As mergers & acquisition (M & A) lawyers, we are very often approached by clients, (usually prospective) for templates and boilerplate clauses of various agreements, thereby implying that there’s no rocket science involved in drafting such provisions. On a lighter vein, litigation colleagues like to tease corporate attorneys for doing “cut, copy, paste” jobs. But as any M&A practitioner or his acquirer client will concur, the pursuit of an M&A transaction is a costly and prolonged exercise, particularly if the deal has cross border implications. And that is where local expertise becomes critical. Having a structure advised by the in-house group, placing reliance on boilerplates, lacking experience in jurisdictional specifics, can often have disastrous implications.
Even M&A experts tend to skim over the miscellaneous provisions at the fag end of the contract document. These usually include governing law, severability, waivers and amendments, counterpart’s notices etc. There is a mindset that these are non-substantive provisions and therefore peripheral to the core deal and that one format will work for all, without considering whether the language being imported, address the client’s purpose and the nature of the deal.
There have been instances of board meetings to be held invalid, because the notice was served by email instead of registered post and facsimile as provided in the agreement. A seemingly innocuous clause envisaging prior consent and consensus on Publicity and Announcements have been known to jeopardise a deal because one party granted an interview without the other’s permission.
Another clause, which can lend itself to unintended interpretations, is the concept of Assignment, or rather prohibition of Assignment provisions contained in most acquisition agreements. The term ‘assignment’ assumes different interpretations in different jurisdictions. There have been cases where transfer of shares by one shareholder group has been challenged by the non-selling group of shareholders on the ground that this amounted to assignment, when the Shareholders’ Agreement governing the parties did not envisage a right of first refusal or prior consent.
It is also not clear whether such a general blanket provision would prohibit assignments by mergers, consolidations or change of control. Therefore in providing for a non-assignment clause, the lawyer has to consider and contemplate every possible form of assignment, which could occur in future and address each one of them specifically. The clause has also to clarify whether a breach situation would be redressed by compensation, restitution or any other mechanism.
Severability clauses, address situations wherein if any provision is unenforceable for illegality, the courts will exclude that provision to enforce the rest of the agreement. Many agreements use a standardised language “if any provision hereof is held or determined to be invalid, void or unenforceable”, therefore binding themselves to any regulation or bye law, which is capable of being challenged judicially, impact fundamental commercial terms. In order that the “Blue Pencil” test should not turn red, it is essential to identify the critical terms so that the severance tool does not prove self-defeating. Finally and most important, there is no reason for the dispute resolution provisions to be included in the “non-critical” list. Very often, the clauses do not even provide a proper mechanism. Parties should recognise the realities and possibilities of post closing disputes.
A comprehensive dispute resolution clause should in the first instance address the issue choice of law, leaving no doubt whether the parties jurisdiction does not recognise or are bound by the substantive laws of third jurisdiction. Choice of forum is equally important, because otherwise choice of law is virtually useless. Ideally, the same jurisdiction as the governing law should be the exclusive forum for litigation. Certain contracts may require submission to more than one jurisdiction for redressal to be effective. It is important to provide in what situations the courts would have jurisdiction and wherever possible, the parties should consider providing for formal mediation.
I’m not advocating that boilerplates should be abandoned altogether, they often do make drafting more efficient and cost effective, but it is the lawyer’s job to consider the overall intent of the clients before importing a boilerplate and just transplanting it in the document to save time.
Kumkum Sen is a Partner in Rajinder Narain & Co. and can be reached at kumkumsen@rnclegal.com