Corporate & Securities Law

Recharacterizing Representations and Pre-closing Obligations as Conditions

By Ken Adams

I’m looking for caselaw or commentary on the following issue relating to the parts of a mergers-and-acquisitions contract.

If a buyer wants to address in an M&A contract circumstances that are under the seller’s control?for example, whether the seller is in good standing under Delaware law?it would make sense to do so by means of a representation. If that representation turns out to have been inaccurate, either at signing or at closing, that would give the buyer a right to indemnification. By operation of the bringdown condition, that inaccuracy would also allow the buyer to walk, subject to any materiality qualification built into the bringdown condition.

If by contrast one is dealing with an action to be taken by the seller between signing and closing?for example, the seller’s giving the buyer and its representatives access to the seller’s premises?you’d address that by means of a pre-closing obligation imposed on the seller. Breach of that obligation would, like an inaccurate representation, give the buyer an indemnification claim and the right not to do the deal.

But a given issue might not be under the seller?s control. It might be under the control of someone else. Or perhaps it relates to general economic conditions?for example, what the market price of unobtanium is. It would be problematic to have the seller make a representation regarding such issues, as in At Closing the market price of unobtanium will be at least $10,000 per gram, given that the seller would be powerless to ensure that the representation is accurate. By the same token, it would be futile to impose on the seller a pre-closing obligation to ensure that circumstances over which it has no control are in effect as of the closing.

Instead, it would be more appropriate to have it be a condition to closing that those circumstances are in effect at the closing?The Buyer’s obligation to consummate the transaction contemplated by this agreement is subject to satisfaction of the following conditions: … that the market price of unobtanium is at least $10,000 per gram.

But you sometimes hear lawyers arguing that it would nevertheless be preferable to address in a representation or pre-closing obligation circumstances over which a party has no control, because then the buyer could sue for damages if the representation were inaccurate or the obligation had been breached. But that assumes that rather than recharacterizing it as a condition, a court would feel compelled to take such a representation or pre-closing obligation at face value?an uncertain proposition. It would be more logical to address this sort of risk allocation through the indemnification provisions or by providing for a breakup fee.

I’ve looked for cases in which courts have recharacterized as a condition something that a contract refers to, illogically, as a representation or pre-closing obligation. So far I haven’t found anything, doubtless because no obvious search strategy presents itself. Relevant cases wouldn’t necessarily involve M&A. I’d be delighted if anyone could suggest any leads.

Full post as published by AdamsDrafting on January 08, 2010 (boomark / email).