WORKINGWITHCONTRACTS

WhatLawSchoolDoesn’tTeachYou

SECONDEDITION

PLI’sCorporateandSecuritiesLawLibrary

Accountants’Liability,byDanL.Goldwasser,M.ThomasArnold&JohnH.Eickemeyer(B1-1348)(#595)AdvisingHigh-TechnologyCompanies,byNathanielT.Trelease(#661)Broker-DealerRegulation,byCliffordE.Kirsch(#5047)CorporateLegalDepartments(3ded.),byCaroleBasri&IrvingKagan(#601)CorporateWhistleblowingintheSarbanes-OxleyEra,byMichaelDelikat(#9287)DeskbookonInternalInvestigations,CorporateComplianceandWhiteCollarIssues,byKayeScholerLLP(#12154)Directors’andOfficers’Liability(2ded.),byJamesFanto(#8136)DoingBusinessUndertheForeignCorruptPracticesAct,byDonZarin(#585)DraftingforCorporateFinance,byCarolynE.C.Paris(#13093)FinancialProductFundamentals,byCliffordE.Kirsch(#610)HedgeFundRegulation,byScottJ.Lederman(#9308)InsiderTrading(2ded.),byWilliamK.S.Wang&MarcI.Steinberg(#7861)InternationalCorporatePractice:APractitioner’sGuidetoGlobalSuccess,byCaroleBasri(#10623)InvestmentAdviserRegulation(2ded.),byCliffordE.Kirsch(#10415)LegalOpinionsinBusinessTransactions(2ded.),byArthurNormanField&JeffreyM.Smith(#10621)MutualFundRegulation(2ded.),byCliffordE.Kirsch(#5519)PLI’sGuidetotheSarbanes-OxleyActforBusinessProfessionals,byJohnT.Bostelman(#4905)PLI’sGuidetotheSEC’sExecutiveCompensationandRelatedPartyTransactionDisclosureRules(2ded.),

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WORKINGWITHCONTRACTS

WhatLawSchoolDoesn’tTeachYou

SECONDEDITION

CharlesM.Fox

PRACTISINGLAWINSTITUTENEWYORKCITY

#17186

Thisworkisdesignedtoprovidepracticalandusefulinformationonthesubjectmattercovered.However,itis sold with the understanding that neither the publisher nor the author is engaged in rendering legal,accountingorotherprofessionalservices.Iflegaladviceorotherexpertassistanceisrequired,theservicesofacompetentprofessionalshouldbesought.

Copyright©2008byPractisingLawInstitute.Allrightsreserved.PrintedintheUnitedStatesofAmerica.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyformbyany means, electronic, mechanical, photocopying, recording, or otherwise, without the prior writtenpermissionofPractisingLawInstitute.

LibraryofCongressControlNumber:2008926691

ISBN:978-1-4024-1060-4

ToLucy,ChristinaandMatthewwithlove.

AbouttheAuthor

CharlesFoxspenttwenty-twoyearsasalawyer—fourteenasapartneratSkadden,Arps,Slate,Meagher&FlomLLP—structuring,negotiatinganddocumentingcomplexdebttransactions.In2005helefttostarthisowntrainingandconsultingbusiness,FoxProfessionalDevelopmentLLC.Heconductstrainingprogramsforlawfirmsandbusinessesoncontractdrafting,transactionallawyeringskillsandthedocumentationandstructuringofdebttransactions.

TableofChapters

Chapter1IntroductionChapter2BuildingBlocks:TheBasicsChapter3TheLawyer’sFunctionsChapter4PrinciplesofEffectiveDraftingChapter5DraftingTechniquesChapter6ReviewandInterpretationofContractsChapter7Amendments,WaiversandConsentsChapter8FormandFormalitiesChapter9BuildingBlocksinDetailChapter10MiscellaneousProvisions;MiscellaneousThoughts

TableofContents

AbouttheAuthor

TableofChapters

Chapter1Introduction §1:1WhatLawSchoolDoesn’tTeachYou

§1:2TheRoleofContracts§1:3Contracts:AUniqueTypeofWriting§1:4TheScopeofThisBook

Chapter2BuildingBlocks:TheBasics §2:1Introduction

§2:2RepresentationsandWarranties:TheSnapshot§2:2.1Representations:ASimpleCase§2:2.2SmokingOuttheFacts§2:2.3AllocationofRisk§2:2.4CategoriesofRepresentations

[A]RepresentationsastotheContractItself[B]SubjectMatterRepresentations[C]RepresentationsabouttheParties[D]Exceptions

§2:2.5Representation"Bringdowns"§2:2.6SurvivalofRepresentations

§2:3Covenants§2:3.1ASimpleCase§2:3.2Credit-relatedCovenants§2:3.3Exceptions§2:3.4TypesofExceptions§2:3.5RemediesforBreachofaCovenant

§2:4ConditionsPrecedent§2:4.1TimingIssues§2:4.2Conditionsas"Outs"§2:4.3CommonConditions§2:4.4WhenAreConditionsSatisfied?

§2:5RemedialProvisions§2:5.1TriggeringEvents§2:5.2TypesofRemedies

[A]Termination[B]Acceleration[C]Indemnification[D]LiquidatedDamages

§2:5.3SofteningRemedies§2:6Definitions

§2:6.1WhereDoDefinitionsAppear?§2:6.2ThePurposeofDefinitions§2:6.3WhattoCallThings§2:6.4NestingDefinitions§2:6.5AvoidSubstantiveRequirementsinDefinitions

Chapter3TheLawyer’sFunctions §3:1TheContractFormationProcess:ABreedingGroundforIssues

§3:2IdentifyingIssues§3:3TheLawyerastheClient’sGuide

§3:4TheDraftingProcess§3:4.1GettingStarted§3:4.2DraftingtheContract§3:4.3UseofPrecedent§3:4.4MarkingupaPrecedent§3:4.5FinalStepsinProducingaFirstDraft§3:4.6TheRoleoftheNon-DraftingLawyer

§3:5TheLawyerasFacilitator§3:5.1RepresentationsandWarranties

[A]LegalIssues[B]EnsuringProperReviewbytheClient[C]PreparingDisclosureSchedules

§3:5.2Covenants§3:5.3ClosingConditions

[A]SubjectiveClosingConditions[B]DueDiligenceConditions[C]ThirdPartyDeliveries[D]LegalOpinions[E]SatisfyingtheClosingConditions[F]ClosingCertificates

Chapter4PrinciplesofEffectiveDrafting §4:1Introduction

§4:2Precision§4:2.1UseofAntecedents§4:2.2TimeReferences§4:2.3Legalese§4:2.4ConveyanceProvisions

§4:3Simplicity§4:3.1KeepSentencesShort§4:3.2UsetheActiveVoice§4:3.3DeleteUnnecessaryWords§4:3.4AccretiveDrafting

§4:4Consistency:LearntoLovetheHobgoblin§4:5Clarity

Chapter5DraftingTechniques §5:1Introduction

§5:2SofteningtheEdges§5:2.1Materiality/MaterialAdverseEffect§5:2.2Reasonableness§5:2.3ConsentNottobeUnreasonablyWithheld§5:2.4Best/ReasonableEfforts§5:2.5TotheBestofItsKnowledge§5:2.6SubstantiallyintheFormOf§5:2.7TotheExtentPermittedbyLaw§5:2.8Promptly§5:2.9InFormandSubstanceSatisfactory§5:2.10SubstantiallyAll/SubstantialPortion§5:2.11IntheOrdinaryCourseofBusiness§5:2.12ConsistentwithPastPractice§5:2.13NotMoreRestrictive

§5:2.14Wouldvs.Could:LevelsofProbability§5:3TrumpingProvisions

§5:3.1Provisos§5:3.2NotwithstandingAnythingtotheContrary§5:3.3ExceptasOtherwiseProvided§5:3.4WithoutLimitingtheGeneralityoftheForegoing§5:3.5InconsistencyAmongAgreements

§5:4AccountingTerms/TermsofMeasurement§5:4.1Formulas§5:4.2FloorsandCeilings§5:4.3OnaConsolidatedBasis§5:4.4OnaConsolidatingBasis§5:4.5CompanyandItsSubsidiaries,TakenasaWhole§5:4.6FrozenGAAP§5:4.7Outstanding§5:4.8PerAnnum§5:4.9AbsentManifestError§5:4.10InArrears/InAdvance

§5:5TermsofInclusionandExclusion§5:5.1MakeExceptionsConsistent§5:5.2SpecificExclusionstoAvoidDoubt§5:5.3UnnecessaryExceptions§5:5.4IncludingWithoutLimitation§5:5.5DisorganizedExceptions

§5:6MiscellaneousDraftingIssues§5:6.1IncorporationbyReference§5:6.2OnanArm’s-lengthBasis§5:6.3AsDeterminedbytheBoardofDirectors§5:6.4UpontheOccurrenceandDuringtheContinuanceofanEventofDefault§5:6.5GrossNegligenceandWillfulMisconduct§5:6.6FromTimetoTime§5:6.7AstheCaseMayBe§5:6.8Respectively§5:6.9ForaParty’sAccount

Chapter6ReviewandInterpretationofContracts §6:1Introduction

§6:2BasicPrinciples§6:2.1LookattheRightAgreement§6:2.2ScopeoftheReview§6:2.3LookattheRightProvisionsandEverythingElse§6:2.4Don’tForgettheDefinitions

§6:3ReviewandInterpretation§6:3.1TheImperfectionofContracts§6:3.2TheLifeofContracts§6:3.3TimingIssues§6:3.4LevelsofReview

[A]TypesofIssues[B]WhatIsatStake?[C]DegreesofCertainty

§6:4DueDiligence§6:4.1ScopeoftheAssignment

§6:4.2DueDiligenceofSeller’sContractsinanAssetAcquisition§6:4.3DueDiligenceofPurchaser’sContractsinanAssetAcquisition§6:4.4DueDiligenceofaTarget’sContractsinaStockAcquisition§6:4.5DueDiligenceofaSeller’sContractsinaStockAcquisition§6:4.6DueDiligenceofaPurchaser’sContractsinaStockAcquisition§6:4.7DueDiligenceoftheContractsofanIssuerofStock§6:4.8DueDiligenceoftheContractsofaBorrowerinanUnsecuredLoanorDebtIssuanceTransaction§6:4.9DueDiligenceoftheContractsofaBorrowerinaSecuredLoanorDebtIssuanceTransaction

Chapter7Amendments,WaiversandConsents §7:1TheAmendmentProcess

§7:2Amendments,WaiversandConsents:DifferentToolsforDifferentTasks§7:3AmendmentTechniques§7:4KeepingTrack§7:5SatisfyingAmendmentRequirements§7:6AmendmentstoAssignedContracts

Chapter8FormandFormalities §8:1Introduction

§8:2LegalRequirements§8:2.1Execution

[A]PowerofAttorney[B]SignatureBlocks[C]OriginalorNot?

§8:2.2Delivery§8:2.3Notarization§8:2.4CorporateSeals§8:2.5ForeignAgreements

§8:3Form:theContract’s"Package"§8:3.1LetterAgreements§8:3.2Title§8:3.3CoverPage§8:3.4TableofContents§8:3.5Date§8:3.6WhereasClauses§8:3.7Headings§8:3.8SectionNumbering§8:3.9OrganizationoftheAgreement

§8:4Aesthetics§8:4.1Font§8:4.2Spacing§8:4.3Margins§8:4.4Paragraphs

Chapter9BuildingBlocksinDetail §9:1Introduction

§9:2EnforceabilityRepresentations§9:2.1Organization§9:2.2PowerandAuthority§9:2.3NecessaryAction

§9:2.4DueExecutionandDelivery§9:2.5NoConflict§9:2.6GovernmentalApprovals§9:2.7Enforceability

§9:3Credit-relatedProvisions§9:3.1Representations

[A]FinancialStatements[B]Projections[C]MaterialAdverseChange[D]Litigation[E]CompliancewithLaw[F]PaymentofTaxes[G]TrueandCompleteDisclosure[H]OtherRepresentations

§9:3.2AffirmativeCovenants[A]ReportingCovenants[B]BooksandRecords[C]Inspections[D]CompliancewithLaw[E]MaintenanceofInsurance[F]PaymentofTaxes[G]CorporateExistence[H]PaymentofClaims

§9:3.3NegativeCovenants[A]Debt[B]Liens[C]AssetSales[D]RestrictedPayments[E]Investments[F]TransactionswithAffiliates[G]PaymentRestrictionsAffectingSubsidiaries[H]AmendmentstoOtherDocuments[I]Mergers[J]CapitalExpenditures[K]FinancialCovenants

§9:3.4EventsofDefault§9:4Acquisition-relatedProvisions

§9:4.1Representations[A]ThePurposeofRepresentations[B]RepresentationsandtheDisclosureProcess[C]TimingofRepresentations[D]RepresentationQualifiers[E]CorporateExistence,PowerandAuthority[F]Consents;NoViolations[G]FinancialStatements;NoUndisclosedLiabilities[H]MaterialAdverseChange[I]BooksandRecords[J]TitletoAssets[K]Capitalization[L]Litigation,FullDisclosure,Etc.[M]OtherRepresentations

§9:4.2Covenants

[A]InterimOperationsoftheTarget[B]ActionsRelatingtotheClosing[C]NotificationofCertainMatters[D]Post-closingCovenants

§9:4.3ConditionsPrecedent:Chickens,EggsandBigFatMomentsinTime[A]PaymentandTransfer[B]LegalImpediments[C]Litigation[D]Representations[E]PerformanceofCovenants[F]Officer’sCertificate[G]Financing[H]LegalOpinions

§9:4.4Remedies[A]Termination[B]Indemnification

Chapter10MiscellaneousProvisions;MiscellaneousThoughts §10:1Introduction

§10:2The"Miscellaneous"Sections§10:2.1ChoiceofLaw§10:2.2ConsenttoJurisdiction§10:2.3WaiverofJuryTrial§10:2.4Counterparts§10:2.5Headings§10:2.6Severability§10:2.7IntegrationClause§10:2.8NoImpliedWaivers§10:2.9Amendments§10:2.10Assignment

[A]Novation[B]AbsoluteAssignmentofRights[C]CollateralAssignmentofRights

§10:2.11CostsandExpenses§10:2.12Indemnification§10:2.13FurtherAssurances

§10:3Miscellany

GlossaryIndex

Chapter1

Introduction

§1:1WhatLawSchoolDoesn’tTeachYou Linda, a new associate in amid-sized law firm, gets her first assignment. She receives a call from apartner who tells her: "Our client, Unibanc, has a customer, Barnes Inc., that is considering a majoracquisitionofacompanycalledAshleyEnterprisesCorp.You’regoingtobeworkingonthefinancingteamwithmeandaseniorassociate.Comedowntomyofficerightaway—we’regoingtoroughouttheclosingchecklist."

In the partner’s office, Linda listens to the following discussion between the partner and the seniorassociate:

"Thiswillbeasyndicatedloanwithbotharevolverandtwoorthreetermfacilities.Barnesiscurrentlyfinanced by Minibank, so we’ll need to review the existing credit facility, understand the prepaymentprovisions,andarrangetoterminateallMinibank’sexistingliensandlienfilings.Linda,thatwillbeyourjob."

"Also,Ashleyhastwentysubsidiaries—we’llneedtodiligencethemandmakethemapartofthecreditpackage.Oneofthemhasanexistingmortgagefinancingonitsplant.Barneswantstokeepthatfinancingin place because the pricing is cheap, so Linda, you’ll need to review those agreements to determinewhetherthereareanycovenantsthatwouldpreventthatsubsidiaryfromexecutingaguaranteeandsecurityagreement."

"And speaking of guarantees and security agreements,why don’t you take a first cut at drafting theguarantee that all of the subsidiaries will sign and the security agreement that the guarantors and theborrowerwillsign.Bobwillshowyoutheprecedentstouse—theonesfromtheRomerotransaction.Alloftherepresentationsintheexistingagreementswillneedtobemodifiedtoreflectthenewparties."

Within thehour,Lindahas theMinibankcreditagreement, thesubsidiarymortgageandtheguaranteeandsecurityagreementprecedentsonherdesk.Sheisdoingherbesttomaintainhersenseofconfidenceandoptimism;nonetheless,hercomplexionhastakenonapastygreenlook.

Meanwhile,hernext-doorneighbor,alsoafirst-yearassociate,isdowninthelibrarybeginningworkonhis first assignment.Hewas told that theclientwasbeing sued forbreachof a supplycontract andwasinstructedtoresearchandwriteamemorandumoflawontheenforceabilityofaliquidateddamagesclauseinthecontract.

WhyisthisotherassociateinanentirelybettermentalstatethanLinda?Likemanyfirst-yearlitigationassignments,hisassignmentissomethingthatlawschooltaughthimhowtodo.Thecasemethodofstudyfamiliarizes law studentswith the language and process of litigation. Legal researchmethods are taughtstartinginthefirstyearoflawschool.Mostlawstudentsarerequiredtotakealegalwritingclass,whichinevitablyincludesonlylitigation-orientedwritingprojects—memorandaoflawandbriefs.

Conversely, lawschoolsdoawoefully inadequate jobofpreparingnon-litigation lawyers—corporate,financing,commercialandrealestatelawyers—toperformthemostfundamentaltasksthatareexpectedofthem.Thisisbecausemuchofwhatthesepracticesentaildoesnotinvolve"thelaw."Ofcourse,therearestrictly"legal"aspectsofmanytransactions:acompanymakingapublicofferingofequitymustfollowthesecuritieslaws;amergeroftwocorporationsrequirescompliancewithcorporatelaws;asecuredfinancing

mustconformtotherequirementsofArticle9oftheUniformCommercialCode.Buttheseissuesusuallycompriseamodestfractionofthetimespentbytransactionallawyers.

Thelawofcontractsascoveredbyafirst-yearcontractsclass—offerandacceptance,considerationandthelike—rarelyposesanyissuesinsophisticatedcommercialtransactions.Themajorityofatransactionallawyer’stimeisspentonstructuringthetransaction,advisingtheclientonstrategy,negotiatinganddraftingthecontracts,orchestratingtheclosing,andthroughoutthelifeofthedealkeepingthetransactionorganizedandmovingforward.

