s just one example of overuse of initial capitals; cumulatively, it’s distracting. There’s no good reason not to follow an established set of guidelines, namely those in The Chicago Manual of Style.
My comments were made from the perspective of a drafter, not someone reviewing a draft submitted by the other side. The levels of scrutiny involved are very different.
Sure, many factors can contribute to sloppy drafting. But for the most part, the Google–Motorola merger agreement wasn’t complex, so I suspect that the bulk of it was drafted by copying some Cleary Gottlieb template or precedent contract. In other words, it’s likely that most of the shortcomings weren’t created de novo but were inherited and so can’t be written off as the result of deal pressure.
But the termination provisions would appear to have been drafted from scratch. They’re what’s scariest about the contract, in that they suggest that when drafters have to do something other than tweak existing language, they risk going off the rails.
I don’t see why you think document assembly wouldn’t work for big-time M&A deals. The only obstacles to commoditizing contract drafting is insufficient deal volume and excessive customization. Neither should be an issue for the most active M&A law firms, and they certainly wouldn’t be an issue if, as I suggest, one were to prepare a suite of document-assembly templates for use industry-wide.
Of course, whether you’re retooling templates or creating document-assembly templates, to avoid a garbage-in, garbage-out problem you should have someone like me involved. But I’m not sitting by my phone—I have yet to encounter a law firm dispassionate enough to acknowledge that outside scrutiny would improve their contracts.
Have you book (MSCD) and read the blog. Often agree with many of your comments and suggestions. After attempting to impliment some of them, I have learned it is an awful lot harder to convince the partners. For better or worse, one has to play by the established rules to get ahead (at least in my neck of the woods).
Any by the way, as I suspect it is used, I don’t think “merged with and into the Company” is redundant. I suspect the phrase is used to describe which entity will survive, e.g. Company A will be merged with and into Company B (Company B therefore survives). If the language read, “Company A will be merged with Company B”, it is not clear which company survives.
Chris: I feel your pain. If you’re at a law firm, are looking to follow MSCD guidelines, and don’t have unfettered discretion, you’ll have to sound out the partner. If the partner is a traditionalist, then you hold your nose and give them traditional language, unless the traditional language could create confusion, in which case you’d be entitled to be a bit persistent. But I’d like to think that the situation is improving—there must be some reason that MSCD continues selling so well! Ken