A reference on Ideoblog to “sloppy drafting” lead me to take a closer look at the litigation between equipment-rental company United Rentals Inc. (“URI”) and the Cerberus Partners acquisition vehicles RAM Holdings, Inc. and RAM Acquisition Corp.
URI sued the RAM entities for having bailed on a $4 billion deal to acquire URI. The RAM entities claimed that URI couldn’t force them to consummate the merger; instead, under the merger agreement URI was entitled to only a $100 million breakup fee.
The suit was brought in Delaware Chancery Court, and last week Chancellor Chandler issued his opinion, in which he found in favor of the RAM entities.
But the holding is of less interest to me that the underlying drafting issues. In that regard, here’s my verdict—What a fiasco!
The Provisions in Dispute
Rather than force you to wade through the dysfunctional language of the merger agreement, here’s a drastically boiled-down version of the provisions that gave rise to the dispute (the text in bold italics is verbatim):
A. URI is entitled to specific performance to enforce RAM’s obligations under this agreement. This section A is subject to section B.
B. Notwithstanding section A, URI’s right to terminate the agreement in specified circumstances and its right to receive the breakup fee will be URI’s only remedy for any damages it suffers as a result of that termination. Whether this agreement has been terminated or not, RAM will not be liable for any damages in excess of the breakup fee and in no event shall [URI] seek equitable relief or seek to recover any money damages in excess of such amount from [RAM].
The court was faced with determining how these two provisions relate to each other.
URI argued that under section A, it was entitled to specific performance—it was entitled to force RMA to consummate the merger.
Doesn’t the first sentence of section B say that the breakup fee is URI’s only remedy? URI argued that it does not—that the breakup fee only served as the exclusive remedy on termination, and neither side had terminated the agreement.
But doesn’t the second sentence of section B say that URI isn’t entitled to equitable relief? URI argued that the closing modifier in excess of such amount modified not only the phrase seek to recover any money damages but also went further back up the sentence and modifed the phrase seek equitable relief, meaning that URI was only precluded from seeking equitable remedies that include monetary damages in excess of the breakup fee. (Our old friend syntactic ambiguity rears its head.) URI argued that this reading was required because otherwise this sentence would render section A devoid of meaning.
URI also argued that if the RAM entities had wanted to eliminate URI’s rights to specific performance in all circumstances, it could have simply stricken section A.
The RAM Entities’ Argument
For its part, the RAM entities argued that if it had been intended that operation of section B would apply only if the merger agreement had been terminated, it would have been redundant to say in section A that the specific performance provisions of section A were subject to section B—specific performance wouldn’t have been available in those circumstances, as one cannot specifically perform an agreement that has been terminated.
The RAM Entities also argued that would be unreasonable to limit the phrase “equitable relief” to those equitable remedies that include monetary damages.
The court concluded that the arguments offered by URI and by the RAM entities were both reasonable as a matter of law, and that as a result summary judgment would be inappropriate.
Instead, the court considered extrinsic evidence to ascertain the meaning of the merger agreement. URI bore the burden of demonstrating that the parties intended that URI be entitled to specific performance. The court held that URI failed to meet that burden.
Let’s look at what the lawyers might have done differently in terms of drafting language or revising language drafted by the other side.
URI Drafting Failures?
I’m not sure that URI’s lawyers could have done much to ensure that the provisions clearly had the meaning sought by URI. For one thing, the current language of section B does tie the breakup fee to termination. The problem wasn’t with the language so much as the idea—having payment of the breakup fee occur only on termination was evidently too restricting.
And URI’s lawyers could have structured the second sentence of section B to make it clear that the restriction was on equitable remedies that include monetary damages, but that too seems an unlikely idea.
So from URI’s perspective, the problem went beyond drafting. That being the case, it’s no surprise that the court found in favor of the RAM entities.
RAM Entity Drafting Failures?
