Monday, October 10, 2011

Identifying Core Language—and simplifying contracts

One of the most important tasks in precedent management is developing model forms containing standard, or core language, offering alternative terms and optional language to cover deal-specific variations.

The key question is how do you identify the core, pre-negotiated language?

In the past we attempted to do this by building precedent collections based on the first draft of agreements. But, since we typically re-purpose documents, this approach is unlikely to succeed because the language of a first draft is very likely to be the terms from the last draft of the re-purposed document.

The better way to identify the core language is programmatically. Software can find and classify each clause type in a set of agreements. Then, by analyzing all the clause examples, we can find common terms, and thereby distinguish deal-specific and divergent terms. In the following example taken from the Oracle-Sun merger agreement, standard terms are shown in green highlight, less frequently occurring terms are shown in yellow highlight, and the deal-specific or divergent terms are shown in red text. In addition, this approach shows that the first clause—Corporate Existence and Power—states that Sun has made available its charter documents to Oracle: terms that would typically be included in a separate clause.

Example Representations from the Oracle-Sun merger agreement
Section 4.01. Corporate Existence and Power. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all corporate powers required to carry on its business as now conducted. The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where such qualification is necessary, except for those jurisdictions where failure to be so qualified would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. The Company has heretofore made available to Parent complete and correct copies of the certificate of incorporation and bylaws of the Company as currently in effect.
Section 4.02. Corporate Authorization
(a) The Company has all requisite corporate power and authority to enter into this Agreement and, subject to the Stockholder Approval, to consummate the Merger and the other transactions contemplated hereby. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Merger and the other transactions contemplated hereby, except for obtaining the Stockholder Approval, have been duly authorized by all necessary corporate action on the part of the Company. The affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock voting to approve and adopt this Agreement and the Merger (the “Stockholder Approval”) is the only vote of the holders of any of the Company’s capital stock necessary in connection with the consummation of the Merger and the other transactions contemplated by this Agreement. This Agreement constitutes a valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium and other similar Applicable Law affecting creditors’ rights generally and by general principles of equity.
(b) At a meeting duly called and held, prior to the execution of this Agreement, at which all but one directors of the Company were present and with all directors present voting unanimously in favor, the Company Board duly adopted resolutions (i) declaring that this Agreement, the Merger and the other transactions contemplated hereby are advisable and in the best interests of the Company’s stockholders, (ii) approving this Agreement, the Merger and the other transactions contemplated hereby, (iii) taking all actions necessary so that the restrictions on business combinations and stockholder vote requirements contained in Section 203 of the Delaware Law will not apply with respect to or as a result of the Merger, this Agreement, the Voting Agreements and the transactions contemplated hereby and thereby, (iv) directing that the adoption of this Agreement, the Merger and the other transactions contemplated hereby be submitted to a vote of the stockholders of the Company at the Stockholder Meeting, and (v) making the Board Recommendation.

Section 4.03. Governmental Authorization. ….
Section 4.04. Non-contravention. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Merger and the other transactions contemplated hereby do not and will not (with or without notice or lapse of time, or both): (i) contravene, conflict with, or result in any violation or breach of any provision of the certificate of incorporation or bylaws of the Company, (ii) assuming compliance with the matters referred to in Section 4.03 and that the Stockholder Approval is obtained, contravene, conflict with or result in a violation or breach of any provision of any Applicable Law or Order, (iii) require any consent or approval under, violate, conflict with, result in any breach of or any loss of any benefit under, or constitute a change of control or default under, or result in termination or give to others any right of termination, vesting, amendment, acceleration or cancellation of any Contract to which the Company or any Subsidiary of the Company is a party, or by which they or any of their respective properties or assets may be bound or affected or any Governmental Authorization affecting, or relating in any way to, the property, assets or business of the Company or any of its Subsidiaries, or (iv) result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries, with such exceptions, in the case of each of clauses (ii), (iii) and (iv), as would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, provided that in determining whether a Company Material Adverse Effect would result, any adverse effect otherwise excluded by clause (A) of the definition of Company Material Adverse Effect shall be taken into account.

By examining a large data set and finding the standard language, we can quickly identify the core, pre-negotiated terms. Next, we remove duplicate and unnecessary terms, and simplify the language.

1.1. Organization [Party] is duly incorporated, validly existing and in good standing under the laws of the State of [_____].

1.2. Qualification. [Party] has organizational power and legal qualifications to own, lease and operate its properties and conduct its business

1.3. Authority
(a) [Party] [is authorized / has corporate authority] to enter into and perform its obligations under this Agreement, and
(b) the execution, delivery and performance of this Agreement [has been / will be] duly and validly authorized.

1.3. No Violation or Conflict. The execution, delivery and the performance the obligations of this Agreement will not:
(a) result in a violation of [Party]'s certificate of incorporation or bylaws,
(b) result in a violation of any law, judgment or order applicable to [Party],
(c) conflict with, result in a breach of, or constitute a default, or give rise to any right of termination, acceleration or cancellation, under any [material] contract to which [Party] is a party.

Now, isn’t that clearer? In addition, the example is styled with line breaks to improve readability and to better serve as a checklist of deal terms. Based on the standard language, agreements can be conformed to deal specifics by adding additional terms and qualifications, such as materiality or knowledge qualifiers.

Of course, you can do this manually, without the aid of technology. However, I have seen numerous instances where even after countless hours of review by highly qualified attorneys, initiatives to create model forms:

(a)    fail to identify the core language,
(b)    contain duplicate or over-lapping terms, and
(c)    contain numerous examples of deal-specific language.

As the old adage illuminates, technology guides us to “see the forest for the trees.”

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