Howisanewlawyersupposedtolearntheseskills?Bydoingandobserving—inotherwords,"onthejob"training.Thereisanawfullotthatstartinglawyersneedtoabsorbbeforetheybecomecapablelawyersin their fields.However, the learning process for litigators is significantly easier because they start theircareersknowingthenecessaryvocabularyandtoolsoftheircraft.

This book will provide the beginning transactional lawyer with an operative understanding of thevocabularyandbuildingblocksofcontracts.ThiswillnotsolveallofthestrugglesofLindaoranyotherjuniorassociatewhoisfacedwiththechallengeoflearninghercraft,toonedegreeoranother,byosmosis.Learningisanaccretiveprocess:themoreoneknows,theeasieritistolearn,becausetherearereferencepointsthatnewinformationcan"stick"to.It’slikeacrystal.Oncetheseedofacrystalisformed,itgrowsquickly by accretion. I hope this bookwill provide the beginning transactional lawyerwith some basicknowledgeonwhichalargersetofskillscangrow.

§1:2TheRoleofContracts Along-termpersonal relationship (asanyonewhohashadoneknows) isgovernedbyacomplexbutunwritten set of rules. Certain behaviors are encouraged, some required, some forbidden. Disclosure isroutinely necessary. Some actions are conditioned on the occurrence of other actions or circumstances.Wrongfulbehaviorispunishedandgoodbehaviorisrewarded.

All of the same dynamics are present in business relationships, the primary difference being that therules ofmost long-term, andmany short-term, business relationships are governed bywritten contracts.This isdictatedbyan interest in efficiency: although there is an initial expenditureof timeandeffort increating the contract, the reduction in negotiation and disputes over the term of a well-written contractoutweighstheseinitialcosts.Theprocessofcontractformationalsoforcesthepartiestounderstandwhattheymustgiveuptogetwhattheywant.Thisprocessresultsinmorerealisticexpectationsastotherisksandrewardsofthetransaction.

Acontractcreatesaprivatebodyoflawbetweenitsparties.Eachpartyhasthelegalrighttoenforcetheobligations and restrictions that the other party has agreed to.Many of the provisions of a complicatedagreementgowellbeyondwhatclientsconsiderthe"businessdeal,"and,asaresult,someclientsareproneto disregard these provisions as legal boilerplate. It is the responsibility of the lawyer to ensure that theclientunderstandstheimpactthatthecontractwillhaveonitsbusinessanditsbusinessrelationships.

§1:3Contracts:AUniqueTypeofWriting Contractdraftingisunlikeotherformsofwritingthatarefamiliartobeginninglawyers.Thewritingthatweareexposedtoonaday-to-daybasis(eveninlawschool)isalmostentirelyexpositorywriting,thegoalofwhichistopersuadeorprovideinformationtothereader.Acontractisdifferent:thegoalofacontractistodescribewithprecisionthesubstanceofthemeetingoftwominds,inlanguagethatwillbeinterpretedbyeachsubsequentreaderinexactlythesameway.

Thisisnosmallorder.Aprerequisiteforapreciselywrittencontract isaclearunderstandingbetweenthe parties, which is often achieved only after significant effort. One of the lawyer’s most importantfunctionsistohelpherclientthinkthroughalltherelevantissuesthatliebeneaththesurfaceoftheclient’sbusinessgoals.Lawyersaretrainedtospotissues,andagoodlawyerwillprotectherclient’sinterestsbyspotting and analyzing all of the potential issues that arise in connection with each element of thetransaction.

Eachoftheseissueswillthenbethesubjectofanegotiation.Theresultofthenegotiationmayinturngiverisetoadditionalissuestobenegotiatedandresolved.Thentheoutcomeofeachnegotiatedpointmust

be reduced to language thateachparty (and itscounsel)concursaccurately reflects theiragreement.Theprocessofdraftingtheappropriatelanguageresultsinyetanothernegotiationbetweenthelawyers,becausethere are many (perhaps even an infinite) number of ways to express any concept. Each lawyer willadvocatewording that he believesmost accurately reflects his client’s understandingof the issue.Thesenegotiations over language often demonstrate that points agreed to in principle still include areas ofdisagreement.

Ambiguity is the contract lawyer’s enemy.Any term that can be interpretedmore than oneway canbecomethebasisofadispute,andeventuallylitigation,betweentheparties.Unfortunately,thequalitiesoftheEnglishlanguagethatmakeitawonderfultoolforpoets—itsrichsupplyofsynonyms,itsrelianceonbothlatinateandgermanicroots,itscomplexsyntaxandgrammar—makeitachallengeforlawyerstodraftwithprecisionandclarity.

§1:4TheScopeofThisBook Thisbook: •introducesthebasicelementsofallcontracts(the"buildingblocks")andtheirfunctions;

•describesthelawyer’sfunctioninthedraftingandnegotiatingprocess; •examinesspecificdraftingskills; •discussesissuesthatariseinreviewingcontracts,includingduediligenceissues; •discussesamendments,waiversandconsents; •describescontractformalities; •discussessomeoftheprovisionstypicallyfoundinfinancingandacquisitionagreements;and •providesaglossaryofthelanguageofcontractsandbasictransactionalpractice. Whatdoesn’tthisbookdo?Itdoesnotattempttoprovideanysubstantiveanalysisordiscussionoflegal

issues(oneofitsmajorpremisesisthatalargeportionofwhatgoesintothedraftingofatypicalcontracthasverylittletodowiththe"law"aswehavelearneditinlawschool).Itdoesnotpurporttobeageneralguide to the practice of law for starting lawyers. It has nothing to add to the extensive literature onexpositorylegalwritingskills.

The author practiced for twenty-two years as a financing lawyer with an emphasis on secured bankfinancings,many in the contextofmerger andacquisition transactions.Asa result, there is a slightbiastowards the agreements used in these kinds of deals.However, although the substance of contractsmayvary,thelanguage,toolsandtechniquesofcontractsdonot.Itismygoaltoprovidethestartinglawyerwithacomprehensivebasicunderstandingofthesecommonelements.

Chapter2

BuildingBlocks:TheBasics

§2:1Introduction Certaincategoriesofprovisionsservethesamefunctions,regardlessofthetypeorsubjectmatterofthecontract.Thesearereferredtohereasthebuildingblocksofcontracts.Alawyerwhoworkswithcontractsmustunderstandhoweachofthesebuildingblocksworks: •representationsandwarranties

•covenants •conditionsprecedent •remedialprovisions •definitions What provisions in a contract aren’t included in these categories? Provisions that set forth what the

contractisabout,referredtohereinasthe"operativeprovisions."Forexample,theoperativeprovisionsofacontracttoselltheassetsofabusinesswouldincludeadescriptionoftheassets,thecalculationandmethodof payment of the purchase price, and the mechanics of transferring the assets. An asset sale contractcontaining only these operative provisionswould be a very short document, legally enforceable, but notaddressingmany of the other important issues that buyers and sellers care about.What if there were amaterial problemwith the assets that thebuyerdidnotdiscoveruntil the closing?Acontract containingonlytheoperativeprovisionswouldrequirethebuyertopurchasetheassetsnotwithstandingtheexistenceoftheproblem.Whatifthesellercauseddamagetotheassetsorthebusinesspriortoclosing?Sameresult.These are the kinds of issues that are addressed in the building block provisions—representations andwarranties,covenants,conditionsprecedent,remedialprovisionsanddefinitions.

This chapterwill provide a basic overviewof thebuildingblocks and their functions.Chapter 9willprovideacloserlookathowbuildingblocksareusedtoaddressspecificlegalandbusinessconcernsinthecontextoffinancingandacquisitionagreements.

§2:2RepresentationsandWarranties:TheSnapshot Representationsandwarranties1are statementsof factmade in thecontractbyoneparty to theotherpartyasofaparticularpointintime.Theirpurposeistocreatea"snapshot"offactsthatareimportanttotherecipient’sbusinessdecisiontoenterintothetransaction.Thefailureofaparty’srepresentationstobetruewillresultintheotherpartyhavingrightsandremediesunderthecontract.

§2:2.1Representations:ASimpleCase Let’slookatacontractforthesaleoftheassetsofabusiness,consistingofaplantthatprocessesand

dyes fabric. The buyer will want to know whether there are any environmental problems at the plant,because it may become liable for them under environmental laws. The buyer may have done anenvironmentalexaminationprovidingamoderatedegreeofcomfortthattherearenoenvironmentalissues.However,it’spossibletherehadbeenahazardouswastespillthatwasnotdiscoveredintheenvironmentalreview. If, after the sale, thatwaste leaches onto an adjoining property, the neighbormay have a claimagainst the new owner for damages. This risk would be addressed by requiring the seller to make arepresentation in the purchase agreement regarding the absence of hazardous waste spills. If the buyerdiscoversbeforetheclosingthattherepresentationisuntrue,itwouldtypicallyhavetherighttoterminatethecontractandwalkawayfromthedeal.Alternatively,ifthespillisdiscoveredafterthesalecloses,thebuyerwillhaveaclaimagainstthesellerforbreachofrepresentation.Typically,thebuyerwillalsohaveanindemnityordamageclaimbasedonthebreach.

§2:2.2SmokingOuttheFacts Theprocessofnegotiating representationshas theeffectof smokingout factual issues thatmightnototherwisebedisclosed.Representationsareanaturaloutgrowthoftheprincipleofcaveatemptor.Inmostcommercial transactions, the parties are under no legal obligation to make any disclosure.2 A partycounteractsthisprinciplebyrequiringdisclosureoffactsthatmayberelevanttoitsdecisiontoenterintothecontract.Thisisaccomplishedthroughtheotherparty’srepresentations.

Goingbacktoourexample,thebuyerwillaskthesellertomakethefollowingrepresentation:

ExceptasdisclosedonScheduleC,HazardousMaterialshavenotatany timebeenreleasedonorfromanyrealpropertyconstitutingpartofthePurchasedAssets.

Whenthesellerreceivesthedraftpurchaseagreementcontainingthisrepresentation,ithasseveralchoices: •Tellthebuyeritrefusestomaketherepresentation.Thebuyerwillprobablyconcludethattheseller

hasanenvironmentalproblemtohide,andwillwanttherepresentationevenmore.Unlessthesellerhaspowerfulnegotiatingleverage,thisisabadapproach. • Tell the buyer that it will give the representation "to the best of its knowledge," so that therepresentationisbreachedonlyifthesellerfailstodiscloserelevantfactsactuallyknowntoit.Thebuyer’sreaction:"Thatdoesn’tdomeanygoodiftherewasaspillatthepropertybeforeyouownedit." •GivetherepresentationafterdisclosingonScheduleCanyresponsivefactsofwhichitisaware.A party being asked tomake a representationwill want tomake complete disclosure in order to avoid

liability.Thedisclosuresmaygiverisetoadditionaldemandsontherepresentingparty,however:thebuyerin the example may insist on an undertaking from the seller to remediate the disclosed environmentalconditions, or on a reduction to the purchase price to compensate the buyer for having to pay for theremediationitself.Or,thebuyermaywalkawayfromthedeal.

§2:2.3AllocationofRisk Representationsallocateriskbetweenpartiestoacontract.Thepartymakingarepresentationassumestheriskthatiftherepresentationisuntrue,theotherpartywillhaveaclaimagainstitorsomeotherremedyunderthecontract.Thepartybeingaskedtomaketherepresentationmaynothaveanybetterinformationon thesubjectmatterof therepresentation than thepartyrequesting it.But itmaybeforced tomake therepresentationanyway,basedontheprinciplethattherepresentationrecipientisentitledtosomeremedyifthefactbeingrepresented turnsout tobefalse. In theexampleofapreviousenvironmentalspill,neitherpartymaybeawareofitsexistence,butfromthebuyer’sstandpointtheriskoftherebeingsuchaproblemshouldbebornebytheseller.Havingthesellermaketheappropriaterepresentationisthemethodbywhich

thisriskisallocated.Ifitturnsoutthatthereisaspillthatresultsindamagestothebuyer,theexistenceoftherepresentationgivesittheabilitytoassertaclaimagainsttheseller.

§2:2.4CategoriesofRepresentations

[A]RepresentationsastotheContractItselfRepresentationsfallintothreebasiccategories.Thefirstcategoryincludesrepresentationsthatrelateto

thecontractitself.Thepurposeoftheserepresentations(referredtohereas"enforceabilityrepresentations")istoprovideassurancethatthepartymakingthemhasthecontractualcapacityandauthoritytoenterintotheagreement,andthatthecontractislegallyenforceableanddoesn’tresultinaviolationoflaw.Thepartyasking for enforceability representationswants to ensure that the other party doesn’t have any technicaldefenses available to it if the contract ever becomes the subject of litigation. These are standardrepresentations and are rarely negotiated to any significant extent. Enforceability representations arediscussedingreaterdetailinsection9:2.

[B]SubjectMatterRepresentationsThesecondcategoryofrepresentations is those that relate to thesubjectmatterof thecontract.These

representations are made to ensure that a party is getting what it bargained for, and are tailored to thespecificcontextofthecontractinwhichtheyarecontained.Herearesomeexamples: • A trademark license contains representations by the licensor that the trademark is properly

registeredanddoesn’tinfringeothertrademarks. •Anassetsaleagreementincludesrepresentationsbythesellerthatthepropertytobetransferredisnotsubjecttoanylien. •Arealestateleasecontainsrepresentationsbythelessorthatithasnotleasedthesamepropertytoanyoneelse. •Acontracttorust-proofsheetmetalcontainsrepresentationsbythecontractorastothequalityofthematerialsusedandthecapacityoftheprovider’splanttohandlethecontractedsupply.

[C]RepresentationsaboutthePartiesMany contracts require the parties to make representations about themselves that go beyond the

enforceability representations and subject matter-related representations discussed above. These arerequiredwhereparticularfactsaboutapartyarerelevanttoitsabilitytoperformitscontractualobligations.Themostfrequentofthesearerepresentationsthatrelatetothefinancialconditionoftheparty.Thesearerequiredwhereaparty’scredit—that is, itsability toperformfinancialobligations—isbeingreliedupon.These representations are described in greater detail in section 9:3.1. Other examples of this type ofrepresentationarethefollowing: •Anemployeeisrequiredtorepresentinanemploymentcontractthattheemploymenthistoryonher

résuméisaccurate. • An insurance company purchasing debt securities under a private placement agreement mustrepresentastothesourceoffundsusedtomaketheinvestment, inordertoensurethat thereisno"prohibitedtransaction"underthebodyoflawsregulatingpensionplans. •ApurchaserofradiostationsisrequiredtorepresentthatitisnotsubjecttoanyinvestigationsorproceedingsbeforetheFederalCommunicationsCommission.

[D]ExceptionsAs representations are negotiated, information that is inconsistent with the statements made in the

representations will emerge. This information must be disclosed in the contract in order to make therepresentationstrue.Thismaybedonebyexcluding,orcarvingout,theinconsistentfactsinthetextoftherepresentation.Thefollowingisanexample:

ThePurchasedAssetsarenotsubjecttoanyliensorencumbrances,exceptforthemortgageinfavorofBigCityBankdatedJune30,2005.

Alternatively,theinformationcanbeputintoschedulestotheagreement.Thismethodisusefulwhere

the exceptions are numerous or the disclosure is lengthy or otherwise unwieldy to include in therepresentationitself.Ifthisapproachisused,therepresentationabovewouldreadasfollows:

ThePurchasedAssetsarenotsubjecttoanyliensorencumbrances,exceptassetforthonSchedule2.1.

It is important to note that schedules cannot be updated once the conract is signed, unless there is

languageinthecontractthatspecificallypermitsit.

§2:2.5Representation"Bringdowns" Representationsarestatementsoffactasofaparticularpointintime;thatpointintimecanbethedatethatthecontractisenteredinto,thedatethattheclosingofthetransactionsunderthecontractoccurs,oranyotherdateprovidedforinthecontract.Representationsthataremadeagainonalaterdatearereferredtoasbeing"broughtdown."

Thebringdownofrepresentationsisusuallyrequiredattimeswhenasignificanteventoccursunderthecontract.Forexample,anacquisitionagreementmayprovideforthetransferofaportionoftheassetsatafuture date, after a necessary consent is obtained. The purchaser will want the seller to bring down itsrepresentationsatthetimeofthedelayedtransfer;thisensuresthattherehasbeennochangeinfactssincethedatethattherepresentationswereoriginallymade.

A common occurrence of the bringdown of representations is in connection with contracts that aresigned before closing. The representations are made at signing to induce the parties to enter into thecontract.Theyarebroughtdownatclosing, to induce theparties toclosebyassuring themthat thefactscoveredbytherepresentationshaven’tchangedsincethesigningdate.

Another common occurrence of representation bringdowns is in revolving credit agreements, whichprovideformultipleborrowings.Theborrowerisrequiredtobringdownitsrepresentationstothelenderasaconditionprecedenttoeachloan.Ifanagreementlikethisrequiresbringdownsatfuturedates,beawarethatchangingfactsmaymake thebringdownimpossible.Considera representation inacreditagreementthatalltheborrower’ssubsidiariesarelistedinaschedule.Ifnewsubsidiariesarecreatedoracquiredafterthe closing date, the representation can’t be brought down, because the schedule doesn’t list the newsubsidiaries.Asaresult,additionalborrowingscan’tbeobtained.

If the lenderwants to prevent the existence of new subsidiaries, thiswould be the correct result. If,however,thecreationoracquisitionofsubsidiariesiscontemplated,thepotentialbringdownproblemmustbeaddressed.Thiscanbedoneinanumberofways.First(andmostcommon)istolimittherepresentationtofactsinexistenceonaspecificdate:

ScheduleAdescribesalloftheCompany’ssubsidiariesasoftheClosingDate.Second, if there is a covenant restricting the creation or acquisition of new subsidiaries, the following

approachisappropriate:

AlloftheCompany’ssubsidiariesaredescribedinScheduleAorhavebeencreatedoracquiredinaccordancewithSection5.15.

Third,theschedulecanbeupdated,withorwithoutlenderapprovalrights:

Allof theCompany’s subsidiariesaredescribed inScheduleA,as suchSchedulemaybeupdatedfromtimetotime[withtheLender’sconsent(suchconsentnottobeunreasonablywithheld)].

