1、Blackjack or Bust: Unclear Contract Provisions Can Lead to a Litigation Crapshoot,Presented By: Rob Carlson Stephen Harris Stephen Lee,October 2, 2008,2,Agenda,Interpreting Contract Language Special Drafting Topics Employment Contracts, NDAs, Amendments, LOIs and Arbitration URI Case Study Bear Stea
2、rns Case Study,3,Interpreting Contract Language,Step 1: Is the contract incomplete, ambiguous, or the product of fraud, mistake or similar bargaining defect? Step 2: If any of the above, courts “interpret” the contracts meaning using extrinsic evidence. Step 3: If the extrinsic evidence does not ide
3、ntify a contracts meaning, courts may consider the “Forthright Negotiator Principle.”,4,Interpreting Contract Language,Step 1: Examine the “Four Corners” The Test: Is the contract ambiguous? If not, courts simply review the “four corners of the agreement” and documents incorporated by reference to i
4、nterpret the contract. If so, courts examine extrinsic evidence to determine a terms meaning. The court determines the terms meaning based on “all circumstances.”,5,Interpreting Contract Language,Step 2: Extrinsic Evidence Negotiations, Drafts, Notes, and Correspondence If a contract term is ambiguo
5、us, then all of the above forms of extrinsic evidence can be used to interpret its meanings Be Mindful Of What You Write Down The Goal: Ensure any writings, drafts or correspondence are consistent with your understanding of a term. Create/Confirm the Record: Communicate, in writing, your understandi
6、ng of a contract term to the other parties to ensure proper judicial interpretation.,6,Interpreting Contract Language,Step 3: “The Forthright Negotiator” Principle If there is no clear meaning of a contract term, the court may apply the subjective understanding of one party (URI v. RAM Holdings, Cou
7、rt of Chancery, Delaware, 2007) A rarely used principle, though arguably a mere extension of extrinsic evidence. The Lesson: If the opposing side articulates their subjective understanding of a contract term, the court may adopt their understanding if you fail to articulate your disagreement. Attorn
8、eys must unequivocally articulate their understanding of a contract, or risk adverse judicial “interpretation” of the evidence.,7,Interpreting Contract Language,Consequences of Not Drafting Clearly Risk adverse judicial “interpretation” of the evidence. May have to try to execute an amendment to you
9、r agreement,8,Agenda,Interpreting Contract Language Special Drafting Topics Employment Contracts, NDAs, Amendments, LOIs and Arbitration URI Case Study Bear Stearns Case Study,9,Special Drafting Topics Employment Agreements,Employment Agreements Should there be an employment agreement? Some key draf
10、ting issues: Employment at will Change in control provisions Severance Equity The Big No-Nos Severability 409A & Other Tax-Related Matters Arbitration (to be discussed later),10,Special Drafting Topics Employment Agreements,Employment at will No employment contract, employment at will is the presump
11、tion Regardless of level, all employees normally should be employees at will Even executives normally should be employees at will, even if they are entitled to severance under certain situations,11,Special Drafting Topics Employment Agreements,Typical Changes of Control Change in Stock Ownership (50
12、% and up) Change in Asset Ownership (40% and up of gross fair market value; all or substantially all of the assets) Change in Effective Control (30% and up) Change in Directors (majority in a 12-month period without endorsement by existing Board members) Change in Control Dont use form language Ofte
13、n language appropriate in one type of document (e.g., a stock option plan may not be appropriate in an employment agreement) A Change in Control appropriate for one group of employees may not be appropriate for other groups,12,Special Drafting Topics Employment Agreements,Severance Should there be s
14、everance pay provisions? Should the employee be entitled to quit for “good reason”? Trend toward 409A safe harbor definition Consider when employee must terminate Release requirement Equity “Employee will be granted an option to purchase 100,000 shares of the Companys common stock with a strike pric
15、e of $1 per share” “Subject to the Compensation Committees approval, Employee will be granted an option to purchase 100,000 shares of the Companys common stock with a strike price equal to the fair market value of such stock on the date of grant”,13,Special Drafting Topics Employment Agreements,The
16、Big No-Nos in California Non-competes Non-compete during employment is ok In connection with the sale of a business can be ok Post-employment tight trade secrets restriction provisions Alternatives Severance mitigation or termination ERISA No-hire provisions Often are not upheld Jury trial waivers G
17、rafton Partners L.P. v. Superior Court (PriceWaterhouseCoopers), 36 Cal. 4th 944 (2005) Alternatives,14,Special Drafting Topics Employment Agreements,Severability Employment law evolves, especially in California Ensure that if a provision or a term in a provision becomes unenforceable, the rest of t
