Anatomy of a Contract Where Traditional Analysis Meets Real Life Contracting Carol Bavousett Mattick, PLLC Corporate and Securities Law for Growing Companies © www.cbmattick.com Elements of a Contract Under Texas Law Consent to the Terms An Offer Delivery and Execution Acceptance A Meeting of the Minds © www.cbmattick.com Elements of a Contract Under State Law Consideration Quid Pro Quo Particular Promise © www.cbmattick.com The Horse Trade A Useful Paradigm for Contracting? Well-Informed Propose Terms Come Together Freely Agree Perform or Breach © www.cbmattick.com The Horse Trade The Assumptions Behind it Fully Understood & Documented Deal Parties are Competent & Self-Interested No Second-Guessing by Other Party or Courts © C B Mattick A Stubbornly Binary Character Either there is a contract (and we know when it began) or there is not Either there are full contract damages or there is nothing © www.cbmattick.com © C B Mattick A Desire for Certainty, Clarity Consequently….. A writing is located designated as the full expression of the agreement between the parties for the foreseeable future. ……. A Contract © www.cbmattick.com A Desire for Certainty, Clarity Businesses Seek Parol Evidence Rule Statute of Frauds Legal Concepts Try to Deliver © www.cbmattick.com But Business Isn’t Conducted That Way! Particularly in Private Companies… Significant duration Franchising Agreements Exchange Employment Agreements © www.cbmattick.com But Business Isn’t Conducted That Way! Particularly in Private Companies… Common & Individual Interests Management/Shareholders, Governance Benefits/Burdens shared Partnerships No Expectation to See Whole Future Mgmt, Shareholders, Employees in Family-Owned Business © www.cbmattick.com The Dilemma Trying to Fit Complicated Working Relationships Into Relatively Black and White Analysis The Black and White Analysis Will Have to Be Relied On To Enforce the Agreement © www.cbmattick.com My Solution Principles Contracts That Fit Relationships Into Traditional Structure Processes & Techniques Observations “Pop Out” “Fixes” & Better Drafting © www.cbmattick.com My Solution A Survey of Cases – Under Construction! A Reference Guide for Contract Drafters Standard and Boilerplate Provisions Common Non Standard Provisions A “Library” of Common Solutions © C B Mattick Drafting Principle #1 Know the Economics of Your Transaction © www.cbmattick.com Know the Economics of Your Transaction Processes and Techniques Diagram Each Element of Consideration Diagram The Sentences “Think” Memos Think 2007 © www.cbmattick.com 2007 © C B Mattick Diagram Spawglass, Inc. v. E.T. Services, Inc. Atlantic Richfield Co. v. Petroleum Personnel, Inc. © C B Mattick Know the Economics of Your Transaction Processes and Techniques Diagramming Sentences • Subject | Verb | Object • Prepositional phrases, adjectives, adverbs shooting off the main trunk General Voting Rights. Except with respect to the election of directors, the holder of each share of Preferred Stock shall have the right to one vote for each share of Voting Common Stock into which such Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Voting Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any shareholders meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote (subject to the provisions of this Section 4(d)), together with holders of Voting Common Stock, with respect to any question upon which holders of Voting Common Stock have the right to vote. © www.cbmattick.com 2007 © C B Mattick “Think” Memos Think about the fundamentals & write it down © www.cbmattick.com Know the Economics of Your Transaction Common Observations The Consideration Only Goes One Way ? Potential Solutions Become Tested © www.cbmattick.com Know the Economics of Your Transaction Examples Cut and Pasted Versions of Previous Documents Leave Out a Key Element – Texas Taco Cabana, LP v. Taco Cabana of New Mexico, Inc. Cut & Paste X Party 1 Party2 Parties Are Transposed – Dresser-Rand Co. v. Virtual Automation, Inc. © www.cbmattick.com Drafting Principle #2 Know How All Documents in a Transaction Affect and Relate to Each Other © www.cbmattick.com Know How All Documents in a Transaction Affect and Relate to Each Other Processes