§2:2.6SurvivalofRepresentations

Although these concepts are often confused, there is a difference between a provision stating thatrepresentations"survive theclosing"andaprovisionstating that the representationsarebroughtdownatsome future time. A survival clause means that the recipient of a representation continues to have thebenefitofthatrepresentationaftertheclosing.Inotherwords,ifamonthaftertheclosingdatearecipientofarepresentationdiscoversthattherepresentationwasfalseatthetimewhenitwasmade,therecipientwillhavea remedyunder thecontract.Somepeople incorrectly assume that a survival clausemeans that therepresentationsaremadeorbroughtdownonacontinuingbasis.This is inconsistentwith theconceptofrepresentationsasasnapshotandwouldhavetheeffectofconvertingrepresentationsintocovenants.

Thealternativetoasurvivalclauseisaprovisionthattherepresentationsmerge,orterminate,atclosing.This typeofprovision is typical inresidential realestatecontracts. In thesecontracts, therepresentationsmadebythesellermustbetrueatclosingasaconditiontothebuyer’sperformance,butoncetitlepasses,ceasetohaveanyeffect.Thenetresultofsuchamergerprovisionisthatthebuyeracquirestherealestate"asis–whereis"—itassumestheriskofproblemsthatarediscoveredafterclosing,eventhosethatwerethesubjectofarepresentationbytheseller.

§2:3Covenants Unlike representations—statements of fact as of a specific point in time—covenants are ongoingpromisesbyonepartytotakeornottotakecertainactions.Covenantscangenerallybedividedintothreecategories:affirmativecovenants—promisestotakespecifiedactions;negativecovenants—promisesnottotakespecifiedactions;andfinancialcovenants—promisestomaintaincertainlevelsoffinancialconditionorperformanceornot to take specificactionsunlesscertain levelsof financial conditionorperformanceexistatthetime.3Negativecovenantsarealsoreferredtoasrestrictivecovenants,becausetheyrestrictorprohibitcertainactions.(Seesection9:3.3.)Broadlyspeaking,covenantsaredesignedtoensurethatapartyreceivesthebenefitsthatitbargainedforintheoperativeprovisionsofthecontract.

Asamatterofusage, theparties’primaryobligationsunder thecontractarenotusuallyreferred toascovenants,eventhoughtheyarepromises.Thus,aseller’sobligationtosellonceallapplicableconditionsprecedenthavebeensatisfiedisnottypicallyreferredtoasacovenant.

§2:3.1ASimpleCase Intheexampleofasix-yearleaseofmanufacturingequipment,themainobjectivesofthelessoraretoensure that the lessee pays the rentwhen due and returns the equipment at the termination of the lease.Thesewill be the subject of the lease’s operative provisions.But the lessorwill alsowant the lessee tomaintaintheleasedassets,tomaximizethevalueoftheequipmentwhenitisreturnedtothelessor.Thisisaccomplishedthroughtheuseofcovenantsthatdictatewhatthelesseemustdo,andcannotdo,withrespecttotheleasedequipment.

Atypicalequipmentleasewillincludecovenantsrequiringthelesseetodo,ornottodo,thefollowing(amongothers):

•keeptheequipmentinsured •maintaintheequipmentinaccordancewiththemanufacturer’sspecifications •operatetheequipmentinaccordancewithapplicablelaws •notpermitthecreationofanyliensontheequipment •notsellorotherwisetransfertheequipment •permitthelessortoinspecttheequipment •usetheequipmentonlyforspecifiedpurposes Each of these covenants is designed to help the lessor protect its residual interest in the leased

equipment.

§2:3.2Credit-relatedCovenants Thelessor,inadditiontoitsconcernregardingthevalueoftheequipment,willwanttoensurethatthelesseewill be able tomake the rent payments over the term of the lease. The lessorwill have receivedfinancial information as to the lessee and required the lessee tomake representations as to its financialcondition.Thisprovidesthelessorwithsomecomfortthatthelesseecanhandleitsleasepaymentsattheoutsetofthelease,butdoesn’tprotectatallagainstthediminutionovertimeofthelessee’scredit,itsabilitytomeetitsfinancialobligations.

Credit-relatedcovenantsrestrictaparty’sabilitytoengageinactivitiesthatmayresultinaworseningofitsfinancialcondition.Theseactivitiesincludethefollowing: •Incurrenceofdebt.Moredebtmeansmoreinterestandprincipalpayments,whichcreateagreater

drain on a company’s cash flow. A creditor will also be concerned that if the debtor goes intobankruptcyahigherdebtloadwillresultinasmallerdistributiontoit. •Creation of liens. Secured debt reduces the assets available to be used to satisfy the creditor’sunsecuredclaimsandgeneralobligationsintheeventofinsolvency. •Saleofassets.Lossofincome-producingassetscouldadverselyaffectthedebtor’scashflow. •Paymentofdividends.Everydollarpaidasadividend toshareholders reducescashavailable forpaymenttoacreditor. •Making of investments. From a creditor’s standpoint, cash spent on investmentswould be betterspentonpayingamountsduetothecreditor. Financial covenants, which require the covenanting party to periodically meet certain financial

benchmarks,arealsousedtoaddresscreditconcerns.Thesebenchmarksaresetatlevelsthataredesignedtocreatean"earlywarningsignal"intheeventthecovenantingpartyishavingfinancialdifficulties.4

§2:3.3Exceptions Thegeneralpatternfor thenegotiationofnegativecovenants is thatPartyAproposesacovenant thatwillrestrictPartyB’sactivities.ThisdraftcovenantisrelativelyabsoluteasPartyA’spreferencewouldbeto prohibit Party B entirely from engaging in the specified conduct. Party B then has the burden ofproposing changes to the covenant that it believes are necessary to give it the flexibility to operate itsbusinesswithouttheneedtorequestconsentsorwaiversfromPartyA.

The difference between crafting exceptions to representations and to covenants is like the differencebetweenwritinganewspaperarticleandwritingsciencefiction:onedealswithactualfacts,whiletheotheraddresses potential facts. Ensuring that representations are correct requires only diligent fact gathering.

Uncoveringanddisclosingallinformationthatiscalledforbytherepresentationsisessentiallyaforensicexercise.5Ontheotherhand,thelawyerwhomustnegotiateacovenantthatrestrictshisclient’sabilitytoincurdebtforthenextsixyears,forexample,hasamuchmorechallengingtask.First,thelawyerandhisclientmustcollectivelyconsiderallofthepossibleneedsfordebtoverthetermofthecontract.Then,theymustconvincetheotherpartyof theneedtobuildflexibility into thecovenant topermitsuchdebt.Last,theymust draft the exceptions broadly enough to achieve their objective, taking into account that plansoftenchange.

§2:3.4TypesofExceptions Therearetwobasictypesofcovenantexceptions:carveoutsandbaskets.

Acarveoutgetsitsnamebecauseithasthefunctionofremoving,orcarvingout,partoftherestrictioncreatedbythecovenant.Iftheparadigmofatypicalnegativecovenantis"thoushaltnotdoAthroughZ,"theparadigmofacarveoutis"butthoushaltbepermittedtodo‘Y’."Hereisanexampleoftheuseofacarveout:

TheBorrowershallnotsellanyofitsassets,exceptforthesaleofobsoleteequipmentintheordinarycourseofbusiness.

A basket, on the other hand, is an exception that creates the right to deviate from the covenant’s

restrictionsbysomespecifiedamount(oftenexpressedindollars).Thepurposeofabasket is togivetherestricted party a limited ability to deviate froma covenant’s restrictions.The above exception could beconvertedintoabasketthus:

TheBorrowershallnotsellanyofitsassets,exceptforthesaleofobsoleteequipmentintheordinarycourseofbusinessinanaggregateamountnottoexceed$1,000,000.

Here,therestrictedparty’sabilitytosellobsoleteequipmentisnotopen-ended.Afterthefirstsuchsale

for$200,000,forexample,thepartymayonlysellanadditional$800,000ofobsoleteequipment.

§2:3.5RemediesforBreachofaCovenant Acontractusuallyprovidesforspecificremediesintheeventofabreachofacovenant(seesection2:5).Apartythatisentitledtoperformanceofacovenantmayalsoseekajudicialorderofspecificperformanceforcingthecovenantingpartytoperform.Evenifthepartiesagreetospecificperformanceasaremedy,itwillnotalwaysbeavailable.Thecourtalwayshas thediscretionnot tograntequitable remediessuchasspecificperformance.Forexample,specificperformanceisnotavailableifthecourtdeterminesthatmoneydamagesareadequate.

§2:4ConditionsPrecedent Theprovisionsspecifyingtherequirementsthatmustbesatisfiedbeforeapartyisobligatedtoperformunderacontractorbeforeaclosingoccursareknownasconditionsprecedent.Thequintessentialexamplesofconditionsprecedentare found inpurchaseagreements: theseller isnot required to transfer theassetsunlessthebuyerpaysthepurchaseprice,andthebuyerisnotobligatedtopaythepurchasepriceunlessthesellertransferstheassets.Conditionsareoftencolloquiallyreferredtoas"outs,"becauseafailurebyoneparty to satisfy its conditions allows the other party to get out of the contract or terminate certain of itsobligations.Conditionsprecedentvarywidely,dependingonthetypeofcontract,althoughasisdiscussedin more detail below there are many that are fairly standard. In agreements that lead to a closing, theconditions precedent section dictateswhat documentsmust be delivered andwhat other actionsmust be

takenattheclosing.6

§2:4.1TimingIssues Asimultaneousclosingoccurswhenanagreementisexecutedanddeliveredatthesametimethatalloftheconditionsprecedenttotheeffectivenessoftheagreementaresatisfied.Whenanagreementisexecutedanddelivered,buttheconditionsprecedentaren’tsatisfieduntillater,adelayedclosingistheresult.

Themaindistinctionbetween these two is that the conditionsprecedent relating to a delayed closingmust be much more carefully negotiated than those that relate to a simultaneous closing. In a delayedclosing,anyelementofuncertainty,discretion,subjectivityorambiguityincludedinaconditionprecedentcan give one party a basis to claim that a condition isn’t satisfied andwalk away from the transaction.Consider a stockpurchase agreement containing the following condition to the purchaser’s obligation topurchase:

The Seller shall have delivered to the Purchaser the Target’s financial statements for the quarterendingSeptember30,2001,andsuchfinancialstatementsshallbesatisfactorytothePurchaserinallrespects.

ThisconditiongivesthepurchasertheunilateralrightnottoclosebyassertingthatitisnotsatisfiedwiththeSeptembernumbers.Supposethatthepurchaserwantsoutofthedealbecausetheeconomyhassufferedadownturnsincethedatethatthisstockpurchaseagreementwasenteredinto,butthereisnoconditionthatgives thepurchaser theright togetoutof the transactionfor thatparticular reason.Thebroadnessof theconditionprecedentaboverelatingtothefinancialstatementscouldbeusedbythepurchaserasitsexcusenottoclose,evenifthetarget’snumbersaren’tsignificantlydisappointing.

Whatif,instead,thesameconditionwerecontainedinanagreementthatwasbeingenteredintobythepartiesat the same time that theclosingwas takingplace?Theseller’s lawyer shouldnotcareabout thesubjective nature of this condition. If the purchaser is not satisfied with target’s financial condition (oranythingelse,forthatmatter,includingtheeconomy)atthetimeoftheclosing,ithastheunfetteredrighttowalkawayfromthedeal,becauseithasn’tsignedtheagreementyet.

Why include conditions precedent at all if there is going to be a simultaneous closing? It is not anecessity, but it does serve two useful functions: while the agreement is being negotiated, it creates aroadmapastowhatthepartiesexpectattheclosing,anditcreatesapermanentrecordofwhatoccurredattheclosing.

§2:4.2Conditionsas"Outs" Conditionsareoftenhotlynegotiatedbecausetheypotentiallygiveoneorbothpartiestheabilitytogetoutofthetransaction.Eachpartywillwanttominimizethenumberofconditionsthatitmustsatisfy,andatthe same timewillwant to impose conditions on the other party that satisfy its own business and legalconcernsaboutthedeal.

Theconditionsprecedentsectionofastockpurchaseagreement,forexample,willstartwithlanguagesuchasthefollowing:

The Purchaser’s obligation to purchase the Shares shall be subject to the prior satisfaction of thefollowingconditionsprecedent:

Thiswillbe followedbya listofallof the things that thepurchaser requires inorder toclose, foremostamong which will be the delivery of the shares being purchased. Others may be business oriented: forexample, delivery of financial projections of the target company, and satisfactory interviews with thetarget’ssuppliers.Somewillrelatetolegalissues,suchasevidenceofthetarget’scorporateexistenceand

deliveryoflegalopinions.Theobligationofthepurchasertopurchasethestockwillbesubjecttothepriorsatisfactionofeachof

the specified conditions.The seller’s failure to satisfy evenoneof the conditionswill normallygive thepurchaserthelegalrighttowalkawayfromthetransaction.Agreementsoftenrequirebothpartiestosatisfya setof conditions, so that eitherparty is excused fromperformance in theevent theotherparty fails tosatisfy the conditions applicable to it. In other cases, only one party is required to satisfy conditionsprecedent in order to force the other party’s performance, the most notable among these being debtfinancingagreements,wherethelender’sperformanceismerelytheprovisionofmoney.Itisallamatterofnegotiationandcustom.

Doesthefailuretosatisfyaconditionprecedentalwaysresultinaterminationofthecontract?Itoftendoesnot—ratherthanterminatingthecontract,thepartyhavingtherighttoterminatemayuseitasasourceofleveragetocommenceanewnegotiationandextractconcessionsfromtheotherparty.Forexample,iftheconditionthatisn’tsatisfiedisarequirementthatabusinessbeingacquiredhaveaminimumamountofcash flow during the threemonths prior to the closing, the buyermay insist that the purchase price bereducedinorderforittowaivetheconditionandproceedwiththeacquisition.

Oftenaconditionwillbewaivedandtheagreementrewrittentorequirethatitbecompletedonapost-closing basis. This is often referred to as a post-closing condition—an inaccurate name, as a technicalmatter,becausesucharequirementisnolongeraconditiontoperformance.Instead,ithasbeenconvertedintoacovenantthatonepartymustperformorelsesuffertheconsequencesforbreach.

§2:4.3CommonConditions Differentcontractscallfordifferenttypesofconditionswithsomeconditionsprecedentbeingtraditionalforcertaintypesoftransactions.Otherconditionswillberequiredtoaddressspecificissuesorconcernsintheparticularcircumstancesofonetransaction.Apartywithahighdegreeofbargainingleveragemayforceitscounterpartytojumpthroughhoopsbyrequiringthesatisfactionofmanyconditionsbeforeitwillclose.

Someconditionsthatareseenmoreoftenthanothersinclude: • No breach. Performance is not required if the other party has breached its covenants or

representationsinthecontract. •Bringdownofrepresentations.Representationsfirstmadeatsigningmayberequiredtobebroughtdownatclosing.Seesection2:2.5. •Certified organizational documents. Entities will often be required to deliver copies of theircertificatesofincorporation,by-lawsorotherorganizationaldocuments,certifiedasaccuratebyanofficialinthejurisdictionoforganizationorbyanofficeroftheentity. •Evidenceofcorporateorotheraction.Corporationsmayberequiredtoprovideevidenceofboardactionauthorizingtheexecution,deliveryandperformanceoftheagreement.Non-corporateentitieswillberequiredtodeliversimilarproofofproperauthorization. • Incumbency certificate. This is a certificate signed by an officer of an entity attesting to thegenuinenessofthesignaturesoftheofficersthataresigningthecontract. •Governmentalapprovals.Ifthetransactioncontemplatedbytheagreementrequiresagovernmentalapproval,neitherpartywillwanttobeobligatedtocloseunlesstheapprovalisobtained. •Thirdpartyconsents.Similarly,bothpartieswillwantallmaterialconsentsfromthirdpartiestobeinhandbeforeclosing. •Legal opinions. These are letters from counsel to one party addressed to the other party, statinglegalconclusionsrelevanttothetransaction.

§2:4.4WhenAreConditionsSatisfied? Manycontractsprovidefor thesatisfactionofconditionsatasingle time: theclosing.Forexample,aprivateplacementofequitysecuritieswillprovideforissuanceofthesecuritieswhenalloftheconditionsprecedenthavebeensatisfied.Othercontractsrequiringperformanceonmorethanoneoccasionmayhaveseparatesetsofconditionsforeachperformanceevent.Anexampleofthisisarevolvingcreditagreementthatpermitsmultipleborrowings.Theseagreementswillhaveafullsetofclosingconditionswithrespecttotheinitialborrowingorclosing,andinadditionaseparate,usuallyshorter,setofconditionsthatmustbesatisfiedbytheborrowerat thetimeofeachborrowing.Manycontractsprovidethat ifall theconditionsprecedenttoaparty’sperformancehavenotbeensatisfiedorwaivedbyaspecifieddate(sometimescalledadrop-deaddate), that party can terminate the contract.Without such amechanism, the party thatmustsatisfy the conditions would be able to keep the contract alive indefinitely, waiting until the mostadvantageoustimetoclose.

§2:5RemedialProvisions A bare bones contract could omit any discussion of what happens if the parties fail to perform inaccordancewiththetermsofthecontract.Aseverylawyerlearnedinlawschool,theaggrievedpartycouldask a court to fashion a remedy for breach based on statutory and case law. However, sophisticatedcommercialpartiesaregenerallyreluctanttorelyonajudgeorajurytodothis,andforthisreasonmanycontractshaveremedialprovisions.

Remedial provisions have two elements: a description of the events that give rise to the right to aremedy,andtheremediesthemselves.Aswiththeotherbuildingblockprovisions,thesevarygreatlybasedonthetypeofagreementinwhichtheyarecontained,andareoftentailoredtothespecificsofatransaction.

§2:5.1TriggeringEvents Oneoftheprimarypurposesofremedyprovisionsistoaddressthefailureofthepartiestoperformtheoperativeprovisionsof a contract in accordancewith their terms.Theoperativeprovisions represent thefundamentalbusinessdealbetweentheparties;eachpartywillwanttohavetheabilitytoenforcetheotherside’sperformancebyhavingthecontractualrighttoenforceremediesintheeventofnonperformance.Forexample,takeacommercialrealestatemanagementagreementunderwhichonepartyagreestomanageapropertyownedbytheotherpartyinexchangeforamanagementfee.Thepropertyownerwillwanttohavetherighttoterminatethecontractifthemanagementcompanyisnotperformingitsdutiessatisfactorily,andthemanagementcompanywillwanttobeabletowalkawayifitsfeesaren’tbeingpaid.