18、he document is still enforceable Savings clause,15,Special Drafting Topics Employment Agreements,Blackjack:If any term or other provision of this Agreement is invalid, illegal or unenforceable, all other terms and provisions of this Agreement shall remain in full force and effect. The parties agree
19、that each of the terms and provisions included in this Agreement is separate, distinct, and severable from the remaining terms and provisions of this Agreement. If any term or other provision of this Agreement is invalid, illegal or unenforceable, all other terms and provisions of this Agreement sha
20、ll remain in full force and effect. If any term or provision of this Agreement is held to be illegal, invalid or unenforceable, in lieu of such term or provision, there shall be added automatically as part of this Agreement a legal and enforceable term or provision as similar in terms to such illega
21、l, invalid or unenforceable term or provision as possible.,16,Special Drafting Topics Employment Agreements,Entire Agreement and Anti-modification Provisions All Good Things Come To An End But Should They? Internal Revenue Code Section 409A Most executive employment agreements require 409A review, e
22、specially with respect to severance obligations 409A applies if the employee has a legally-binding right to receive compensation in a future year, unless there is an exception Non-compliance can decimate benefits End of year documentary compliance requirement quickly approaching,17,Special Drafting
23、Topics Employment Agreements,Practice pointers: Carefully review the agreement Provide for time and form of payment in agreement Make sure that release requirements dovetail with payment requirements Do not provide for different types and timing of payments depending on what type of termination (e.g
24、., termination for disability v. termination without cause) Carefully review the agreement, again and again,18,Special Drafting Topics Employment Agreements,Other Tax Considerations 105(h) 162(m) 280G,19,Agenda,Interpreting Contract Language Special Drafting Topics Employment Contracts, NDAs, Amendm
25、ents, LOIs and Arbitration URI Case Study Bear Stearns Case Study,20,Special Drafting Topics - NDAs,Non-Disclosure/Confidentiality Agreements What are they? What are the key drafting issues? What is subject to non-disclosure/confidentiality What are the carveouts? Term of the confidentiality period,
26、21,Special Drafting Topics - NDAs,What is confidential information? Any information that is provided to the receiver The fact that you have provided information to the receiver The fact that there you are in discussions with the receiver or that you are considering a transaction The status of the di
27、scussions or transaction,22,Special Drafting Topics - NDAs,What are the typical carveouts? Information that was already in the receivers possession prior to the time of disclosure provided that such information was not furnished by a source known by the receiver to be bound by a confidentiality agre
28、ement with the Company, or otherwise prohibited from disclosing the information to the receiver Information that was or becomes generally available to the public other than as a result of a disclosure by the receiver,23,Special Drafting Topics - NDAs,What are the typical carveouts (contd)? Informati
29、on that becomes available to the receiver on a non-confidential basis from a source other than you or your representatives provided that such source is not known by you to be bound by a confidentiality agreement with the Company, or otherwise prohibited from disclosing the information to you Informa
30、tion that was independently developed by the receiver without violating its obligations under the NDA,24,Special Drafting Topics - NDAs,Term of the confidentiality period Should the obligation expire or not? It depends! Provider of confidential information says never Receiver of confidential informa
31、tion says as soon as possible How do you bridge the gap? Determine when the information will become stale Trade secrets/Uniform Trade Secrets Act,25,Special Drafting Topics - NDAs,Bonus Issues When should the confidentiality obligation flip? In acquisition transactions, you want a surviving seller t
32、o be prohibited from disclosing information about the acquired business/entity Incorporation by reference into purchase agreements When does the obligation expire now?,26,Agenda,Interpreting Contract Language Special Drafting Topics Employment Contracts, NDAs, Amendments, LOIs and Arbitration URI Ca
33、se Study Bear Stearns Case Study,27,Special Drafting Topics - Amendments,Amendments to Agreements What are the key drafting issues? Offer, Acceptance and Consideration Effect on the original agreement Conflicts between the original agreement and the amendment,28,Special Drafting Topics - Amendments,