and Techniques Client’s POV - Ideal Consideration All Documents Needed in Deal Key Elements Under Each Can Turn Into a Term Sheet Summaries of Documents Closing Chronology © www.cbmattick.com Know How All Documents in a Transaction Affect and Relate to Each Other Diagram 2. Capitalization + And Account for $$ Raised 1. Entity diagram Relationships Agreements 3. Questions That Arise © www.cbmattick.com Diagram A Convertible Note from Parent Note Purchase Agreement Shareholders Agreement Potential Terms of a Warrant to Purchase Partnership Interests © C B Mattick 2007 Summary Term Sheet © C B Mattick Summary Term Sheet © C B Mattick Summary Term Sheet 2007 © C B Mattick Know How All Documents in a Transaction Affect and Relate to Each Other Processes and Techniques Client’s POV - Ideal Consideration All Documents Needed in Deal Key Elements Under Each Can Turn Into a Term Sheet Summaries of Documents Closing Chronology © www.cbmattick.com Summaries of Documents • Keep Track Of All Issues • Aid Clients in Keeping Track • Key Substantive Points • More Detail Than Maps or 1-Pagers © www.cbmattick.com To Keep Track Of All Issues To Aid Clients in Keeping Track Key Substantive Points More Detail Than Maps or 1-Pagers © www.cbmattick.com To Keep Track Of All Issues To Aid Clients in Keeping Track Key Substantive Points More Detail Than Maps or 1-Pagers © www.cbmattick.com To Keep Track Of All Issues To Aid Clients in Keeping Track Key Substantive Points More Detail Than Maps or 1-Pagers © www.cbmattick.com Know How All Documents in a Transaction Affect and Relate to Each Other Processes and Techniques Client’s POV - Ideal Consideration All Documents Needed in Deal Key Elements Under Each Can Turn Into a Term Sheet Summaries of Documents Closing Chronology © www.cbmattick.com Chronology © www.cbmattick.com Chronology © www.cbmattick.com Know How All Documents in a Transaction Affect and Relate to Each Other Common Observations • Promise Is Not In Document Signed By Party Against Whom You Want to Enforce It • Don’t Have All the Ideal Terms Covered • Need Additional Documents • Dangers of Subcontracts © www.cbmattick.com 2007 © C B Mattick Know How All Documents in a Transaction Affect and Relate to Each Other Common Observations • Promise Is Not In Document Signed By Party Against Whom You Want to Enforce It • Don’t Have All the Ideal Terms Covered • Need Additional Documents • Dangers of Subcontracts © www.cbmattick.com Drafting Principle #3 Make a Conscious Decision Whether You Want an Enforceable or Unenforceable Contract © www.cbmattick.com Make a Conscious Decision Whether You Want an Enforceable or Unenforceable Contract Less Bargaining Power Why Would You Ever Want An Unenforceable Agreement? Gain No Advantage By Signing Intellectual Property, Confidentiality, Non-Compete Agreements © www.cbmattick.com Make a Conscious Decision Whether You Want an Enforceable or Unenforceable Contract Processes & Techniques Reviewing Contract Drafted By the Other Party Diagram the consideration Diagram key elements ID Confusing or Circular Language Consequences Not Thought Out Know Weaknesses © www.cbmattick.com Make a Conscious Decision Whether You Want an Enforceable or Unenforceable Contract Processes & Techniques Know Weaknesses Evaluate How Weaknesses Used to Your Client’s Advantage Exploit Weaknesses Results In Deliberately Ambiguous Language Deliberately Incomplete/Ineffective Language © www.cbmattick.com 2007 © C B Mattick Make a Conscious Decision Whether You Want an Enforceable or Unenforceable Contract Examples • Faulty UCC Filings or Security Agreements • Letters of Intent That One Party Wants Binding More Than the Other Does • Confidentiality and Non-Compete Agreements, Esp. Mid-Tenure • The Case of the Subsequently Amended Documents © www.cbmattick.com Make a Conscious Decision Whether You Want an Enforceable or Unenforceable Contract Pennzoil v. Texaco 12/20/83 – 01/02/84 Meeting & negotiations Gordon Getty (40.2% shareholder of Getty Oil) & Pennzoil 01/02/84 Letter from Gordon Getty agrees to: • support plan of merger before Board • remove Board if it doesn’t agree • try to get 10.8% shareholder to agree © www.cbmattick.com Make a Conscious Decision Whether You Want an Enforceable or Unenforceable Contract Pennzoil v. Texaco 01/02/84 (Same day) Memo of Agreement signed by G. Getty, Pennzoil but not Getty Oil 01/02/84-01/03/84: Board Meetings • Board initially rejects offer • Pennzoil makes better offer • Board accepts counteroffer, 15-1. 