In addition, remedies are almost always provided in the event there is a breach of a representation.Representationsfacilitatethefactgatheringanddisclosureprocess,butthispurposewouldbesignificantlyblunted if there were no remedy for false representations. Likewise, the inclusion of covenants in anagreementisconsiderablymoreusefulifthecontractspellsoutexactlywhatwillhappenifacovenantisbreached. This way, the aggrieved party is not forced to seek judicial enforcement of the covenant byspecificperformanceoradamageaward.

Acontractmayalsoprovide thateventsother thanbreachesby theparties trigger remediesunder thecontract.Theseareoftenthingsthatareoutsideoftheparties’controlandthereforearenotappropriateformakingthesubjectofaffirmativeornegativecovenants.Someexamplesofsuchremedialeventsare: •Changeofcontrolofaparty,forexample,duetoatenderofferoraproxycontest

•Changeinaparty’screditrating •Judgmentsorordersbeingenteredagainstaparty •Involuntarybankruptcypetitionsbeingfiledagainstaparty •Defaultoraccelerationbeingdeclaredunderotheragreements

The distinction between a covenant, the breach of which creates a remedial right, and a separateremedialevent,isoftenanarrowone.Theonlydifferencebetweenacovenanttomaintaininsuranceandaremedialeventoccurringifinsuranceisnotmaintainedisthatabreachofthecovenantmaygiverisetoaclaimforspecificperformancewhereastheremedialeventdoesnot.Bothwouldtypically,however,giverisetothesameremediesunderacontract:thefirstasaresultofthebreachofacovenantandthesecondasaresultof theoccurrenceofa remedialevent.Whenaparty is reluctant tocovenant tosomething that itdoesn’thave thepower tocontrol, thesolution is to frame thesepointsas remedialevents rather thanascovenants.

§2:5.2TypesofRemedies Theremediesthataremadeavailableunderacontractvarybasedonthetypeofagreement,thenatureofthe event giving rise to the remedy and the objectives of the parties. In some agreements the remedyprovisions are highly negotiated; in others they are very standard andmay not be subject to verymuchdiscussion.Someofthemoretypicalprovisionsarediscussedbelow.

[A]TerminationTerminationof thecontract isoneof themostcommon remedies, and results inneitherparty’sbeing

requiredtocontinueperformanceunderthecontract(althoughinsomecasestherightofterminationmaybeexercisedtogetherwithotherrights,suchastherighttoreceiveindemnificationpaymentsorliquidateddamages). For this reason, termination is not a useful remedy where significant obligations under thecontracthavealreadybeensatisfied.Considerthesituationwhereapurchaserofsecuritiesdiscoversafterthe closing that the seller breached its representations in the contract. At this point, the remedy ofterminatingthecontractwouldbeuselesstothepurchaser.Ontheotherhand,ifthepurchaserdiscoveredthe breach of representations before the sale occurred, a right of termination would be very useful andentirelyappropriate.

Sometimesacontractwillpermitapartytoterminatecertainobligationswithoutterminatingtheentirecontract.Anexampleisarevolvingcreditagreement,underwhichalenderisrequiredtomakeloanstotheborrower from time to time. If the borrower defaults, the lenderwill be given the right to terminate itsongoingcommitmenttomakeadditionalloans,butexerciseofthisrightbyitselfwillnotterminateotherrightsandobligationsundertheagreement.

[B]AccelerationTheremedyofaccelerationisfoundprimarilyindebtfinancingagreements.Theexercisebyalenderof

thisrightresultsintheindebtednessundertheagreementbeingaccelerated,i.e.,becomingimmediatelydueandpayablebytheborrowerdespitealaterstatedmaturitydate.Aborrowerrarelyhasthecashtorepaytheamountofaloanthatbecomesdueasaresultofacceleration.Inaddition,theexistenceofanaccelerationoftencausesanumberofothernegativesideeffects:accountantswillbeunwillingtoissuecleanopinionsontheborrower’sfinancialstatements;defaultsmaybetriggeredunderotheragreementsoftheborrowerasaresultofcross-defaultprovisions;tradecreditmaytightenordisappear;otherdebtoftheborrowermaybeacceleratedasaresultofcross-accelerationprovisions;iftheborrowerisapubliccompany,itwillhavetopublicly disclose that its debt has been accelerated. As a result, acceleration often has catastrophicconsequences.Usually, themere threatofacceleration is sufficient tocause thedefaultingparty tomakesignificantconcessionsinexchangeforthelenderagreeingnottoaccelerate.

[C]IndemnificationAnagreementmayprovide that apartybreaching its representationsor covenantswillbe required to

indemnify the other party for all costs, damages and losses incurred as a result of the breach.Indemnificationwouldbeanappropriate remedyforapurchaserofamanufacturingplantwhodiscovers

afterthesalethatthesellerbreacheditsrepresentationthattherewasnohazardouswastecontaminationoftheproperty.Thesellerwouldberequiredtoreimbursethepurchaserforremediationandrelatedcosts.

Liabilityunderindemnificationprovisionsisoftenlimitedbybaskets,capsandterminationprovisions.Ifindemnificationisnotrequiredforclaimsthatarelessthansomespecifieddollaramount,thatisreferredtoasabasket.Acap isa limitationonthemaximumamountofpaymentsthatmayberequiredunderanindemnificationprovision.Ifthenegotiatedcapistenmilliondollars,thentheindemniteemayreceivenomorethanthatamountintotalindemnificationpayments,evenifitsdamagesaregreater.Indemnityclausesmayalsobesubjecttoterminationafteracertainpointintime.Therearetwovariationsonthis:acut-offofindemnificationiftheeventgivingrisetotheindemnificationclaimarisesafterthecut-offdate,andacut-offiftheclaimismadeafteracertaindate.

[D]LiquidatedDamagesLiquidateddamagesclausesprovideforonepartytomakeaspecifiedpaymenttotheotherpartyupon

theoccurrencesofcertainevents.Examplesincludethefollowing: •Anequipmentleaserequiringthedefaultinglesseetopayalumpsumcalculatedbyestimatingthe

decreaseinrentthatthelessorwillreceiveuponreleasingtheproperty •Aseverancepaymentunderanemploymentagreementtoanemployeewhoisterminatedotherthanforgoodcause • An increase in the interest rate payable on debt securities issued under Rule 144A if the debtsecuritiesaren’tregisteredundertheSecuritiesActof1933byaspecifieddate Caselawsuggeststhatliquidateddamagesmaybecharacterizedasanunenforceablepenaltyunlessthe

actual amount of damages in the event of a breach would be difficult to compute and the amount ofliquidateddamages represents a good faith attempt to estimate the actual damages thatmaybe suffered.Accordingly,liquidateddamagesprovisionsoftenrecitethattheseelementsarepresent—althoughacourtislikelytolookthroughanysuchconclusorystatementtotheunderlyingsubstance.

A common example of a liquidated damages provision is themake-whole provision found in certainfinancingagreements.Wherealenderprovidesloansatafixed(asopposedtofloating)rateofinterest,thefinancingagreementwilloftenrequireanadditionalpaymentfromtheissuerifitprepaystheloanspriortotheirstatedmaturity.Withoutthisprovision,aborrowerwouldrefinanceeverytimeinterestratesdecreased,andfixed-rate lenderswouldlosethebenefitof theirbargain—theright toreceiveafixedrateof interestoveraspecifiedperiodoftime.Thispaymentiscalculatedbyreferencetothelossthatthelenderwillsufferbybeingforcedtoreinvestataloweryieldthanitwasreceivingontheprepaidloan.

§2:5.3SofteningRemedies Theconceptofmaterialityisoftenusedtopreventaremedialprovisionfromhavingtooharshaneffect.Forexample,astockpurchaseagreementmayprovidethepurchaserwitharightofterminationintheeventthatthesellerbreachesanyofitsrepresentationsorcovenantsinanymaterialrespect.Theinclusionofthelastphraselimitsthebreachesgivingrisetothepurchaser’srighttoterminatetheagreementtothosethatarematerial.Assumethatthesellerhadmadearepresentationastotheamountofdebtonthebalancesheetofthecompanytobeacquired.Ifthepurchaserdiscoversthatthetotaldebtis$10,000,500insteadoftherepresented level of $10,000,000, the representationwill bebreachedbut not in amaterial respect.As aresult,thepurchaserwillnotbeabletoterminatetheagreement.Ofcourse,thequestionofwhatbreachesareorarenotmaterialcanbecomethesubjectofdebate.

Grace periods are also used to protect against hair trigger remedial provisions: instead of beingimmediately available upon the occurrence of a breach of covenant or other event, a remedy will beavailableonlyafteraspecifiedperiodoftime(thegraceorcureperiod)haselapsedfollowingtheevent.Iftheactorconditionatissueiscuredduringthegraceperiod,theremedyisnevertriggered.Insomecases,thegraceperioddoesn’tbeginuntilthebreachingpartyreceivesnoticeofthebreach.

§2:6Definitions Theimageofalawyercarefullydefininghistermshasbecomealmostacliché.However,precisionwithwordsisoneofthemostpowerfulweaponsinthelawyer’sarsenal.Innoareaoftheprivatepracticeoflawisthepreciseuseofwordsmoreimportantthaninthedraftingofcontracts,whereimprecisioncanleadtomultimilliondollardisputes, litigationandliability.Theprocessofdefiningimportanttermsincreasesthelikelihoodnotonlythattherehasbeenatruemeetingofthemindsbutthatitwasproperlyreflectedintheagreement. Inaddition to thisvaluablefunction, theuseofdefined termsalsoengendersconsistencyandreducesunnecessaryrepetition.

§2:6.1WhereDoDefinitionsAppear? Definitionsareincludedinagreementsinoneoftwoways.Eithertermsaredefinedinaseparatesectionortheyareplacedinthetextitself,asinthefollowingsentence:

TheSeller shall not enter into agreements to sell any parcel of owned real property having a fairmarketvalueof$1millionormore("MaterialOwnedProperty").

Shorteragreementsaremorelikelytoplacethedefinitionswithinthebodyofthetextratherthanina

separate definitions section. The disadvantage of this method is that the reader must flip through theagreementtofindthelocationofadefinition,althoughunderliningthedefinedterm(asisdoneintheaboveexample)orplacingtheterminitalicsorboldfacewillhelpthereaderfindtheburieddefinitions.Acontractofanylengththattakesthisapproachshouldatleasthaveatableindicatingthesectionsorpagenumberswheretermsaredefined,inordertomakethereader’sjobeasier.

Whenthereareanumberofrelatedcontractsusingmanyofthesamedefinedterms,thedefinitionswillsometimesbecontainedinasingleexhibitthatcanbeattachedto,andincorporatedbyreferenceinto,eachof thecontracts.Thisavoids the risk thatchanges toadefinition inoneagreementwon’tbemade to thesamedefinitioninoneoftherelatedagreements.Leveragedleaseandprojectfinancetransactionsoftenusethisapproach.

§2:6.2ThePurposeofDefinitions Definitionsisolateatermorconceptthatisusedrepeatedlyintheagreement,andensurethatitwillbegiven the samemeaning each time.Consider a real estate leasewithboth a representation and covenantdealingwith the issue of encumbrances on the leased property. The landlord is required to represent asfollows:

OntheClosingDate,therearenoliens,mortgages,encumbrances,easementsorencroachmentsontheLeasedProperty.

Furtheroninthecontract,thelandlordmakesthiscovenant:

Landlordshallnotcreate,incurorpermittoexistanysecurityinterest,lien,pledgeorencumbranceontheLeasedProperty.

Thereareinconsistenciesbetweenthesetwoprovisionsthatareprobablynotintentional,butwhichcouldgive rise to interpretation issues.The representation refers to easements andencroachments,whereas thecovenant does not. If therewere no easements or encroachments on the property at the time of closing(when the representationwasmade)butwere subsequentlycreated, is therenoviolationof thecovenantbecause it fails to include these terms? Alternatively, can it be argued that the term "encumbrance"

appearing in the covenant is intended to be broad enough to pick up things like easements andencroachments?Ifso,whywerethesewordsincludedintherepresentation?

Theobvioussolutionistocreateadefinedtermforencumbrancesthatwouldbeusedinbothprovisions.Ofcourse,thereisnoreasonwhytherepresentationandthecovenantcouldn’teachhaveitsownreferencetoencumbrances,particularlyifthedraftspersontookcaretousethesamewordinginbothprovisions.Butthisapproachcreatesariskthatchangesinonesectionwillnotbecarriedforwardintotheother.Itisbothsaferandmoreefficienttodefinearecurringconcept,inordertoavoidthesecomplications.

§2:6.3WhattoCallThings There are no hard and fast rules as to what defined terms to use. An agreement that definedencumbrancesas"Apples"wouldbeperfectlyenforceable,butitwouldnotbeaneasyagreementtoworkwith.A reader seeing the secondor third reference to "Encumbrances,"on theotherhand, isunlikely tohave togoback to thedefinition inorder tomakesenseoutofwhat she is reading.Theoverridinggoalshouldbeenhancingtheuser-friendlinessoftheagreement.

Terms that frequentlyappear incertainkindsofagreementsareoftencalled the same thing. Increditagreements,theseinclude,forexample,Indebtedness,MaturityDate,GuarantorsandMajorityLenders.InanassetpurchaseagreementsomeexampleswouldbeAssumedLiabilities,DisclosureSchedule,SellerandHSR Act. The benefit of using a defined term that has a generally understood meaning is that anexperienced reader will comprehend what is being referred to without having to flip to the definitionssectioneach time. (Alwaysbeaware,however,of the riskof incorrectlyassuming thatyouknowhowatermisdefined;ifindoubt,gobackandreaditagain.)

What should somethingbecalled if it doesn’thave some traditionaldefinedname?Thereare severalpracticalguidelineshere.Chooseatermthatgivesthereaderasignalastowhatitmeans.Forexample,inarealestateleasethatdealswithimprovementsthatmaybemadeondifferentpartsoftheproperty,atermdefining improvements made on the ground floor after 2003 could be referred to as "Category ThreeImprovements"oras"Post-2003GroundFloorImprovements."Althoughwordier,thelatterdefinedtermismorelikelytohelpthereaderorienthimself,particularlyifitissignificantthatthespecifiedimprovementsarepost-2003andonthegroundfloor.

Going too far in the direction of specificity when creating defined names can become a problem,however,asextremelengthinadefinednamecanbecomeunwieldy.Forexample,"AdjustedInitialClosingDateConsolidatedTotalCapitalizationtoIndebtednessandPreferredStockRatio"isjusttoolong."InitialCapitalizationRatio"wouldbebetterandisprobablyequallylikelytogivethereadertheorientationthatsheneeds.

§2:6.4NestingDefinitions Acommonproblemincomplexagreementsisthatofnestingdefinitions.Thisoccurswhereadefinitionincludesreferencestooneormoredefinedterms,whichinturnthemselvesrefertootherdefinedterms,andsoforth.Thenetresult is thatareaderdoingacarefulreview,ashetracksthrougheachdefinitioninthechain,mayeasilyforgetwherehestarted.Often,thereisnosimplefixtothisproblem.Sometimesadefinedterm that appears inoneof thesedefinitiondaisychains appearsnowhere in thedocumentother than inanother defined term in that chain. If this is the case, the substance of that defined term should beincorporatedintothedefinedtermwhereitisused,soastoavoidatleastoneextralinkinthechain.

§2:6.5AvoidSubstantiveRequirementsinDefinitions Occasionallycovenants,representationsormechanicalrequirementscreepintodefinitionsasaresultofsloppydrafting.Hereisanexamplefromashareholders’agreement:

"PurchaseAgreement"meanstheStockPurchaseAgreementdatedOctober6,2000betweenBuyerand Seller, as amended, modified or supplemented from time to time, provided, that no such

amendmentmaybeenteredintowithouteachShareholder’sconsent.

Let’s assume it is now time to amend the purchase agreement, and the shareholders’ agreement isreviewedtodeterminewhetherconsentoftheshareholdersisrequired.Thattherequirementisburiedinthedefinition, and not included as a covenant, creates a greater likelihood that this requirement will beoverlooked,becauseitisnotwherethereaderwouldexpecttoseeit.(Ofcourseadiligentreaderwillcheckalldefinitionsandcatchtheissue.)Theguidingprinciple,onceagain,istocreateadocumentthatwillbeaseasytoworkwithaspossible.

____________________1Althoughthetermsareoftenusedsynonymously, thereisatechnicaldistinctionbetweenrepresentationsandwarranties.Arepresentationissimplyastatementoffactuponwhichanotherpartyisexpectedtorely,whileawarrantyisaparty’sassuranceastoaparticularfactcoupledwithanimplicitindemnificationobligationifthatfactisfalse.Inacontractcontainingspecificremediesforfalserepresentationsandwarranties(asisthenorm),thisdistinctionisnotmeaningful.Infact,itistypicalforanagreementtolabelallsuchstatements"representationsandwarranties,"andpractitioners(andthisbook)tendtorefertothemcolloquiallyonlyasrepresentations.2However,asageneralrulethesecuritieslawsdoimposeonissuersandsellersofsecuritiesanobligationtodiscloseallfactsthatwouldreasonablybeexpectedtoaffectthedecisionoftheotherpartytoenterintothetransaction.Seealsosection9:3.1[G]withrespectto"10b-5"representations.3Inmanycases,thesedifferenttypesofcovenantsareusedwithoutbeinglabeledassuch.4Sections9:3.2and9:3.3,containadetaileddiscussionofcredit-relatedcovenants.5However,draftingrepresentationsthatneedtobebroughtdowninthefuturerequiressomeofthesameskillsasaredescribedhereforcovenants.6Contractsthatdonotcontainconditionsprecedentareeffectiveuponexecutionanddeliverybytheparties.

