It’s not exactly breaking news, but there are still useful lessons to be had in a Delaware chancery court case, Zayo Group, LLC v. Latisys Holdings, LLC,:
- Latisys Holdings (the “target company”) put itself up for sale, and ultimately sold itself to Zayo Group (the “buyer”)
- The M&A agreement included a “rep” (a representation and warranty) that none of the target company’s key customers “intends to cancel, terminate, materially modify or refuse to perform” their contracts.
- The target company failed to disclose to the buyer that some of the target company’s key customers were refusing to renew their expiring contracts without significant changes in pricing.
- The buyer’s original draft of the rep would have required disclosure of the non-renewing customers. But during negotiation of the M&A agreement, the target company’s counsel redlined the draft agreement to delete the “refuse to renew” language, and the buyer accepted the deletion.
The court ruled that the language of the rep was ambiguous, so it looked to the negotiation history for clarification — and found that the buyer’s acceptance of the deletion of “refuse to renew” amounted to a meeting of the minds about the meaning of the remainder of the rep:
Zayo returned the redline to Latisys—accepting Latisys’ change to Section 4.12(b). …
[FN90] Because Zayo returned the redline with no changes or comments to Zayo’s deletion of “‘refuse to renew,” the parties assume, as do I, that Zayo accepted the change and there was a meeting of the minds that the phrase would not be included. * * *
The SPA [i.e., the M&A agreement] drafting history makes clear that Latisys made no commitment to inform Zayo if existing customers will or will not renew their expiring contract. To the contrary, Latisys expressly declined to make that commitment when Zayo proposed it during the course of negotiations. Zayo did not object and the parties executed the SPA without the “refuse to renew” language in the Material Contracts representation and warranty.
The fact that Zayo inserted this added language in its proposed SPA reveals that Zayo, like Latisys, believed that “refuse to renew” had a different meaning than the language already included in Section 4.12(b)—i.e., “terminate,” “cancel” and “refuse to perform.”
Zayo Group, LLC v. Latisys Holdings, LLC, No. 12874-VCS, slip op. at 17-18 & n.90, 36-37 (Del. Ch. Nov. 26, 2018) (footnote omitted, emphasis and extra paragraphing added). The court found (i) that the target company didn’t breach the rep, and (2) in any case, the resulting financial harm to the buyer didn’t exceed the agreement’s “basket” threshold for liability.
In a discussion at the redline.net lawyer forum (membership required), Sean Hogle suggests that “the court undoubtedly placed too much emphasis on the removal of the clause in question”; he quotes a blog post by “the always-awesome Glenn West” for the proposition that (in Glenn’s words):
… as deal lawyers know well, another possible explanation is that the buyer’s counsel thought (ill-advisedly as it turns out) that the buyer was already covered by the other redundant words and decided not to push the issue.
After all, if the words that were already there basically were all various ways of saying “terminate” or “come to an end,” isn’t one way that a contract comes to an end the expiration of its term without being renewed?
(Emphasis and extra paragraphing added.) This is one of the rare occasions where I find myself disagreeing with Sean and Glenn; let me explain.
Lessons: There are a couple of lessons here for contract negotiators:
- Whenever “The Other Side” asks for a change in contract language, assume that there might be a substantive reason — and consider asking questions. As we see from the above case, it can be dangerous to assume that The Other Side’s contract reviewer was concerned solely about drafting style. (Keep in mind that we don’t know whether the buyer’s counsel made that mistake in the Zayo Group case.)
- A corollary: If you’re reviewing a draft contract, then to keep the negotiation moving (and to avoid coming across as a nitpicker): Don’t ask for purely-stylistic changes; instead, for the most part stick to substantive matters, with the exceptions discussed just below.
There are a couple of exceptions to the don’t-ask-for-stylistic-changes corollary in item 2 above:
- Exception 1: Whenever you encounter a long, “wall of words” provision while reviewing a contract draft, then break up the wall of words into short, single-subject paragraphs, for two reasons:
- First, you want to make the provision easier for your client to review. I’ve never had an opposing counsel complain about my breaking up a wall of words when I’ve preemptively noted this in a comment at the beginning of my redline.
- Second, you want to avoid the MEGO Factor (Mine Eyes Glaze Over). You can’t rule out that The Other Side might have intentionally written a wall of words in the hope that you’ll miss something important.
- Exception 2: A style problem can create an ambiguity, in which case it’s usually better to fix the ambiguity right away. Other things being equal, it’s generally better to raise potential disputes and get them out into the open before the parties get too far down the road. That’s why it’s usually good to follow the A.T.A.R.I. Rule: Avoid The Argument: Rewrite It!