By contrast, deleting section A would have spared the RAM entities the lawsuit. According to the RAM entity view of things, section A was meaningless. If you allow a contract to contain meaningless language, you’re leaving yourself open to unpleasantness down the road.
Lawyers for the RAM entities could also have insisted on a more sensible regime for payment of the breakup fee, rather than having it artificially tied to termination.
And they could also have structured the second sentence of section B so as to preclude the interpretation that URI sought.
The Real Culprit
URI’s counsel was Simpson Thacher—enough said. They prepared the first draft of the merger agreement. The RAM entities were represented by Lowenstein Sandler, a well-known New Jersey law firm. Simpson Thacher’s presence at the table indicates that this was high-stakes M&A.
So how did it come to pass that the lawyers failed to produce an agreement that reflected a meeting of the minds on so important an issue?
I think the fault lies with how even the most exalted law firms go about generating deal documentation:
- First, start with precedent contracts generated by a haphazard process of accretion and without recourse to any set of rules.
- Second, have the drafting done by junior associates who have learned by osmosis rather than through any structured process. One can count on them to regurgitate, on a wing and a prayer, the language of precedent contracts.
- Third, have the drafting reviewed by senior associates and partners who have never had to measure their drafting against any objective standards. Generally they’re serenely confident of their superior talents and immune to suggestions that their documentation is flawed.
- Fourth, in revising contracts during the course of negotiation, shoehorn the revisions into the existing language, no matter how cumbersome the result.
- And fifth, do all this at a breakneck pace that precludes measured reflection.
The result is that you end up wallowing in verbiage of the sort excerpted in Chancellor Chandler’s opinion. It’s no surprise that lawyers lose control of deal documents.
Some might be inclined to shrug this off, on the grounds that the deal’s the thing and that it’s naive to think you can capture it in the contracts. A post on Concurring Opinions discussing the URI-Cerberus litigation exemplifies this approach:
[L]awyers, for all their pretensions of being at the center of a deal are often flies swarming around the galloping steed that is the deal itself, and the focus on the contract as the source of the problem is merely a fly’s-eye view.
Perhaps it is because I have actually been in the shoes of an M&A lawyer trying to craft a linguistic solution, or have been the client of M&A lawyers trying to craft linguistic solutions for me, that I chuckle at the charges of “sloppy drafting” as though lawyers have the absolute power (a reductive, rational, scientific, but unrealistic assumption) to control all outcomes through language. One of my rules of thumb in negotiating language was to change as little as possible to achieve the desired outcome. That’s an art not a science, and Cerberus’ lawyer’s judgment ultimately bore out in this case. Who knows what would have happened if he tried to make the change by deleting rather than trumping?
This sort of reasoning attempts to rationalize dysfunction. For my part, I’m confident that if I can’t control all outcomes through language, I come pretty darn close, a lot closer than Simpson Thacher and Lowenstein Sandler did in this case.
What Are the Prospects?
In this October 2006 post, I suggested that when it comes to contract drafting, law departments are more open to change than law firms. I’ve seen nothing since then to change my opinion.
But I noted with interest an article in the current issue of The Metropolitan Corporate Counsel by Robert A. Profusek and Lyle G. Ganske, co-chairs of Jones Day’s M&A practice. It’s entitled It’s Time to Rethink the Lawyer’s Role in Dealmaking: Start by Facing Up to the New Realities. In it, Profusek and Ganske in effect suggest that dealmaking has become a sterile exercise in scrivening, and that instead M&A lawyers should focus on what really matters in a deal.
Here’s what they propose:
In sum, we think of it this way: The old legal rituals should not be permitted to obscure actual thinking and foresight. We need to clear the way for the stuff that’s really important. At Jones Day, we have started moving in this direction already. We are spearheading an initiative to rethink deal documentation fundamentally, and we intend to invite other leading firms to join our effort. Our goal is to come up with an entirely new documentation regime – a regime that builds on the realities of today’s environment and requires that people think through what clients really need. Our goal is to come up with standardized base documents, and common language, that can be used in any transaction, whether it’s a merger, a loan, or a capital markets event. That way, we’ll free ourselves to think about the business purpose of a deal, rather than its paper trail.
