Drafting Contracts

23 February

• How to find forms in LexisNexis
• There are thousands of forms available, but we're focusing on transactional business forms.
• Handout #1: outline of LexisNexis forms.
• Add/edit tabs: corporate and securities
• Corporate tab: Warren's Forms for Agreements is a good stating place.
• Note the miscellaneus area in Warren's: non-compete, confidentiality, etc.
• Aside from Warrens, there's also Business transactions forms. This pulls in forms from a lot of publications. There's also the LEXIS Clause Library. That's kind of cool.
• There's crossover between corporate and securities tab, but now let's look at securities. You can search SEC filings, for example.
• SEC Exhibits are nice as well: material contracts. (licensing agreements, shareholder agreements, etc.)
• The search analysis stuff can be useful as well: securities law techniques, e.g., has some forms in its appendix.
• There's the Transactional Advisor tab as well. This is a different view into all the practice areas that have a significant transactional component: it's template based, and easy to use.
• For general business purposes, go to Warren's. For public company/SEC stuff, the transactional advisor is better because it just has more stuff (go there and then focus).
• Handout 2: sample taxable purchase of assets.
• Handout 3: the assignment.
• So, back on acquisition documents. We've got the three basic ways: merger, stock purchase, and asset purchase. Successor liability is one consideration when picking a method, but tax is generally the overriding concern, and the parties might have different ideas of which plan is best.
• So, Buyer's counsel prepares the first draft of the acquisition document.
• The handout agreement actually starts on p. 134. On p. 137, we have the recitals. Define the buyer and the seller.
• Next, there's a definition section. We'll need a dozen at the most. These have substantive impact on the obligations of the parties, so we have to pay attention to them. When reviewing a complex agreement, the smart thing to do is to make a separate copy of the definition section, so you can refer to it side-by-side with the provisions you're reading.
• After that, you've got the operative provisions (p. 142). The basic transaction: what is being bought, what is being sold, what's the price, what's the date of the closing, how will the purchase price get paid (and maybe adjusted), etc.
• You actually could pretty much stop right there-- just add in a governing law clause and maybe a bit more, and you'd have a working contract. But it would leave out a lot of stuff that would be very difficult to resolve without winding up in court. For example, what are the rights and obligations of the parties if the seller's is sued over some intellectual property 3 days before the sale? Or what if the main plant burns down between the signing and the closing? So you want some additional terms in there to cover eventualities, so you don't have to litigate.

  So the remainder of the handout agreement is there to deal with these kinds of eventualities: what to do with things that happen between signing and closing, and how to resolve confusion about whether the buyer got what they bargained for.

  Conditions precedent to the closing, representations and warranties of the parties, and covenants of the buyer and seller governing behavior between the signing date and the closing date.

• Seller's representation and warranties is usually the longest and most important section of the document. These are statements of fact that the seller is making that speak of a particular date and time (when the document is signed) and the status of some aspect of the deal. If they turn out not to be true, the buyer has some rights or remedies under the contract. So writing these basically means smoking out factual issues that might otherwise not be disclosed.

  That will identify issues that need to get resolved: it puts the buyer in the position to make an informed decision about whether to proceed and if so on what basis. This is sort of like having an inspection before buying a house: it's a way to get disclosure of things you care about, and it gives the buyer the right to walk away from the deal if it finds things out that are not appealing.

  The reps and warranties have to be true not just when the document is signed, but also on the closing date. If there's a change that makes them no longer 100% accurate, one of the conditions precedent won't be satisfied, and the buyer can say they're not going to close, or negotiate and amendment to the deal.

  This gives the buyer some indemnification if it discovers, after the closing, that some rep/warranty was not true. At least in the case of a privately-held company... there's no real way to have reps/warranties survive the closing in the case of a public company. But generally with a private company they survive for a year; this is like a statute of limitations for bringing claims.

  When it comes down to it, these are tools for allocating economic risk.

• The textbook has a good example of representations and warranties and the way they cause information to be disgorged (the fabric dying plant).
• Representation: a statement of fact; warranty: a thing that creates an obligation. Just say "represents and warrants" in order to be safe.
• Disclosure schedules: when the seller has something contrary to a representation, it basically drafts an exception. This allows the buyer to investigate properly as part of due diligence, and price the deal accordingly, etc. Usually schedules are numbered correspondingly to the section to which they relate.
• Sellers can refuse to make representations (this is alarming), or make them to the best of their knowledge (i.e., in a qualified manner). But the bottom line is that knowledge doesn't really matter: we're just negotiating who is going to bear some risk.
• Buyer's consel needs to make sure that the disclosures are comprehensive. Sellers want to make them strict.
• The sample has a zillion examples of representations and warranties.
• There are always representations about financial statements, etc. Also good and marketable title to all assets, the capitalization of the company, that the books are correct and well-maintained, etc.
• At the closing the officers of the seller sign "bring-down" certificates attesting to the representations and warranties.
• The buyer's representations and warranties are lovably short in comparison. For obvious reasons. Basically they tend just to say that the buyer can really do this transaction. If part of the purchase price is stock in the buyer, that can get more complex, and maybe the buyer's financial condition is an issue.
• Covenants are ongoing promises either to take or not take certain actions. A lot of these are designed to protect the buyer from material adverse changes in the way the business is operated between signing and closing (i.e., no changing accounting practices, bylaws, articles of incorporation, disposal of assets, issuance of stock, declarations of dividends, entering giant contracts, etc.). Transactions consistent with the ordinary course of business, or up to a certain dollar amount, are excepted.
• A carve-out: removes something from a restriction (i.e., "the seller shall not sell any of its assets EXCEPT for the sale of obsolete equipment in the ordinary course of business").
• A basket: the right to deviate from a restriction with some limited flexibility (i.e., up to a certain dollar amount).
• Typical covenant: both parties will make their best effort to ensure that the conditions precedent to closing are satisfied.
• The Conditions Precedent section. You only need this if there's a materially significant time between signing and closing. If these aren't fulfilled, the parties can waive them, negotiate a compromise, or agree to wait until they are fulfilled.

  At closing, there's document-signing galore, and we engage in this fiction that it all happens simultaneously, as though they all get signed at the same moment. You hardly ever schedule a closing on a Friday afternoon, because you're probably going to wire-transfer the money, and you don't want a screw-up to make it last over the weekend.

• Choice of law: if you don't have a better choice, pick NY. Or if it's real estate, you might want the law of that state.
• We are going to draft the title, recitals, definitions, and basic transaction for an asset purchase agreement.
• The example hanout Basic Transaction section is a decent model for us.