Chapter3

TheLawyer’sFunctions

§3:1TheContractFormationProcess:ABreedingGroundforIssues Thedocumentationofabusinessdeal iswhere theworldsofbusinessand lawmostclearly intersect.Thebusinesspersonoftenviewslawyersasanecessaryevil—inhisview,heiscapableofworkingouttheterms of the business deal himself, and the lawyers are just there to wordsmith andmake it legal. Thelawyer,ontheotherhand,mayviewherroleaspreeminent—yes,thebusinesspeoplemayhaveagreedtothenineorteneconomicpointsthatarethebasisofthedeal,buttheyhavefailedtoconsiderthemyriadotherissuesthatflowfromthosekeypoints,muchlesshowtoresolvetheseissues.

Somethingbetweenthesetwoextremeviewpointsisactuallyclosertothetruth.Obviously,therewouldbe no deal to document without clients. On the other hand, if business people were to document theirtransactionsbywritingdownonlythepointstheyconsidertobethebusinessdeal,astreamofunanticipatedissuesandproblems that thedocumentsdidn’taddresswould likelyhave tobe resolvedover time.Evenbetweenpartieswhoserelationshipisgood,workingoutmutuallyagreeablesolutionstotheseproblemsonanongoingbasiswouldbeaconstantandincreasingsourceofstress.Ifcompromisescouldn’tbeworkedout,theresultmightbelitigationandtheendofthebusinessrelationship.

Thereisanotherimportantadvantagetoresolvingissuesinadvanceasapartofthecontractformationprocess.Itisatimewhenbothpartieswantadealandthereforearemorelikelytoreachacompromise.Forexample,duringthenegotiationofatrademarklicenseagreement,thelicenseemayagreetoaprovisionthata more rigorous set of quality testing requirements will apply to any overseas production. This is aconcessionthatthelicenseemaybewillingtomakeasoneelementoftheoverallnegotiationprocess.Ontheotherhand,ifthisprovisionweren’tincludedinthecontract,andthelicensorrequestedmorestringentoverseastestingayearafterthecontractwassigned,thelicenseewouldbeunlikelytoagree.Thiswillbethe case even if the change is not that significant from the licensee’s point of view, because of afundamental tendency of human nature and business conduct: no one wants to give up something fornothing.Thecompromisethatthepartiesmighthaveeasilyagreedtoiftheissuewerebroachedduringtheinitialnegotiationwillbemuchmoredifficulttoachieveafterthecontracthasbeenenteredintowhenallleverageisgone.

The time to anticipate and resolvepotential issues isbefore thepartieshavebound themselves to thetransaction,whendealmomentumandmutualinterestincompletiongreasestheskids.Amongthelawyer’smostimportantfunctionsaretohelporchestratethisprocess,toidentifyissues,toproposesolutions,tohelpidentifyworkablecompromisesandtoputitallintowordsthatclearlyexpresstheparties’intent.

§3:2IdentifyingIssues Askillfullawyerisadeptatsniffingout,sizingupandsolvingissues.Let’stakeasimpleexample.Aclientcallsuphislawyerwiththefollowinginstructions:"We’vejustagreedtoacquireausedModel780pipethreaderfromSellcofor$3million.Drawupthepapers,butdon’tspendalotoftimeonthis."

Thegoodlawyerwillresistthesuggestionthatheshouldn’ttakeupherorherclient’stime,andwillaskthefollowingquestions:

• Is it aparticularModel 780 (if Sellco hasmore than one), and, if so, how can I get the serialnumbertoidentifyitinthecontract? • Have you examined the equipment and found it satisfactory? If not, what are the repairs orreplacementsthatneedtobemadeandwhichpartyisresponsibleformakingthem? •WhoisresponsibleformovingtheequipmentfromSellco’splanttoyours?IfSellco,whatisthemethodof transportationanddelivery?Whendoes the responsibility to insure the equipment shiftfromSellcotoyou?Whoisresponsibleformakingtheinsurancearrangements? •Whatrightsdoyouwanttohavetoinspectandapprovetheequipmentafterithasbeeninstalledinyourplant?Whatifitisnotworkingproperlyatthattime? •Whenisthesaleexpectedtotakeplace?Whatareeachparty’sconsiderationsastotheearliestandlatestpermissibledeliverydates?Shouldeitherpartybeabletowalkawayfromthecontractiftheothersidedoesn’tperformbyaspecifieddate? •Isthepurchasepricepaidentirelyincash?IsSellcorequiringanyportionofitasadepositwhentheagreementofsaleissigned?Ifaportionofthepurchasepriceisapromissorynote,whataretheterms:interestrate,maturitydate,amortization,interestpaymentdates,rightsofsetoff? •When does the cash consideration get paid?What formof payment is expected—check orwiretransfer?Whatisthesourceofthepayment?Areyouborrowingtopaythepurchaseprice? • Are there any special undertakings with respect to the equipment that you expect to get fromSellco? Is Sellco willing to warrant its performance for any period of time? Are there existingwarrantiesfromthemanufacturer,andifsodoyouexpecttobeabletoenforcethemdirectly? Theseareallissuesthattheclientshouldcareabout.Theymaynotbeasfundamentaltothedealasthe

purchaseprice,buttheyshouldallbeofinteresttothepersonbuyingtheequipment.However,iftheclientinthisexampleisnotinvolvedinbuyingandsellingusedequipmentasaregularpartofhisjob,hemaynothaveconsideredallthenecessaryanglestomakethetransactionasuccess.

Many business peoplewill take the view that any issues raised by a lawyer are legal issues and arethereforenotworthspendingtheirtimeon.Theaboveexampleillustratesthatthisismostdefinitelynotthecase.(Notealsothatthisexampleinvolvesthesimplestoffactpatterns.Imaginehowthatlistofquestionswouldgrow if theproposed transaction involvedanacquisitionofmultiplebusinesses located in severalcountriesforconsiderationconsistingofacombinationofcashandsecurities,andwhichisfinancedwithsenior secured bank financing and a public high-yield debt offering.) A good business lawyer, throughtrainingandexperience,isskillfulatspottingissuesthathaveeconomicandpracticalsignificanceforherclient.Itisoneofthelawyer’smostimportantfunctions.

§3:3TheLawyerastheClient’sGuide It is often necessary for a lawyer to guide his client through the contract negotiation and draftingprocess. This, of course, depends on the circumstances. A lawyer in a commercial lease transactionrepresentingabankerwhohasspentherlasttenyearsdoingthesetransactionswillnotbeabletoidentifymany issues that the client hasn’t seen before.On the other hand, a lawyer representing a clientwho isnegotiatingherfirstcommercialleasetransactionwillhavetoeducatetheclientastotheterms,risksandcontractualintricaciesofthetransaction.

Agreementsthatinvolvesignificantongoingobligationsaftertheclosingcreatethegreatestchallengeinthis regard, as illustrated by the kinds of provisions that are found in many financing agreements:affirmative covenants, negative covenants, financial covenants, financial reporting requirements,representationsthatneedtobebroughtdown,andobligationsregardingthemaintenanceofcollateral.Thelawyermustmakesurethattheclientunderstandsandhasareasonableexpectationofbeingabletocomplywiththeserequirements.

Carefully negotiating a complicated set of provisions may be a long, laborious process. Often thenegotiationofoneagreement is takingplaceasapartofa larger transaction inwhich theclient isbeingpulledinmanydifferentdirections.Occasionally,aclientwilltaketheviewthataslongashegetsthedealclosed, he canworry about the rest of the "legalmumbo-jumbo" later.Unfortunately, the legalmumbo-jumboislikelytocontainprovisionsthat,ifignored,couldcreatesignificantproblemsfortheclientanditsbusinesslater.

Inotherwords,itisthelawyer’sjobinthecontractformationprocesstomaketheclientunderstandandcare about many things that the client may prefer to ignore. It is a task requiring not only technicalknowledgeoftheissuesbutthenecessaryinterpersonalskillstoengagetheclientinthisprocess.Inordertoperformthistaskwell,thelawyermustalsodeveloptheskilltoexplaincomplicatedconceptsandissuesinaclearandunderstandableway.Asignificantelementofthisisgaugingtheclient’sknowledgeandinterestlevelandtailoringtheexplanationaccordingly.

§3:4TheDraftingProcess

§3:4.1GettingStarted Attheoutset,thelawyerresponsiblefordraftingthecontractwillgetsomeindicationfromhisclientastowhatthetermsofthetransactionaretobe.Itmaybeaphonecallofthetypedescribedabove,itmaybesomethinginwritingsuchasaletterbetweentheparties,oritmaybeatermsheet.Inanycase,thelawyerwillprobablyseekadditionalinformationfromtheclientthatwillhelphimproduceacrediblefirstdraft.Atthisstagethelawyershouldexplorewhethertheclienthasanydocumentsthatmayberelevant.Theclientis unlikely to knowwhat is relevant, so pointed questionsmust be asked.Are there any letters or otherwritten communications between the parties relating to the transaction?Are there anywrittenmaterialsrelatingtothesubjectmatterofthetransaction?Ifthetransactionisanacquisition,isthereanofferingbookwith respect to the target? Are there any relevant financial statements or reports? Are there any expertreports relating to the subject matter of the transaction, such as reports of accountants, appraisers orenvironmentalexperts?Suchmaterialsmayormaynotbehelpfultothelawyer’stask,butthelawyermustensurethathehasanopportunitytomakethatdeterminationhimself.

Thenthelawyerpreparesthefirstdraftofthecontract.Duringthedraftingprocessadditionalissuesandfactualquestionswillarise.Somemaybeso importantorwide-ranging thatananswermustbeobtainedfrom the client before the drafting process continues any further. These may include fundamentalstructuringpoints thatwill broadlyaffecthow the contract is tobedrafted,or issues thatmayaffect theviabilityofthedeal.Thistypeofconcernwillwarrantimmediatecommunicationwiththeclient.

Other issueswill be of less importance. In the interests of efficiency (andnot exhausting the client’spatienceandgoodwill)amethodofraisingtheseissuesotherthanrepeatedphonecallstotheclientshouldbeemployed.Therearethreeapproaches: •Puttheissuesorquestioninthedraftitself,bracketedandmadeboldtoensurethattheyareseenby

thereaderandtomakethemeasiertofindanddeleteasthecontractisrevised. •Prepareaseparatelistofissuesandquestionstobedeliveredtotheclientwiththefirstdraftofthecontract. •Raisealloftheissuesandquestionswhenthedraftisfirstdiscussedwiththeclient. Undermostcircumstances, thebestapproachis tocombineeither thefirstorsecondmethodwith the

third.Havetheclientreadthedraftandthelawyer’swrittenquestionsandissues(whetherembeddedinthedocument itselfor ina separate list) together.Then,when it is time togo through thedraft together, thelawyershouldelicitdiscussionandresponsefromtheclientastoeachofthesepoints.

Theaboveprocessshouldalsobefollowedinthesituationwhereajuniorlawyerispreparingadraftforaseniorlawyer.Bydoingthis,thejuniorlawyerwilldevelopimportantissue-spottingskills,andshewilldemonstrate to thesenior lawyer thatshe isactively thinkingabout theassignmentrather than justgoing

through themotions.Manyof thesewill bevalidpoints thatultimatelywill be addressed in thedraftorraisedwiththeclient.

§3:4.2DraftingtheContract Which lawyer drafts the contract is often dictated by custom: financing agreements are drafted bylenders’ counsel; acquisitionagreements aredraftedbypurchaser’s counsel;underwritingagreements aredrafted by underwriter’s counsel; employment contracts are drafted by employers’ counsel; securityagreementsaredraftedbysecuredparty’scounsel.Theunderlyingprincipleisthatthepartywiththemostleverageorwiththemosttolosefromaninadequatelydraftedcontractwilldothedrafting.

Whatistheimportanceofbeingthedraftsperson?Thedraftspersoncanensurethattheissueshewantstobeaddressedarenotonlycovered,butcoveredinthemannerthatbestserveshisclient’spurposes.Theparty that is reacting to the draft presented by the other side is functionally in a defensive posture: it isreactingtotheotherside’sproposalsratherthanproactivelyassertingitsownagenda.

The difference between these two positions can be illustrated in an example. What if, contrary totradition, a purchaser of a business allows the seller’s lawyer to prepare the purchase agreement? Theseller’slawyerwillprepareaveryslimdraft,omittingasmanyoftheprovisionsthatprotectthepurchaseras he feels he can get away with. (The seller’s goal is to receive its consideration with as few stringsattached as possible, whereas a purchaser wants representations regarding the purchased assets andindemnitiesforthebreachoftherepresentations,amongotherthings.)Thepurchaseranditscounselwillreactbyprovidinganextensivebarrageofcommentsintendedtoturnthedraftintoamoremiddle-of-theroaddocument.However,thepurchaserinthiscaseisinthepostureofrequestingnumerouschanges,ratherthan imposing its terms on the other side. From a purely mechanical standpoint, no changes to a draftdocumentaremadewithouttheapprovalandcooperationofthepartythathasthedraftonitsoritslawyers’wordprocessingsystem.

Anotherbenefitofhavingdraftingresponsibilityisbeingabletocontrolthepaceofthetransaction.Theabilitytocontrolwhenadraftagreementisdeliveredtotheotherparticipantsinadealcanbeanimportantstrategicdevice,particularlyforapartyanxioustohavethedealprogressquickly.

§3:4.3UseofPrecedent Incontractdrafting,plagiarismisavirtue.Alawyerdraftingacontractshouldalwaystrytostartwithaform designed for the kind of transaction involved, or from a contract previously used in a similartransaction.Therearenumerousreasonsfornotwantingto"reinvent thewheel":startingacontractfromscratchismoretime-consumingthanmarkingupagoodform;precedentscontainprovisionsthataddressissuesinwaysthataregenerallyacceptedinthelegalandbusinesscommunities;andboilerplateprovisionsthat have been used and accepted in previous transactions are less likely to require careful review andnegotiation.

It is crucial to find a precedent that closely matches the transaction at hand. Ideally, you will haveseveralgoodprecedents.Thecloserthematchis,thelessredraftingandengineeringwillberequiredofthedraftsperson.Alawyerusingastockpurchaseagreementasaprecedentforanassetpurchase,forexample,will have to add all the provisions that identify the assets to be transferred and themechanics of suchtransfer,sincetheseprovisionswillnotbeinastockpurchaseprecedent.Anotherexampleistheuseofasingle-lender credit agreement precedent for a credit facility involving a syndicate of lenders. Thedraftspersonwillberequiredtomakesomesignificantchanges(e.g.,addingalloftheagencyandvotingprovisions that are needed in syndicated credit agreements) aswell as numerous clean-up changes (e.g.,changingeachreferenceintheagreementto"lender"totheappropriatepluralreference).Theextraeffortandtimeexpendedinfindingthemostcloselyapplicableprecedentatthebeginningofthedraftingprocesswillbewell-rewarded.

If insteadofamodel form, theprecedent isanagreement fromaprevious transaction,particularcaremust be taken to distinguish between standard provisions and the provisions that were specificallynegotiated.Ofcourse,totheextentthesenegotiatedprovisionsarefavorabletothedraftsperson’sposition,itwillnotbeharmfultoincludetheminthefirstdraft.Butitcanbeverydamagingtounknowinglygive

somethingupinthefirstdraftbyincludingaconcessionmadeinaprevioustransaction.Theinexperiencedlawyermayhaveadifficulttimedistinguishingbetweenboilerplateandnegotiatedprovisions.Onewaytoaddressthisconcernistoobtainthefirstdraftoftheprecedent(bygettingthefirstwordprocessingversionorsearchingthefiles)andcomparingittothefinalversion.Thiswillnotonlypreventtheunintendeduseofnegotiatedprovisionsbutwillalsogivethejuniorlawyeraroadmapofsomeissuesthatmaycomeup(andtheirpossiblesolutions).

Ifthereaderofthefirstdraft(whetheritisaseniorlawyer,theclientortheotherside)isfamiliarwiththeprecedentusedtocreatethedraft,itmaybeusefultoprovideacopythatshowswhatchangeshavebeenmade.1Thiswillenablethereadertoreviewthedraftmoreefficientlybyfocusingonthechangestotheprecedent.

Theeffectiveuseofprecedentsgoesbeyondfindingtherightagreementtostartfrom.Italsocomesintoplay when the draftsperson needs to add provisions that don’t appear in the precedent he is using. Forexample,apartytothetransactionmaybeaquasi-governmentalentityandthelawyermaywanttoaddawaiver of sovereign immunity.He has two choices: draft from scratch or find a good precedent for thisprovision.Ifgoodlanguageisfound,itisaneasyprocessaddingittothedraft,althoughthedraftspersonmustmakesurethatalldefinedtermsusedintheinsertedprovisionmatchthoseintheagreement,andthatotherwisethestyleandformatoftheinsertblendintotheagreement.

Ontheotherhand,inmanycasesitmaybeeasiertodraftfromscratch(particularlyasthedraftspersongains experience). Some lawyers seem to think there is magic to using precedent—that for every newconceptorprovisionthatmustbeinsertedinacontract,thereisprecedentthatworksexactlyright.Thisisoftennotthecase,andaskillfuldraftspersonmaybeabletodraftabetterprovisioninlesstimethanonefoundinaprecedentafteralengthysearch.Thisisparticularlytruewheretheconcepttobewrittenisnotafrequentlyrecurringone.Itbearsrepeatingthatthepurposesfortheuseofprecedentsaretostreamlinethedraftingprocessandtorelyontime-testedlanguagecoveringrecurringfactsorcircumstances.

Forthejuniorlawyerwhohasnotyetdevelopedafeelforwhatisnormallyincludedinaparticulartypeofagreement,itisagoodpracticetorefertooneortwootherprecedentsasthefirstdraftisbeingprepared.Thiswillprovideguidanceastowhichprovisionsarecustomaryandwhicharedeal-specific.

§3:4.4MarkingupaPrecedent Thissectionaddressesamundane,mechanicalmatter:howbesttomarkupchangestoadraftforwordprocessing.Adraftspersonwho revisesa contractbyword-processing the revisionsherselfwillnotneedany of the techniques discussed in this section. But thosewho do it the old-fashionedway—that is, bymarking up a precedent by hand for input by a secretary orword processor—should heed the followingguidelines.Andinanyevent,thepointsthatfollowareimportantwhenthelawyeriscalledupontoprovidecommentstoanagreementsomeoneelsehasdraftedbypreparingamarkup.Seesection3:4.6.