It certainly sounds laudable. But to increase the chances of success, any fundamental rethinking of deal documentation should be really fundamental—it should take into account the five factors mentioned above.
8 thoughts on “Costly Drafting Errors, Part 3—United Rentals Versus Cerberus”
Ken, I generally agree with your analysis, but when I’m reading I do so recognizing that you have the leisure of time and choosing your issues. I think you’ve given the firms unfairly short shrift in your analysis. You’ve picked 2 (albeit critical) provisions out of a merger agreement that, together with the disclosure schedules and securities filings ran into the thousands of pages. Take a look at the proxy statement (the “Background of the Merger” Section) and think about all the balls Simpson was juggling at the time. They ended up negotiating 2 full sets of documents (with “Sponsor A” and Cerberus) while a third latecomer (“Sponsor C”)was also trying to get in on the party. Simultaneously, they were advising the board, working with UBS on responses to the financing documents, producing responses to due diligence inquiries and so on.
Saying that they “failed so abjectly” and ended up “wallowing in drek” is unduly harsh. That’s the sort of ivory-tower view that drives practitioners crazy. It might be a little fairer to say that they did as good a job as anyone could under the circumstances, and despite that, a big mistake was made.
Personally, I think this is more on Lowenstein Sandler than it is on Simpson. Lowenstein is obviously the firm that requested this term; the folks at Simpson are way too smart to offer up anything like this option in the initial draft. Lowenstein had to ask for it and, since they were only doing one set of documents, should have caught it when they sent back one of their revised drafts. (I’ve never worked at either firm but I’ve done deals with both.)
10803: I’m acutely aware that I’m not subject to the same constraints as big-time M&A practitioners. But I’m not pointing the finger at individual lawyers. Instead, the problem liest with the entire process. (Don’t blame the playa, blame the game!)
Was my language a little dramatic? Perhaps. But taking into account the turgidity of the language of the merger agreement and the fact that the issue in question was one of the most crucial of the transaction, I think some passion was warranted. But I don’t wish to alienate anyone, so I’ve gone back and toned down the two passages you refer to.
“Ivory-tower view”? Ouch! I would hope that I’ve established my credentials as someone who’s principally concerned with the practical side of contract drafting.
Thanks for the changes.
It’s also interesting to note that Chancellor Chandler thought that one party’s case was pretty close to being compelling enough for him to decide without resorting to parol evidence (although he didn’t specify whose… personally, I think it was Cerberus’s).
The decision seems to indicate that both parties (or at least Cerberus, its counsel and Lowenstein, if not URI) actually knew what was meant by the terms when the deal was signed (whatever they called it, it was a $100M option) and the ambiguity was somewhat contrived after the fact.
I found this extremely interesting, as someone who only does litigation.
But was this ambiguity, in which both parties thought that they had achieved something different than the other party, necessary to close the deal?
Was it really bad drafting or simply each side taking a calculated risk to get to the next step?
Michael: What you propose may have been the case; I haven’t as yet looked too closely at who said what to whom, and when.
But we’re talking about one of the core deal points here, rather than some side issue.
And I’d be more open to the notion that the parties had intentionally set aside a major issue if the contract wasn’t an incoherent mess. See this recent post.
I am very sympathetic to your observations about how large contracts actually get drafted.
What interests me about this case is whether there actually was a meeting of the minds but didn’t get properly drafted up.
I would look at a decision tree model of the conditions precedent to see if we could make sense of what outcomes people were trying to focus on.
Simple decision trees often make clear what outcomes have not been considered by the drafters: notwithstanding, subject to clauses are unlikely to be of great assistance if the contract is not complete.