01/04/84 Press Release stating that 40.2%, Pennzoil and Getty Oil had agreed in principal to merger © www.cbmattick.com Make a Conscious Decision Whether You Want an Enforceable or Unenforceable Contract Pennzoil v. Texaco 01/06/84: Texaco announces deal to buy 100% of Getty Oil *Part of the deal is an indemnity Texaco gives to the Trust and Museum (Getty Oil SH) against any liability they have to Pennzoil. © www.cbmattick.com Make a Conscious Decision Whether You Want an Enforceable or Unenforceable Contract Pennzoil v. Texaco Pennzoil files suit in Texas alleging tortious interference with Pennzoil Getty contract Both Pennzoil and Texaco agree that New York law applies to the question whether there was a contract and whether Texaco tortiously interfered with such a contract. Under Texas law, damages are a question for the jury in a jury trial. © www.cbmattick.com Make a Conscious Decision Whether You Want an Enforceable or Unenforceable Contract Pennzoil v. Texaco What to Learn from Pennzoil? Every interaction your client has with the other party, whether “complete” or a written signed agreement (or not), will be used to determine whether litigation is warranted and can be won. © www.cbmattick.com Additional Drafting Principles • #4:Is Your Client Entering a Contract or Partnership? • #5: A Contract or Pre Contractual Activities? • #6: Know the Need for Additional Expertise • #7: Look at the Contract Through the Eyes of a Litigator or Jury • #8: Know the case and statutory law on common contractual provisions • #9: Help your client form an exit strategy • #10: Know the consequences of breach and/or bankruptcy. © www.cbmattick.com Drafting Principle #4 Make a Conscious Decision Whether Your Client Will Be Entering Into a Contract Or Forming A Partnership © www.cbmattick.com Make a Conscious Decision Whether Your Client Will Be Entering Into a Contract Or Forming A Partnership Have You Noticed? Everyone is a “Team Member” “Team Toyota” “We’re Working With Our Partners” Alliances , “Strategic” or Otherwise © www.cbmattick.com Make a Conscious Decision Whether Your Client Will Be Entering Into a Contract Or Forming A Partnership Why Should We Be Concerned? General Partnerships Can Be Formed By Actions of the Parties w/out Agreement Then – Fiduciary Duties – Joint & Several Liability © www.cbmattick.com Make a Conscious Decision Whether Your Client Will Be Entering Into a Contract Or Forming A Partnership Processes & Techniques Contributing Assets for Common Purpose Sharing in Profits and Losses of Common Activity Dual or Joint Employees Compare the Relationship or Contract With Key Elements of Partnerships © www.cbmattick.com Make a Conscious Decision Whether Your Client Will Be Entering Into a Contract Or Forming A Partnership Processes & Techniques Formal Agreements Press Memos / Emails Training Between Some & Not All Parties Materials Sales and Marketing Materials Do a Quick Audit w/ Your Client of Any Documentation of Relationship © www.cbmattick.com Make a Conscious Decision Whether Your Client Will Be Entering Into a Contract Or Forming A Partnership Processes & Techniques Look at the Relationship From the Perspective of Those To Whom It Is Directed © www.cbmattick.com Make a Conscious Decision Whether Your Client Will Be Entering Into a Contract Or Forming A Partnership Common Observations Create a New Separate Entity Need a Structured, Written Agreement W/Disclaimer of Partnership Options to Achieve Economic Results Without Sharing Profits © www.cbmattick.com Drafting Principle #5 Make a Conscious Decision Whether Your Client is Entering Into a Contract or Engaging in Activities Preliminary to Entering a Contract © www.cbmattick.com Make a Conscious Decision Whether Your Client is Entering Into a Contract or Engaging in Activities Preliminary to Entering a Contract We All Know the Problem of Getting Into Enough Detail to Know if There Is a Deal • Letters of Intent • MOU’s • Term Sheets © www.cbmattick.com Make a Conscious Decision Whether Your Client is Entering Into a Contract or Engaging in Activities Preliminary to Entering a Contract Processes & Techniques Quick Audit What Does Your Client Want? Compare With Case Law Fact Patterns Binding or Not Binding? Any Superceding Statute © www.cbmattick.com Make a Conscious Decision Whether Your Client is Entering Into a Contract or Engaging in Activities Preliminary to Entering a Contract Processes & Techniques • Are All Necessary Terms Present in a “Preliminary” Document? • If Not, What Are They? Can You Write Them Down? © www.cbmattick.com Make a Conscious Decision Whether Your Client is Entering Into a Contract or Engaging in Activities Preliminary to Entering a Contract Common Observations Limitations on Communications Advise Your Client How to Conduct the Process © www.cbmattick.com Drafting Principle #6 Know When You Need Additional Expertise and Cultivate Relationships To Call On When You Need It © www.cbmattick.com Know When You Need Additional Expertise and Cultivate Relationships To Call On When You Need It Use of Entities with Pass Through Tax Consequences Form and Structure of Any Sale of A Business is Tax Driven Raising of Private Equity Always Involves Compliance with a federal and at least one state exemption from registration © www.cbmattick.com Know When You Need Additional Expertise and Cultivate Relationships To Call On When You Need It Processes & Techniques Distributions of Available Cash Allocations of Profits and Losses Distributions on Liquidation Know Basic Tax Consequences of Common Contract Terms in Governing Document of a Pass Through Entity © www.cbmattick.com Know When You Need Additional Expertise and Cultivate Relationships To Call On When You Need It Certain Industries or Commercial Communities Have Developed Specialized Language Outside the Plain Meaning Insurance Coverage Government Contracting Contracts with Highly Technical Deliverables © www.cbmattick.com Know When You Need Additional Expertise and Cultivate Relationships To Call On When You Need It Processes & Techniques Know Basic Tax Consequences of Alternative Forms of Buying and Selling a Business © www.cbmattick.com © www.cbmattick.com Drafting Principle #7 Look At The Contract Through the Eyes of A Litigator or A Jury © www.cbmattick.com 2007 © C B Mattick Look At The Contract Through the Eyes of A Litigator or A Jury What is the REAL test of Enforceability? WINNING © www.cbmattick.com Look At The Contract Through the Eyes of A Litigator or A Jury Processes & Techniques Know the Elements of Related Causes of Action O’Connor’s Causes of Action: Recent Cases Organized by Elements of Causes of Action Be Aware of Elements of Related Fraud Actions Also © www.cbmattick.com Look At The Contract Through the Eyes of A Litigator or A Jury Processes & Techniques Do a Quick Chronology of Relations Between the Parties With Your Client’s Project Lead Cover Same Bases As Principle # 4 Communications (Docs, Memos, Email Among Anyone Involved) © www.cbmattick.com Look At The Contract Through the Eyes of A Litigator or A Jury Processes & Techniques Think of Creating File of Documentary Evidence of Contract to Withstand Summary Judgment As Though You Were Appealing the Other Party’s Granted Motion As Though Your Motion was Granted by the Trial Court © www.cbmattick.com Look At The Contract Through the Eyes of A Litigator or A Jury Common Observations Litigators Are Looking For: A Good Story Tort Causes of Action Impress on Your Clients The Importance of Acting Consistently Relative to Other Party © www.cbmattick.com Look At The Contract Through the Eyes of A Litigator or A Jury Common Observations If You Find Yourself In Litigation Put Everything You Have Into The Summary Judgment Evidence © www.cbmattick.com Look At The Contract Through the Eyes of A Litigator or A Jury The Tale of the Whistleblower Exec © www.cbmattick.com Look At The Contract Through the Eyes of A Litigator or A Jury (d) The term "non-performance by the Employee" in the event of termination of the Employee's employment by the Company means the determination by a super-majority (greater than 75%) of the members of the