Allof theseguidelines arepresentedwithonegoal inmind: efficiency. It is alwaysmoreefficient toprepareaclearmarkupthatiseasilyunderstoodbythewordprocessorthefirsttime,ratherthanneedingtomakemultiplerevisions.Avoidingmultiplerevisionsyieldssavedtimeforthelawyer.

The following pages show comparisons between difficult-to-readmarkups and easy-to-readmarkups.ExampleA shows the right and wrong way to make insertions. Note that it is much easier to see theinsertionsandwheretheyaresupposedtogointhesecondexample.Drawingtheinsertionlinesinbetweenthe lines of the text can force the reader to follow the lines as if trying to find herway out of amaze.Example B illustrates how best to reflect a number of small changes in close proximity. Sometimescrossingoutthephraseorsentenceandrewritingitismuchcleaner,asisdemonstratedhere.ExampleCillustratesaveryimportantpoint: for insertsofanysignificant length, it isfareasier(bothfor thepersondoing themarkup and theword processor) to do so by inserting a rider. This is particularly true if thedraftsperson expands or modifies the inserted language as she goes along. There is a potential tacticaladvantagetosendingwordprocessedriders:inmanycases,thedraftinglawyerwillinsertyourlanguageinitsentirety,becauseitissoeasytodoso.

§3:4.5FinalStepsinProducingaFirstDraft

Whenafirstdraftiscompleted,itwillusuallybesenttotheclientforitsreviewandcomments.Atthispoint,thedraftwillbecleansedofanyinternalcommentarythatwasmeantonlyfortheeyesofthelawyers,andanyquestionsorissuesfortheclientwillbeincorporatedintothedocumentoronanattachedlist,asdiscussedabove.

Whenthelawyerandtheclientgothroughthisfirstdrafttogether,thelawyerwillwanttoensurethattheclient’sexpectationsastohowlongthisprocesswilltakearerealistic—oftenaclientwillunderestimatehowlongthissessionwilllast,particularlyinthecaseofalongorcomplicatedcontract.Inadditiontothequestionsandissuesdirectedtotheclientinthecontractorinaseparatelist,thelawyermaywanttofocustheclient’sattentiononparticularissuesthatthelawyerconsiderslikelytobeofinterestorimportancetothe client. The extent the lawyer will want to do this will be a function of the experience level of the

individualclient.Aclientwhoisanovicemayneedmoreofaguidedtourofthecontract.Evenifsuchaclienthascarefullyreadthedraft,shemayneedhelprecognizingthesignificanceofcertainprovisionsorthewaycertainprovisionsinthecontractinteractwitheachother.

Thelawyerwillthenrevisethedrafttoincorporatetheinputobtainedfromtheclient.Ordinarily,thesechangesshouldbemadeinanewversionandblacklinedsothenextreviewbytheclientcanbelimitedtothelanguagewhichhaschanged.Iftimepermitsandtheclientwishes,theprocessofreview,commentandrevisioncanberepeated.Sometimes,thelawyersmaybeinstructedtosendthedrafttotheopposingpartyand counsel prior to the client’s review and input. If the lawyer believes this approach may bedisadvantageoustotheclient(because,forexample,thedraftopenssomedoorsthattheclientmaynotwanttoopen),sheshoulddiscussthisconcernwithherclientpriortocirculatingthedraft.Eventually,thedraftisreadytobesenttotheotherside.Undernormalcircumstancesitwillbesenttothebusinesspeopleontheothersideofthetransactionandtheirlawyersatthesametime.

Inmultipartytransactions,strategicissuescomeintoplayindecidingwhogetstoseethecontractandwhen.Oftenthereisadesirefor twoparties tobeabletoagreetoacontractandthenpresent itasa faitaccomplitootherinterestedparties.Thisisbasedontheconcernthatsharingmultipledraftsofacontractwhileitisbeingnegotiatedwillbeperceivedbyotherpartiesasaninvitationtocomment.Forexample,asyndicated credit agreement is usually fully negotiated by the borrower, the agent and their respectivecounselbeforeitissenttotheotherbanksinthesyndicate.Tomentionanotherexample,thelenderinanacquisitionfinancingwillhaveaninterestinseeingtheacquisitionagreementbutwillusuallynotbegiventheopportunityuntillateintheprocess.Inthissituation,abankanditscounselpresentedwithafinal(evensigned)acquisitionagreementwillbereluctanttoraiseanythingbutthemostimportantsubstantivepoints.

When the first draft is sent out to the other side, unless the drafting lawyer’s client has given finalapprovalofthedraft,itisusuallysentunderacovermemostatingthatthedraft"issubjecttotheclient’scontinuingreviewandcomment."Thisisabsolutelyessentialinthecasedescribedabovewherethelawyerisinstructedtocirculatethedraftwithoutanyclientreview.Failuretoprovidethiswarningdoesnotstoptheclientfrommakingadditionalcomments,butmakesitfarlessawkwardfortheclientoritscounseltodoso.

Iftheagreementwasbasedonaprecedentfamiliartoopposingcounsel,itisusuallyappropriatetoofferablacklinedversionaswellasacleancopy.Ifthereissuchaprecedentandcounselwantstocompareittothe new draft, your failure to volunteer a blackline just makes the process more difficult for yourcounterpart.Suchtacticsarenotconducivetoaconstructivenegotiatingprocess.

§3:4.6TheRoleoftheNon-DraftingLawyer Soyouandyourclienthavejustreceivedanagreementtoreviewandcommenton.Whattodo?

First,youandyourclientmustreadit.Somepeoplestartreadingacontractonpageoneandcontinuetotheend.Others jumparound,perhapsstartingwith theoperativeprovisions, then thecovenants, then therepresentations,andsoon.Aparticularlyhelpfultechniqueistoremovethedefinitionssectionandstapleitseparately, referring to it as necessary. This is usually much more helpful than slogging through thedefinitions,whichareoftenthefirstsectionoftheagreement,withoutanycontext.

This initialreadleads toadiscussionof thedraftwith theclient.Moreoftenthannot, thatdiscussioninvolvesapage-turningsessioninwhichbothlawyersandclientsraiseanddiscusstheirrespectivepoints.Occasionally, theclientwillwantamarkupofher lawyer’spreliminarycommentsbefore thisdiscussiontakes place. If that is the case, the lawyerwill prepare a formalmarkup of the documentwith her ownquestionsorcomments.Thismarkupshouldbeeitherwordprocessedandblacklinedorpreparedfollowingthesameprinciplesasforawordprocessingmarkup.(Allridersshouldbetyped,however.)Thismarkupcanbeusedtoraisequestionsorissueswiththeclient.Oneadvantageofgettingthismarkupintheclient’shandsinadvanceofthepage-turningmeetingisthatitenablestheclienttobetterunderstandthecontextofherlawyer’scomments.

Aftertheclientandthelawyergoovertheircomments,thenextstepistopassthosecommentsalongtotheotherside.Therearetwoapproachestothis.Therecanbeameetingofallpartiesandtheirlawyers(oronlylawyers),whereallthecommentscanberaisedanddiscussed.Alternatively,amarkupcanbepreparedand sent to the other side in anticipation of such a meeting. The second approach is almost always

preferable.Atameetingwherecommentsarebeingraisedforthefirsttime,resolutionoftheissuesislesslikely because the other side will not want to concede on any single point without understanding thecompletepackageof requestedchanges.Deliveringamarkup firstgives theother sideanopportunity toreview,consideranddiscussthecommentspriortoameeting.Asaresult,themeetingislikelytobemoreconstructive.

Iftheinitialmeetingincludedclients,thelawyerswillwanttofollowupwithanothersessionthatcoverstheso-calledlegalordraftingpoints:thetypos,thegrammaticalandstylisticpoints,thesubstantivepointsthataretrulylegalinnature,andpointsthatthelawyersshouldbeabletoresolvewithouttheclients’input.Adiscussionofthesepointswithclientsintheroomoronthephoneoftenresultsingrumpyclients.

Themarkupthatissentoutinadvanceofameetingwillbepreparedbythelawyerandreflectboththelawyer’s and the client’s comments. The same principles discussed with respect to a word processingmarkupapply:onceagain,thethemeshouldbeuser-friendliness.Itshouldbeeasytofollow—theothersidemayhaveproblemswiththesubstanceofyourpoints,butcausingthemtostruggletounderstandthemwillcertainlynothelp.Somethoughtsinthisregard: (1) Whenever possible, provide suggested language rather than just a general comment. This is

particularlytruewheretheissueisacomplexoneorinvolvesanydegreeofsubtlety.Itgoesbacktothe basic premise that the act of drafting allows the draftsperson to direct the resolution of theprovisioninaparticularway.Ofcourse,thereisnoassurancethatyourcounterpartwillacceptyourlanguage,butinmanycasesshewilleitheruseitverbatimoruseitasabasisforthechange.Inanyevent,youavoidtheconfusionastothechangeyouarerequestingthatwhichcanbecreatedifonlyageneralcommentisprovided.Inaddition,bypreparinglanguageyouwillbeforcedtothinkthroughadditionalissuesthatwouldhavegoneunnoticedifamoregeneralcommenthadbeenmade.Evenonuncontroversialpoints,byprovidingyourownlanguageyouimprovethechancesthatthechangewon’tbedraftedinsomeunfavorable(orincorrect)way.Further,thisengenderscooperativespirit—thedraftspersonwon’tfeelthateveryoneissittingbackwhilehedoesallthework. (2)Theuseof typed riders is extremely importanthere for several reasons.First, they arealwayseasiertoreadthanhandwritteninserts.Second,youcanreviseandeditaridermuchmoreeasilythanahandwritten insert.Last,providing ridersmakes itveryconvenient for theother lawyer toadoptyourlanguageintherevisionprocess. (3)Beneatwhendoingahandwrittenmarkup.Do it inpencil, so thatanychanges to themarkupitselfcanbemadeneatly.Don’twriteinsertionstooclosetothemargin,otherwisewordswillgetcutoffinthecopyingorfaxingprocess.Makesurethatthecopiesofthemarkuparelegibleandthatallridersareattached. (4)Don’thesitatetouseyourmarkuptoexplainapointaswellastoconveyit.Forexample,ifyoustrikeoutasentencebecauseitcoversapointalreadymadeelsewhereintheagreement,saythatinthemarginorinbrackets.Or,ifyou’veprovidedaridertoaddressanissuethatmaynotbereadilyapparentfromthelanguageitself,addabracketednoteattheendoftheriderexplainingthepurposeforthelanguage.Themoreyouhelptheothersidetounderstandyourcomments,thelesstimewillbewastedexplainingthem,sothatmoretimecanbespentdiscussingthem. Mostcontractsarenotfinalizedafteronerevision.Thestepsdescribedabovewillberepeatedeachtime

anewdraftisproduced.

§3:5TheLawyerasFacilitator Under normal circumstances, it is the lawyer’s job not only to draft and help his client negotiate thecontract,butalsotofacilitateandcoordinatethevariousrequirementsthatmustbesatisfiedforthecontracttobeeffective.Inmanycases,theseareprimarilyresponsibilitiesofthejuniorlawyer.Thequalitiesthatarenecessary for a lawyer to handle thesematters successfully are organization, foresight, diligence and anattentiontodetail.

§3:5.1RepresentationsandWarranties It is the ultimate responsibility of the client to ensure that the representationsmade about it and itsbusiness are correct. However, the lawyer is often closely involved in the process of getting therepresentationsright.

[A]LegalIssuesCertainrepresentationsandwarrantiesareessentiallystatementsoflegalconclusions.Amongtheseare

thefollowingrepresentations,2withadescriptionoftheactionsthelawyermaybeaskedtotaketoensuretheiraccuracy:

[B]EnsuringProperReviewbytheClient

Even in the caseof representations that don’t relate to legal issues, the lawyer should think carefullyaboutanypotential issues.Intheprocessofworkinggenerallyfor theclientorworkingontheparticular

transaction, the lawyer may have obtained knowledge of a fact or circumstance that may need to bedisclosedunderarepresentation.

Bythetimethatthecontractisreadytobesigned,theclientshouldhavecarefullyreadandconsideredtherepresentations.Inthefirstinstance,thismeansthattherightindividualsattheclienthavedoneso—thatis,thosepeoplethataremostlikelytoknowwhattherelevantfactsare.(Inmanycases,thiswillbethein-housegeneralcounsel,ifthereisone.)Ifthelawyerhasanydoubtthattheclienthasproperlyfocusedontheseprovisions,thelawyershouldsitdownwiththerightpersonandwalkthroughtherepresentationswithher.

[C]PreparingDisclosureSchedulesManyrepresentationsneedtobequalifiedbyexceptions.Forexample,arepresentationthatacompany

is ingood standing in every state inwhich it doesbusinesswill notbe true if there is a statewhere thecompanyisnotingoodstandingbecause,forexample,thereisunpaidfranchisetaxthatisbeingdisputed.Asdiscussedabove, the lawyercanhelphisclientuncover theseexceptions. Inmostcases, it isalso thelawyer’sfunctiontoorganizetheseexceptionsandincorporatethemintodisclosureschedules.

Whyuseschedulesinsteadofjustputtingtheexceptionsdirectlyintothetextoftherepresentation?Thelattermethodworksfineifthereareonlyoneortwoexceptions,butbeyondthatit’smechanicallyeasiertouseaschedule.Further,inmostagreementswithextensiverepresentations,thepartiesexpecttheexceptionstobeintheschedules.Itisalmostalwaysbesttoputthingswherethereaderwillexpecttoseethem.

Another reason for putting factual disclosures in schedules is thatmore often than not it is the non-draftingpartywhoisresponsiblefortheschedules(forexample,theborrowerunderacreditagreementorthesellerunderanacquisitionagreement).Sotheschedulesarenormallypreparedasaseparatedocumentonthenon-draftingparty’s(oritslawyer’s)wordprocessingsystem,tobeattachedtotheagreementattheclosing.

Thefacts thatneedtobeincorporatedintotheschedulesalmostalwayshavetocomefromtheclient.Thelawyer,however,hasseveralimportantrolesinconnectionwiththeschedules: Helptheclientunderstandthescopeoftherequireddisclosure.Therepresentationthatgivesrise

tothedisclosurewillbewritteninlanguagethattheclientmayneedassistancetounderstand.Forexample,thescopeofarepresentationthatthereisnolitigation"thatcouldreasonablybeexpectedtohaveamaterialadverseeffect"maynotbeimmediatelycleartoapersonwhoisnotwellversedincontract language and who therefore might be inclined to disclose more or less than is actuallynecessary. Actasafilterfortherawdataprovidedbytheclient.Theclientmayprovideinformationthatismoreorlessdetailedthanitneedstobeorthatrequiressomemassagingbeforeitisappropriatetodisclose.Forexample,whatifinresponsetoarepresentationrequiringdisclosureofallcapitalizedleasestheclientproducesaprintoutshowingallofitsleases,bothcapitalizedleasesandoperatingleases, and indicating the monthly required payments on each? It may not result in a falserepresentation to attach this list as the schedule, but it would be better to pare it down to beresponsiveonlytowhattherepresentationrequires.Ifalltheextraneousinformationisincluded,theother partymay be able to argue that the representation is breached if the information regardingoperating leases or monthly payments is incorrect, even if those items were not required. In anyevent, it is almost always a bad idea to disclose more than is necessary. A lawyer should notautomaticallyacceptinformationprovidedtohimforinclusioninschedules;heshouldreviewitandconverttherawdataintoappropriatedisclosure. Bethekeeperandprocessoroftheschedules.Thetaskoforganizingandprocessingtheschedulesis a detail-oriented and time-consuming one. The lawyer should always volunteer to take on thisassignment.Whentheclientwantstomaintaincontrolofthisprocess,thelawyershouldkeepacloseeyeontheschedulesastheyareproduced,toensurethattheyareintheproperformat,thattheyareresponsive to the applicable contract provisions and that they don’t give rise to significant

substantivepointsthatneedtobeaddressedinsomeotherfashion.3

It isbest forallof theschedules tobepreparedasasinglewordprocessing file.Anyotherapproachmakes it difficult to distribute revised drafts of the schedules. Even where parts of the relevant factualinformation are on another participant’s word processing system, it is ultimately more efficient toconsolidateallsuchinformationinoneplace.

Delivery of the first draft of schedules late in the process often leads to significant angst and delay,particularly when items being disclosed identify risks or issues that the parties must then address.Rememberthatoneoftheprimarypurposesofrepresentations(andthereforeofdisclosureschedules)istosmokeout relevant facts.Once these facts come to light, theymaygive rise to substantivenegotiations,whichmayinturnrequirethatcontractprovisionsbeaddedormodified.Itiseasytoseehowthisprocessmaybecomemuchmoredifficultifitoccursatthelastminuteduetoalatedeliveryofschedules.Toavoidthisproblem, it isoftenhelpful tostartcirculatingdraftsof theschedulesevenbefore theyare finalized.This way, the parties can reviewwhat is available at an earlier time, with additional information beingincludedinsubsequentdrafts.

§3:5.2Covenants A lawyer will assist her client in understanding and getting comfortable with the covenants in thecontract.Thisisoftenmorechallengingwithcovenantsthanitiswithrepresentations.Thetaskofgettingarepresentationtowork(exceptastobringdowns)isapurelyforensicone,involvingthedeterminationanddisclosure of the true state of facts at the time the representation is made. Getting covenants to workinvolvesgettingyourclienttolookintothefutureinordertobuildinnecessaryflexibility.

The first step in thisprocess is tobesure that theclientunderstandswhat thecovenantwillorwon’tpermit it todo.Donotassumethat theclientunderstandsthescopeofacovenant: it isnotunusualforabusinesspersontomakeincorrectassumptionsregardingthecovenantthatcouldresultinsomenecessaryissuenotbeingaddressed.Thebestapproachistoengageinadialoguewiththeclientwhenreviewingtheagreementtogether.Asthelawyercomesuponcovenantsthatarelikelytoproduceissues,heshouldpointthemout to the client and suggest somepossiblepoints thatmayneed tobe addressed.Suchadialoguemightunfoldlikethis:

Thelawyerhashelpedtheclientunderstandthetruenatureoftherestrictionbygettinghimtofocusonthedefined term insteadof relyingonhisgeneral senseofwhat "indebtedness"means.The lawyerhas also

broughthisunderstandingoftheclient’sbusinesstobearinhelpingtoidentifyafutureitemthatneededtobeaddressed.