34、Offer, Acceptance and Consideration Remember, amendments are contracts that require consideration Time and effort to continue with a transaction Increased or modified obligations of the parties More than a peppercorn Now Therefore, in consideration of the premises and mutual agreements and covenants
35、 set forth herein, and intending to be legally bound hereby, the parties hereto hereby agree as follows:,29,Special Drafting Topics - Amendments,Effect on the Original Agreement Amendments should clearly specify what provisions are being amended Clarify that amendment only modifies the specified pro
36、visions; otherwise you introduce ambiguity into how courts may interpret your agreement,30,Special Drafting Topics - Amendments,Blackjack Effect of Amendment: Except as and to the extent expressly modified by this Amendment, the Agreement, the Exhibits thereto, and the schedules shall remain in full
37、 force and effect in all respects. In the event of a conflict between this Amendment and the Agreement, the Exhibits thereto or the Schedules, this Amendment shall govern.,31,Agenda,Interpreting Contract Language Special Drafting Topics Employment Contracts, NDAs, Amendments, LOIs and Arbitration UR
38、I Case Study Bear Stearns Case Study,32,Special Drafting Topics Letters of Intent,Letters of Intent What are they? What is the key drafting issue? Binding v. non-binding The courts view Two key principles,33,Special Drafting Topics Letters of Intent,Principle 1 If the parties intend to be bound prio
39、r to executing a definitive agreement, a court will give effect to that intent and the parties will be bound, even if they contemplate replacing the LOI with a definitive agreement.(See Texaco v. Pennzoil Co., 729 S.W.2d 768 (Tex. Ct. App. 1987),34,Special Drafting Topics Letters of Intent,When does
40、 Principle 1 apply? Parties agree on all points Parties agree to memorialize this agreement in a more formal agreement What is the effect? The letter of intent is enforceable as the definitive agreement Courts may fill in the gaps with commercially reasonable terms,35,Special Drafting Topics Letters
41、 of Intent,What does this type of letter of intent look like? The parties have clearly evidenced their agreement to the terms and have agreed to memorialize them in a final purchase agreement. What if there is no specific language stating that the parties intend the letter of intent to be non-bindin
42、g?,36,Special Drafting Topics Letters of Intent,Principle 2 If the parties clearly evidence an intent not to be bound until the execution of a definitive agreement, courts will find an LOI to be non-binding even if negotiations are completed(See Quake Construction, Inc. v. American Airlines, Inc., 5
43、65 N.E.2d 990 (1990),37,Special Drafting Topics Letters of Intent,When does this apply? The parties expressly state what is binding and what is not What is the effect? Parties cannot demand performance of the transaction Parties can abandon the transaction before signing definitive agreement However
44、, parties must always act in good faith under California law (See Copeland v. Baskin-Robbins U.S.A., 117 Cal. Rptr. 2d 871 (2002),38,Special Drafting Topics Letters of Intent,What does this look like?Except for paragraphs 6 (Exclusivity Period; Deposit), 7 (Expenses), and 8 (Publicity) below, this l
45、etter does not constitute a binding obligation of the parties, and, except as set forth in this sentence, such binding obligation would only arise, if ever, upon the execution and delivery by the parties thereto of the Definitive Agreement (hereinafter defined).,39,Special Drafting Topics Letters of
46、 Intent,What happens if the intent of the parties is not clear? Courts will look to extrinsic evidence: Oral communications Course of conduct/partial performance Is the LOI sufficiently definite to be enforceable,40,Special Drafting Topics Letters of Intent,What provisions should be binding? Exclusi
47、vity Confidentiality Expenses and deposits Publicity Termination of LOI Governing Law,41,Special Drafting Topics Letters of Intent,Bust:When signed by an authorized person in the manner hereinafter provided, this letter will constitute the understanding between SELLER “Seller” and BUYER “Buyer” with
48、 respect to the terms of the transaction herein described, which will be reflected in the Definitive Agreement (hereinafter defined). The proposed transaction between Buyer and Seller will involve the following terms:,42,Special Drafting Topics Letters of Intent,Blackjack:When signed by an authorize
49、d person in the manner hereinafter provided, this letter will constitute an expression of the intention of SELLER “Seller” and BUYER “Buyer” with respect to the transaction herein described. Except for paragraphs 6 (Exclusivity Period; Deposit), 7 (Expenses), and 8 (Publicity) below, this letter doe
50、s not constitute a binding obligation of the parties, and, except as set forth in this sentence, such binding obligation would only arise, if ever, upon the execution and delivery by the parties thereto of the Definitive Agreement (hereinafter defined). The proposed transaction between Buyer and Seller would involve the following terms:,