Board of Managers of the Company, in their sole and absolute discretion, that the Employee is not performing his duties…. © www.cbmattick.com Drafting Principle #8 Know the State Statutory and Case Law Regarding The Provisions We All See In Every Contract © www.cbmattick.com Know the State Statutory and Case Law Regarding The Provisions We All See In Every Contract Requirements to Procure Particular Types of Insurance, Amount of Coverage What Does Contract Say? Mean? Does Insurance Cover Realistic Exposure, Likely Risks? What Risks Is Contract Asking Your Client to Carry? Does Insurance Cover Those Risks? © www.cbmattick.com Know the State Statutory and Case Law Regarding The Provisions We All See In Every Contract Indemnity Provisions Alignment of: Whom You Want Indemnity From Vs The Party With Whom Your Client Is Contracting Stand Alone Agreements vs. Provisions Feasibility/Lack of Feasibility of Applying Economic Pressure © www.cbmattick.com Know the State Statutory and Case Law Regarding The Provisions We All See In Every Contract Disclaimer or Limit on Liability Express Negligence Rule Suppliers’ Limitations on Delivery Invoices © www.cbmattick.com Know the State Statutory and Case Law Regarding The Provisions We All See In Every Contract Confidentiality Provisions On Their Own Mabrey v. Sandstream, Inc. Or As Consideration for Non-Competes Should Contain Obligation to Give Info On Part of Employer/Owner Evidence of Confidential Information/Trade Secrets Actually Given Close In Time to Obligation Not to Compete Whether or Not the Non-Compete Is Enforceable, Clawbacks Are! © www.cbmattick.com Know the State Statutory and Case Law Regarding The Provisions We All See In Every Contract Ownership of Information •Beware of lack of assignment of copyrightable works © •Acknowledgment of Non-Reliance •Estoppel of fraud and negligence claims with acknowledgment of NonReliance © www.cbmattick.com Drafting Principle #9 Know Your Client’s Exit Strategy If There Is A Workable One Short of Litigation © www.cbmattick.com © C B Mattick Know Your Client’s Exit Strategy If There Is A Workable One Short of Litigation The Key to Making An Agreement Really Work For Your Client? Allowing For Unforeseen Circumstances © www.cbmattick.com Know Your Client’s Exit Strategy If There Is A Workable One Short of Litigation Processes & Techniques Quick Discussion with Client Posing Termination Scenarios © www.cbmattick.com Know Your Client’s Exit Strategy If There Is A Workable One Short of Litigation Common Observations Client Often Gains Action Plan for Less Dependency On That Supplier/Customer Denial of Economic Windfall to Other Party Can Often Make Things Better © www.cbmattick.com Know Your Client’s Exit Strategy If There Is A Workable One Short of Litigation Examples Push/Pull Buy-Sell Provisions Rights of Co-Sale “Clawback” of Amount Gained Liquidated Damages Provisions © www.cbmattick.com Drafting Principle #10 Know What Your Client’s Economic Position Will Be Should Your Client or the Other Party Breach the Agreement or Go Into Bankruptcy © C B Mattick 2007 © C B Mattick Know What Your Client’s Economic Position Will Be Should Your Client or the Other Party Breach the Agreement or Go Into Bankruptcy Processes & Techniques An Extension of Discussion of Termination Scenarios • If Your Client Were to Breach • If Other Party Breaches • If Either Goes Into Bankruptcy Look For Areas of Economic Leverage © C B Mattick Know What Your Client’s Economic Position Will Be Should Your Client or the Other Party Breach the Agreement or Go Into Bankruptcy Common Observations Be a Secured Creditor, If You Can! Even If You Are A Creditor, Being Part of a Confirmed Bankruptcy Plan May Still Not Get You Paid Bankruptcy Court’s Ability to Set Aside Contracts © C B Mattick In Conclusion • Effect of Standard of Review of Grant (or Denial) of Summary Judgment on Meaning of Contract Terms • Effect of Standard of Review of Grant (or Denial) of Temporary Injunction on Meaning of Contract Terms • Distilling Leads to Less Ambiguous Contracts • Mechanisms For Keeping Track © www.cbmattick.com Anatomy of A Contract Where Traditional Analysis Meets Real Life Contracting Thank You! © www.cbmattick.com