Ofcourse,whiletherewillbemanycovenantsthatrequireafairdegreeoffocusonthepartofboththelawyerandtheclient,therewillalsobemanythatrequirelittleattention.Askillthatagoodcontractlawyermustdevelopistobeabletohomeinonthecovenantsthatarelikelytocausehisclientproblems.

§3:5.3ClosingConditions The lawyer has twoprimary functions relating to conditions precedent: negotiating themandmakingsurethattheyaresatisfied.Inmanycases,theclientswillfeelthatthesigningofanagreementconcludesthedeal,whereasinmanycasesthereisstillamountainofpapertobeproducedandfinalizedbeforethetransaction is closed. A key element of the negotiation of the conditions precedent is avoidance ofconditionsthatwillbedifficulttosatisfy.Arequestedconditionmayalsobeobjectedtoonthebasisthatitisonerous,orexpensive,ornotcustomary,butthecardinalsinistohavethecontractrequiresomethingthatcan’tbedelivered;thisresultsintheotherpartybeinggivenanoptiontocloseornot.

[A]SubjectiveClosingConditionsAriskof non-closure arises each time that a condition is drafted topermit theother party tomake a

subjectivedeterminationastowhetheraconditionissatisfied.Examplesoftheseare:

Sellershalldeliverabillofsale,informandsubstancesatisfactorytoPurchaser.

PurchaserandSellershallenterintoamutuallysatisfactoryservicesagreement.No material adverse change shall have occurred with respect to Lessee’s financial condition, asdeterminedbyLessorinitssolediscretion.

Shareholder shall have completed its due diligence review of the business, assets, contracts andfinancialconditionofCompany,andshallbesatisfiedinallrespectswiththeresultsthereof.

Let’sexaminehoweachofthesecouldbereworkedinordertomakethemmorecertain.

Sellershalldeliverabillofsale,informandsubstancereasonablysatisfactorytoPurchaser.

Bytheinclusionofareasonablenessstandard,purchasercannotavoidclosingmerelybyobjectingtothebill of sale; it must have a reasonable objection. Of course, the parties could disagree on whether aparticularobjectionisreasonable,butasapracticalmatter,withasimpledocumentsuchasabillofsale,thereareunlikelytobemanycontroversialissues.

Anotherapproachtothesameproblemisimposingastandardwhichismoreobjective:

Sellershalldeliverabillofsale,informandsubstancecustomaryfortransactionsofthistype.

SellershalldeliverabillofsalesubstantiallyintheformusedbySellerintransactionsofthistype.

Theseapproachesattempttomoderatethesubjectivityoftheconditionbyreferringtomarketpracticeor

to a party’s own prior practice. Here the goal is to employ an external standard instead of a party’sdiscretionindeterminingwhetheraconditionhasbeensatisfied.

Aredraftofthesecondexample:

Purchaser and Seller shall enter into a services agreement substantially in the form attached asExhibit2.

Asinthebillofsaleexample,thisconditionasoriginallywrittenallowedpurchasertowalkawayifthe

services agreementwas not to its liking.On the other hand, it gave the same right to seller, but for thepurposesof thisanalysiswewillassumeseller’sgoal is to lockpurchaser inasmuchaspossible,not tohaveanescapehatchitself.Thechangeaboveachievesthatobjectiveforsellerbyhavingthepartiesagreeinadvancetotheformofservicesagreement.Oncetheformofagreementisnegotiatedandattachedasanexhibit,purchasermaynotlatertakethepositionthatthetermsoftheagreementarenotacceptabletoit.Ofcourse,thecircumstancessometimesmakethisapproachimpractical,particularlywhenanagreementmustbeenteredintoquicklybeforethereistimetonegotiatealloftheancillarydocuments.Insuchacase,oneoftheapproachesdescribedabovemustbereliedoninordertoavoidacompletelysubjectivecondition.

Thethirdexampleabove,withtwoalternativeredrafts:

No material adverse change shall have occurred with respect to Lessee’s financial condition, asdeterminedbyLessorinitssolediscretion.

No material adverse change shall have occurred with respect to Lessee’s financial condition, asdeterminedbyLessorinitsreasonablediscretion.NomaterialadversechangeshallhaveoccurredwithrespecttoLessee’sfinancialcondition.

The first of these gives lessor the greatest leeway, allowing it to unilaterally determine if amaterialadversechangehasoccurred. If lessor fails tocloseon thisbasisand issuedforbreachby lesseeon thegroundsthatnomaterialadversechangeexisted,thejudgewouldconcludethattheagreementgavelessorcompletediscretion.4

Inthesecondexample,lessormustbereasonableinitsdetermination.Iflessorassertedthatamaterialadversechangeoccurredbecauselessee’sannualsaleshaddeclined.05%,thatwouldbeunreasonable.Adeclineof15%wouldbeamuchmoredifficultcall.Ajudgepresentedwiththeissueofwhetherlessor’sassertion thata15%dropconstitutedamaterialadversechangewouldhave todeterminewhether itwasreasonableforlessortoreachthisconclusion.Thejudgewouldneedtoexaminewhetherareasonablelessorwouldconsiderthisfactsignificantindecidingwhethertoenterintoasimilarleasetransaction.

Inthethirdexample,whetheramaterialadversechangehasoccurredisnotdeterminedbythepartiesatall. It is a completelyobjective standard. (Unfortunately it still contains a large amountofwiggle room,becausematerial adverse change is a flexible concept.) If the parties found themselves in court becauselessorfailedtoclose,thequestionforthejudgewouldnotbewhetherareasonablelessorwouldconsideritmaterial,butwhetheritwasinfactmaterial.

Theabovefocusesonhowtomakeconditionslesssubjective.However,forthepartywhosesatisfactionisrequired,themoresubjectivetheconditionsare,thebetter.Butwherebothparties’performanceissubjecttoconditions,itisdifficultforalawyertoarguethattheconditionstotheotherparty’sperformanceshouldbe airtight, while those required for his client’s performance should be riddled with subjective escapehatches.

[B]DueDiligenceConditions

Let’stakeanotherlookatthelastoftheinitialfourexamplesabove:

Shareholder shall have completed its due diligence review of the business, assets, contracts andfinancialconditionofCompany,andshallbesatisfiedinallrespectswiththeresultsthereof.

Theissuehereisobvious:shareholdercanassertthatanythingitfindsinitsreviewisunsatisfactory,and

walkawayfromthe transaction.Aduediligencecondition isbyitsnaturesubjective.Aparty thathasn’tfinisheditsreviewofnecessaryfactsandissuesbythetimethecontractissignedwillofteninsistonaduediligenceout.On theotherhand,anopen-endedduediligenceconditioncreatesanoption: thepartycanclosethedeal,ornot,asitchooses.

Onewayofhandlingthisistheinsertionofareasonablenessstandard,inthesamemannerasdiscussedabove.Inotherwords,thedeterminationthatsomeinformationdiscoveredintheduediligenceprocessisunsatisfactoryhastobemadeonareasonablebasis.Thisiscertainlyhelpful,althoughtheapproachisoftenresistedbyapartywhodoesn’twanttofinditselfinadisputeoverwhatisreasonable.

Anotherapproachistowaittosigntheagreementuntiltheduediligenceprocesshasbeensatisfactorilycompleted. Unfortunately, this issue usually comes up where the party objecting to the due diligenceconditionhassomebusinessneedtohavethecontractsignedquickly.Acommonexampleisabidderforanacquisition that must deliver a financing commitment with its bid. Often the lender providing thecommitment letterwill insist on a full due diligence out because it has not had time to do the level ofhomeworkthatwouldsupportasoundcreditdecision.

Therearecases,however,wheretheduediligenceprocessispartlycompletedatthetimeanagreementis signed. In these cases, the due diligence condition can be modified to reflect that certain areas ofdiligencehavebeencompletedonasatisfactorybasis:

Shareholder shall have completed its due diligence review of the business, assets, contracts andfinancial condition of Company, and shall be satisfied in all respects with the results thereof,provided,however,thatShareholderhasreviewedandissatisfiedwithallofCompany’spublicdebtindentures,employeebenefitplansandemploymentagreementsexistingonthedatehereof.

Whatif,aftersigningtheagreementthatcontainstheabovecondition,shareholderdiscoversthatoneof

thedebtindentureshadbeenamendedinanadversemannerinanamendmentthathadnotbeenreviewed,orthatthereareotheremployeebenefitplansoremploymentagreementsthathadnotbeenavailabletoitatthetimeofsigning?Thisis thereasonthata limitedduediligenceconditionofthetypeaboveisusuallyaccompaniedbythefollowingadditionalcondition:

Nothing shall have come to the attention of Shareholder in its continuing review of the business,assets,contractsandfinancialconditionoftheCompanythatismaterialandadversetotheCompanyand that is additional to, or different from, the information available to Shareholder on the datehereof.

[C]ThirdPartyDeliveries

Anothercategoryofconditionsprecedentthatmaycreateasignificantriskofnon-closurearethosethatrequireadeliveryoranactionbyapersonotherthanthepartiestothecontract.Someexamplesofthistypeofcondition(inincreasingorderofdifficulty)are:

Borrowershallhavedeliveredcertificatesofinsuranceissuedbyitsinsurancecompanyorinsurancebrokersettingforthasummaryofcasualtyinsuranceonitsproperty.

Mortgagor shall have received an appraisal from B&B Appraisal Company stating that the fairmarketvalueofthePropertyisnotlessthan$10,000,000.Employeeshallhavereceivedconsentfromhercurrentemployertotheterminationofherexistingemploymentagreement.

Thefirstexampleisarelativelybenignrequirementbecausecertificatesofthistypeareroutinelygivenbyinsurancecompaniesandinsurancebrokers.Allthatisrequiredhereisthatthecertificateisdelivered,not that the insurance coverage levels have to meet any particular standards. As a result, the lawyer’sprimarytaskhere is tosee to it that theconditionisactuallysatisfiedbythe timeofclosing.Thelawyerneeds to coordinate with the client to make sure that the insurance company or broker is contactedsufficientlyearlysothatthisdeliveryisnotalast-minutecrisis.

Thesecondconditionismoretroublesome.Therearetwoissues:whatifB&BAppraisalCompanygoesoutofbusinessorforanyotherreasondoesnotdelivertheappraisal?Whatiftheappraisalcomesinatlessthan$10,000,000?Astothefirstoftheseissues,theappropriatefixistoreferto"B&BAppraisalCompanyorsuchotherappraiserasthepartiesreasonablyagreeto."Thesecondissueislesseasilyresolved.Perhapsthemortgagormaybewillingtoacceptalowerappraisedvalueifotherelementsofthedealareadjusted.For example, the appraisal requirement could be reduced to $7,500,000, but the interest rate on themortgage loanwould increase in theevent theappraisalcomes inat less than$10,000,000.On theotherhand,ifa$10,000,000valuationisanabsolutenecessitytothemortgagee’swillingnesstodothedeal,theonlyalternativesaretosigntheagreementandaccepttheriskofnon-closureduetoalowappraisal,ortodelaythesigninguntiltheappraisaliscompleted.

Thelastconditionisanexampleofathirdpartyconsentrequirement.Thistypeofconditionpresentsthegreatest risk to the party thatmust satisfy it.Whywould the prospective employee’s existing employerconsenttotheemployee’sjumpingship?Thenaturalreactionoftheemployerinsuchacircumstancewouldbetosayno,ortoask"what’sinitforme?"Ofcourse,theremaybemitigatingfactors.Theemployermaybehappytogetridofthisperson,ortheremaybeastrongpersonalrelationshipwithmanagementoftheexistingemployerthatwillsmooththeway.

Thebestwaytoensurethataconditioninvolvingathirdpartyactionorconsentcanbesatisfiedis torewriteitusingoneofthefollowingstandards:

Employeeshallhaveusedits[reasonable][best]effortstoobtainconsentfromhercurrentemployertotheterminationofherexistingemploymentagreement.

With this approach, the conditiondoesnot require the existing employer’s consent tobedelivered, it

merely requires that the employeemake some level of effort to obtain the consent.Regardless ofwhichstandard is employed, the conditionwill be satisfied so long as the employeemakes the required effort,whetherornotitissuccessful.(Seesection5:2.4.)

[D]LegalOpinionsTherequirementoflegalopinionsatclosingisatopicthatbearsspecialmention.Alegalopinionisa

writtenstatementoflegalconclusionsrelatingtotheagreement,deliveredbyoneparty’slawyertotheotherparty. At first blush, a condition precedent that a legal opinion be delivered seems different from arequirement thata thirdpartyconsentbedelivered.Afterall, the lawyerwhoseopinion is required tobedelivered is involved in the deal and has an incentive to see the transaction close. This is true, butsometimesanindividuallawyercannotbecertainthattheopinionrequiredbyopposingcounselwillbeanopinionthatshe,orherfirm,willbewillingorabletodeliver.

Mostlawfirmshaveareviewprocessthatmustbecompletedbeforeopinionsbearingthefirm’snamemaybedelivered.Sometimestheopposinglawyersmaydisagreeontheappropriatescopeoftheopinion.

Inothercases,arequestedopinioncan’tbegivenbecausethenecessarylegalconclusioncan’tbereached.For these reasons, a closing condition requiring the delivery of an opinion "in form and substancesatisfactory" to the other party and its counselmaybe incapable of being fulfilled.Therefore,wheneverpossible, it isadvisablefor theformofnecessaryopiniontobenegotiatedinadvanceandattachedasanexhibit. Inaddition,completingallof thenecessaryduediligenceprior to the time that theagreement issigned and the form of opinion is attached as an exhibit will help avoid last-minute problems. If, forexample,areviewoftheclient’scontractsshowstheneedforaconsentthatmaybedifficultorimpossibletoobtain,thelawyerrequiredtogiveanopiniononthisissuewillbeembarrassedifthatimportantfactisuncoveredattheclosing,ratherthanpriortothesigningoftheagreement.

Oneoftheworstplacesforalawyertofindhimselfisataclosingwheretheverylastissue,theonethatstands between the clients and the consummation of their business deal, relates to a legal opinion. Theclientswillnotunderstandtheopinionissue,willnotwanttounderstandit,andwillnotunderstandwhythelawyerscan’t justworkitoutamongthemselveslikerationalbusinesspeople.Inordertoavoidthisveryawkwardsituation,itispreferablethatthelawyersattendtothenegotiationofthelegalopinionsatanearlystageofthetransaction.

[E]SatisfyingtheClosingConditionsAfter the closing conditions are negotiated, it is each lawyer’s job to ensure the completion of the

conditionsthatmustbesatisfiedinorderforhisclienttobeentitledtoperformancefromtheotherparty,andalsotoconfirmthattheotherparty’sconditionsaresatisfied.Themindsetofsomeclientsisthatoncethe agreement is signed, the deal is done and the closing is just a legal technicality. A lawyer will beappreciatedbestbyhisclientsat this stageof the transactionbyorganizingaclosing that is smoothanduninteresting. This is achieved by foresight, organization and attention to detail. The first step in thisprocessshouldbethecreationofa"closingchecklist,"adocumentthatlistsallofthetransactiondocumentsand closing conditions, who is responsible for them and their current status. This checklist creates aroadmap to theclosingand is typicallysharedbyallof the lawyersworkingon thedeal.Theprocessofassigning responsibility for each closing item is extremely important; without this, participants in thetransactionmayeachassume that another is takingcareof something,with the result that that item fallsthroughthecracks.

The lawyers on both sides of the transaction should confer regularly about the status of the closingconditions,usingtheclosingchecklistasaguide.Attheclosingthechecklistisaninvaluabletool.Itservesasaguidetoliterally"checkoff"eachclosingdocumentasitisfinalized.

Certain closing conditions are very standard. In many transactions involving entities as opposed tonatural persons, documents relating to the entity’s existence and power are required. For example,agreementstowhichacorporationisapartymayrequirethefollowingclosingdocuments: • Certificate of incorporation, certified by the secretary of state of the jurisdiction where the

corporationisincorporated. •By-laws,certifiedasaccuratebythecorporatesecretary. • Good standing certificate issued by the secretary of state of the state of incorporation, andcertificatesfromotherstatesindicatingthatthecorporationisqualifiedtodobusinessinsuchstates. • Resolutions of the corporation’s board of directors authorizing the transaction, certified by thecorporatesecretary. • Certificate of the corporate secretary certifying the signatures and titles of the officerswho aresigningthetransactiondocuments. Itisalmostalwaystheresponsibilityofthelawyer(usuallythejuniorlawyer)toprepareand/orgather

theseandsimilardocuments.Althoughareviewoftheseitemsdoesn’toftenyieldsurprises,itcanhappen,and any issues are best dealt with early. For example, what if a company’s certificate of incorporationrequiresaspecialshareholdervoteforthecompanytoenterintotheparticulartransaction?Or,whatifthe

by-lawsrequirethesignaturesofspecifiedofficerstoenterintocertaincontracts?Suchissuesmaybeeasytoaddressifdiscoveredearlyenough.

Asdiscussedabove,subjectiveconditionsandconditions that require theparticipationof thirdpartiesare twopotential closing condition pitfalls.The lawyer shouldmake it a priority to get these conditionssatisfiedasearlyaspossiblepriortotheclosing.Forexample,ifthereisaconditionthattheotherpartyhastoreceiveasatisfactoryenvironmentalreport,thelawyershouldmakesurethatthereportisbeingprepared,thatonceitisprepareditislookedatpromptly,andthatthepartyreviewingthereportissatisfiedwithit.Neverpassivelywaituntilthescheduledclosingdatetolearnthataprocesslikethishasn’tbeencompleted.

[F]ClosingCertificatesAcertificateisadocumentsignedbyanindividual,eitherinhisindividualcapacityorasanofficerof

oneofthepartiestothecontract,inwhichstatementsoffactaremade.Acertificatethatisoftenrequiredasaclosingconditionisacertificateexecutedbyaseniorofficerof

oneof theparties thatstates thatallof therepresentationsmadeby theparty in thecontractare trueandcorrect.Whatisthebenefitofreceivingthiscertificate?Afterall,ifarepresentationisuntrue,therewillberemediesavailableunderthecontractanyway,sowhatadditionalprotectiondoesdeliveryofthecertificateadd?Therationaleisthatrequiringanindividual(eveninhiscapacityasanofficerofanentity)tosignaformal-lookingdocumentwillresultinthatindividualmakingamorediligentinquiryintothetruthofthematterscertifiedto,thanhewouldinthecontextofsigningalargerdocumentsolelyonbehalfoftheentity.

____________________1Thisisafunctionofmostwordprocessingprograms;itisgenericallyreferredtoas"blacklining"or"redlining."2Seesection9:2foramoredetaileddiscussionoftheserepresentations.3Anexampleofthelatterwouldbedisclosureshowingthatalloftheassetstobesoldinanassetsaletransactionaresubjecttolienssecuringtheseller’sbankborrowings.Thisisnotameredisclosureitem;thesellerwillhavetoarrangetohavetheliensreleasedatclosing.4Allcontractsaresubjecttoanimpliedcovenantofgoodfaith.Itispossiblethatajudgemightfindthisimpliedcovenantbreachedifthelessorassertedamaterialadversechangeifindeedtherewerenoadversechangeatall.

Chapter4

PrinciplesofEffectiveDrafting

§4:1Introduction Contractdrafting isdifferentfromallother typesofwriting, includingother typesof legalwriting. Inhighschoolandcollege(andinmostlawschoolandcollegewritingclasses)welearnedastyleofwritingthatorganizesandpresentsfacts,statespositions,andmakesarguments.Theprimarypurposeofthistypeofwritingistoconveyinformationorapointofviewtothereader.StephenKingcharacterizessuchwritingas ameans of telepathy: a device allowing one person (the reader) to get into themind of another (thewriter).1

Acontractisdifferent.Itrepresentstheeffortsofoneperson(thedraftsperson)toaccuratelyconveytheagreementoftwoormoreotherpersons(thepartiestothecontract).Theprimaryaudienceforthiswritingis thepartiesand theircounsel.Theagreementmayhaveadditional readers, suchas regulators,creditorsandothers interested in thecontractual relationshipsandobligationsof theparties. In theworstcase, theultimateaudiencewillbeajudgeorajury.

Let’sexaminethedifferencesbetweenthetwobasicformsoflegalwriting.Hereisasentencefromabriefbycounseltoaplaintiffinapersonalinjuryaction:

These thoughtless actions of the defendant, taken without regard to either the basic standards ofhuman decency or the minimal standards of care described in the cases cited above, resultedproximatelyandimmediatelyinsevereharmtotheplaintiff.

Thewriterisexpressingpositionsbothastoquestionsoffactandoflaw:theactionsofdefendantwere

asdescribedinthepreviousportionofthebrief;theseactionsviolatedtheapplicablestandardofcare;theplaintiffsufferedinjuryasadirectresult;andtheinjurywasserious.Defendant’sbriefwill takecontrarypositionsonsomeorallofthesepoints.Theprimarygoalofthesewritingsistopersuadethereader—thejudge—thatthepositionbeingconveyedisthecorrectone.Persuasionismoreartthanscience.Itrequiresthat the writing is tailored to the reader, and may employ rhetorical devices and the creative use oflanguage.

Nowlet’stakeawelldraftedcontractprovision:

Thisagreementwillterminateat12:00noononJune30,2002,unlessbeforesuchtimeBuyershallhavedeliveredtoSelleraletterofcreditintheformofExhibitAattachedhereto.

Notethattherearenorhetoricalflourishes,noadjectives,noimpreciseterms.Everywordservesaprecisepurpose.Assumingthatitaccuratelyreflectstheunderstandingoftheparties,itissuccessfulbecauseitisdraftedinawaythatisclearandunambiguous.

Writingacontract involves twoprocesses:determiningwhat thepartieshaveagreed to, and reducing

thatagreement towords.Eachof thesepresents itsownsetofdifficulties.Thedynamicsofnegotiationsoftenyielduncertaintyratherthancertainty:thehesitancytomakeconcessions,thetendencytosloughoverdisagreements or contentious points, the emotional reaction to being told "no," the intrusion of personalabrasion, all stand in theway of consensus. The substantive complexity of the points under discussion,intersectingwiththecomplexityofhumanpsychology,canmakethenegotiationofcontractschallenging.Itisthelawyer’sfirsttasktoextracttheactualagreementoftheparties.Thisisnotapassiveendeavor:thelawyermustinsertherselfintotheprocess,exploreinconsistencies,challengepositions,battleambiguities,andraiseuncomfortableissues,inordertobestextractameaningfulandcomprehensiveagreement.

§4:2Precision Thelawyerthenfacesthechallengeofputtingwordsonpaperthatpreciselyreflecttheagreementsofthe parties. (This is not to suggest that negotiation and drafting are separate and distinct. They areinextricably entwined.Forone thing, themere act of putting a concept intowordsoften leads to furtherdiscussionandrefinement.)Thedifficultyiscraftinglanguageaccuratelydescribingwhatthepartieshaveagreedthatwillbeinterpretedbyallsubsequentreaders(includingthecontractparties) tohavetheexactsamemeaning.

Awell-written contract provision is one that provides no traction for either party or their counsel toarguethatsomethingelsewasintended.Inordertofullyunderstandthispoint,itishelpfultoimaginethepositionofalitigatoraskedtoreviewacontract.Thelitigatorwilllookforeveryweaknessinthecontractlanguagethatcanberaisedforhisclient’sbenefit.Aresponsiblelitigatorwillnottakepositionsthathavenobasis,butwillidentifyeveryissueforwhichthereisacredibleargument.

Consider the weaknesses a litigator could exploit in the following provision from a real propertymanagementcontract:

Owner,bynoticetoManager,mayterminatethisagreement,ifOwnerassertsabreachbyManagerof the termsandconditionshereof, to the extentManager isgivena reasonable time to cure suchbreach.

Owner and manager have had a series of increasingly heated conversations over several months

regardingaproblemintheproperty’splumbingsystemthathasdamagedsomefurnishings.Ownerreferstoasectionof theircontract that requiresmanager tomakeallnecessary repairspromptly.Managerhiresacontractor to repair the plumbing, but the contractor fails to complete thework in a timely fashion. Tomanager’ssurprise,ownersendsmanagerawrittennoticeterminatingthemanagementcontract.Eachpartycalls its lawyer. Each lawyer separately advises its client that the following argumentsmay credibly beassertedbyownerandwouldprobablysurviveamotionforsummaryjudgment: • The phone conversations in which owner asserted that manager failed to comply with the

contractualrequirementtopromptlymaketherepairsconstitutedtherequirednoticeoftermination. •Managerisnotentitledunderthecontracttothedefensethatitpromptlyhiredaresponsiblethirdparty to make the repairs and that the delay was attributable to the third party and not withinmanager’scontrol. • The period of time commencing on the date that owner first complained about the failure ofmanager to make the repairs and ending on the date that owner sent the notice of terminationconstitutesareasonablecureperiod. Althoughmanagerjustifiablyfeelsmisusedbyowner,hislawyeradviseshimthatajudgeorjurycould

very well determine that the contract supports the action taken by owner. The result would have beendifferenthadtheprovisionbeendraftedwithmorecare:

If (a)Manager breaches any of its obligations hereunder, (b) Owner delivers a written notice to

Managerstatingthat it isa"NoticeofTermination"whichidentifiessuchbreach,and(c)Managerfailstocuresuchbreachwithin30daysafterthedateofsuchnotice,thisAgreementshallterminate,provided,however,thatifthecureofsuchbreachreasonablyrequirestheactionorcooperationofathirdparty,noterminationshalloccursolongasManagerisusingitsdiligenteffortstocausesuchthirdpartytoactorcooperate.

This improved language demonstrates two important lessons. First, it is always possible to make

contract languagemoreprecise and thusmore resistant to the attemptsof aparty to assert aggressiveorspurious interpretations. Second, it is often difficult to craft language so precise that some "gray area"doesn’texist:undertheimprovedlanguageownercanstillarguethatmanagerhasnotemployeditsdiligenteffortstomakethethird-partycontractorperform.

Precisionmustalwaysbeagoalofthecontractdraftsperson.Apreciseprovisiondoesn’tlenditselftocompetinginterpretations.Oneprincipleofcontractinterpretationtobekeptinmindinthiscontextisthatan ambiguous provision will be construed against the draftsperson. Common sources of imprecisioninclude:

§4:2.1UseofAntecedents Donotuseapronoununlessit isclearwhoorwhat isbeingreferredto.Anexampleofthefailuretofollowthisrule:

IfbyDecember31,2001,ContractorfailstodelivertheCertificateofOccupancytoOwner,itshallpromptlygivewrittennoticetoLesseeofsuchfailure.

WhohastheobligationtogivethenoticetoLessee?Itisnotclearbecausethepronoun"it"asusedin

thequotedprovisionisimprecise.Itcouldbeareferencetoeitherownerorcontractor.Itmaybethatthecontextprovidessomecluesaboutwhichpartyisbeingreferredto,butwhynotwritethesentenceclearlyinthefirstplace:

IfbyDecember31,2001,ContractorfailstodelivertheCertificateofOccupancytoOwner,OwnershallpromptlygivewrittennoticetoLesseeofsuchfailure.

Stylistsmaybeconcernedthattheuseoftheword"Owner"twiceinsuchcloseproximityisinartfuland

awkward.Inartful,perhaps,butrememberthatartisnotthegoal;precisionis.

§4:2.2TimeReferences Acontractprovisioncallingforonepartytoperformanactionortomakeapaymentmustbeclearastowhensuchpaymentorperformanceisrequired.Failuretoprovideproperlyforthetimingcomponentmaycreateconfusion:

VendorshallprovideVendeewithcopiesofitsannualauditedfinancialstatements.

Whenisthisdeliveryrequired?Theremaybealongstandingcourseofconductbetweenthetwopartiesthat these annual statements are delivered 90 days after the end of vendor’s fiscal year. The failure tospecify this in the contract, however, allows vendor to argue for more time than the parties may haveintended.

Ifanactionmustbetakenbyacertaintime,theprovisionwouldbedraftedasfollows:

Borrowershalldeliveraborrowingbasecertificatenolaterthanthefifteenthdayofeachmonth.

Conversely,iftheactionistobetakenafteracertaintime,thefollowingapproachisused:

SellermayselltheTopekaWarehouseatanytimeafterApril1,2003.

What ifanaction is required tobe takenbetween twodates?Theway todraft this isbydefining therelevantperiod:

LesseemayprovideanoticeofrenewalduringtheperiodbeginningonOctober31,2001andendingonDecember31,2001.

Insomecases,thepartiesmaywanttobeevenmorepreciseandspecifythehour thatperformanceis

requiredonaspecifiedday.Thisisoftenthecasewheretheprovisioncallsforthepaymentofmoney.Ifpaymentistobemadebywiretransfer,forexample,paymentwillberequiredduringthehoursthatwiretransferscanbeeffected.Ifthislevelofprecisionisused,itisimportanttospecifytheapplicabletimezone,e.g.,EasternStandardTime.ContractsdraftedbyNewYorklawyers,withcharacteristichubris,oftenreferto"NewYorkCitytime."

Sometimesthislevelofprecisionisnotpossibleordoesnotreflectthedealbetweentheparties.Oftencontractswillusephrasessuchas"promptly"or"aspromptlyaspracticable"insteadofaspecificdeadlineortimeperiod.Thesearemoresubjectivestandardsthatcangiverisetodifferinginterpretations.Anotherformulationis:"promptly,butinanyeventnotlaterthanthefifteenthdayofthemonth."Thisputsanouterlimitonhowlateperformancemaybeandstillbeconsideredprompt.

Another important concept in the precise drafting of timing requirements is the distinction betweenbusinessdaysandnon-businessdays.Abusinessdayisusuallydefinedtomeanadaythatbanksareopenfor business in a particular area or jurisdiction. This is an important distinction in provisions requiringpayment.Acontractthatrequiresapaymenttobemadeonthefirstdayofeachfiscalquarterbutdoesnotaddresswhathappensifsuchdayfallsonanon-businessdaywillbeimpossibletoperformifapaymentfalls due on a Saturday or a Sunday. For that reason, there is usually a provision to the effect that anypaymentthatisdueonadayotherthanabusinessdaywillinsteadbedueonthenext(orprevious)businessday.

§4:2.3Legalese Lawyersareoftenaccusedofwritingin"legalese"insteadofplainEnglish.Itistruethattoomuchlegalwritingisobfuscatory,wordy,denseandstilted.Manylawyersseemtobelievethatsoundinglikealawyerisasimportantasthesubjectmatterbeingcommunicated.Afrequentresultisthattheeffectivenessofthecommunicationsuffers.

Inthecontextofcomplexcommercialcontracts,however,muchthatmightbecriticizedaslegalesebythe uninitiated observer is instead completely appropriate. Effective writing consists of clearcommunication of the subjectmatter to its intended audience. The audience for commercial contracts issophisticatedbusinesspeopleandtheirlawyers.Thenotionthatcommercialcontractsshouldbewritteninplain English so as to be understood by people who would never be expected to read them is anunreasonable extension of the plain Englishmovement,which is aimed at helping consumers and otherunsophisticatedparties.

Thefollowingsentencefromanacquisitionagreementisclearandprecise.Itcontainsnounnecessarywordsandexpressesitspointsinawaythatreadersofacquisitionagreementswillreadilyunderstand.

Seller shalluse, and shall causeeachof its subsidiaries touse, commercially reasonableefforts to

obtain from each of their licensees (except licensees under licenses with annual base royaltypaymentsoflessthan$200,000),aconsenttoassignmentsubstantiallyintheformofExhibitS(orinsuch other form asBuyermay reasonably approve), no later than 10 days prior to the ScheduledClosingDate.

No one would ever suggest that a report whose audience consists of medical doctors should avoid

medical terminology that could not be understood by the layperson. By the same token, a contract thatembodiesacomplexcommercialtransactionwillcontainspecializeddictionandvocabularyfamiliartoitsaudience.Anyattempttoavoidthiswouldmakethecontractmuchlonger,certainly,butoflessutilitytoitsreaders.

Allofthetermsdefinedinthisbook’sglossaryaretermsthatarenotself-evidenttotheuninitiatedandcouldthereforebeincorrectlyreferredtoaslegalese.Onthecontrary,thesearetermswithspecializedandprecise meanings that function to streamline contracts and make them more useful to their intendedaudience.

The next example, on the other hand, illustrates truly bad legalese. This sentence is filled withunnecessarywords,phrasesandrhetoricalthroat-clearingdevicesandismarkedbyagenerallybombastictone.

It isherebyagreedamongthepartieshereto thatupontheoccurrenceofeachandeveryfailurebyBorrower tocomplyandperforminall respectswith thecovenants, restrictionsand limitationssetforthinArticle6,Lendershallhaveandbeentitledtoexercise,andshallbedeemedtohave,andbeentitledtoexercise,therightandprivilegetocausetheterminationandextinguishmentoftheLoanCommitments, provided, however, that delivery of prior notice of said termination andextinguishmentbemadetoBorrower.

Thiscanberewrittenmoreclearly,simplyandpreciselyasfollows:

IfBorrowershallbreachanycovenant inArticle6,Lendermay terminate theLoanCommitmentsuponnoticetoBorrower.

§4:2.4ConveyanceProvisions

One type of provision requiring a high degree of precision is a provision conveying or granting aninterest in property. Applicable property law requirements must be followed. For example, a securityinterestisn’tcreatedunderArticle9oftheUniformCommercialCodeunlesstheagreementprovidesforapresentgrantof the security interest, and languageeffecting a conveyanceof real propertymust complywiththerelevantrealestatelaw.

§4:3Simplicity Eachpointinacontractshouldbeexpressedassimplyaspossible.Thebenefitsofsimplicityaremany.Simpleprovisionsareeasier to readandunderstand.Simpleprovisions inadraftagreementareeasier tonegotiateand rewrite.Simpleprovisionsare less likely tobe impreciseorunclear, andare therefore lesssusceptibleofcompetinginterpretations.

Unfortunately,thereareavarietyoffactorsthatcanmakesimplicitydifficulttoachieve: •Theincreasinglyhurriedpaceoftransactions—asaresultofwhich,lawyersmaynothavethetime

toeditandsimplifyexcessivelycomplicatedprovisions. •The increasedcomplexityof transactions—asdealsbecomemoreandmorecomplex, itbecomeshardertokeeptheagreementsgoverningthemsimple.

• Creative solutions—the tendency of transaction participants to come up with solutions that arecreativeandcomplex.Thesesolutionstooneproblemoftencreateasetofadditionalproblemsthatmustbeaddressed.Ontheotherhand,themajorityofoverlycomplicatedcontractprovisionscouldeasilybesimplifiedbythe

useofproperdraftingandeditingtechniques.

§4:3.1KeepSentencesShort Oftenanundulycomplicatedsentencecanbesimplifiedbydividingitintoseveralsentences.Thisoldchestnutfromeverywritingclassandwritingbookisequallytrueinthecontextofcontractdrafting.Hereisanexampleofanunfriendlysentence:

In the event Lessee fails to obtain insurance as required in this section, Lessor may obtain suchinsurancewithout any obligation to give Lessee notice thereof, which insurancemay provide theminimum levels of coverage described above or such increased coverages as Lessor reasonablydeemsappropriate,andthepremiumpaymentsinrespectofwhichshallbeforLessee’saccount.

Noticethatthefollowingrewrite,whichbreakstheabovelanguageintothreesentences,ismucheasiertofollow:

In the event Lessee fails to obtain insurance as required in this section, Lessor may obtain suchinsurance without any obligation to give Lessee notice thereof. Such insurance may provide theminimum levels of coverage described above or such increased coverages as Lessor reasonablydeems appropriate. The premium payments in respect of such insurance shall be for Lessee’saccount.

Sometimesanoverlyconvolutedsentenceneedstobebrokenup,evenattheexpenseofcreatingmore

words:

SellershallnotdiscloseConfidentialInformationtoanyPerson,except itsprofessionaladvisors totheextentnecessaryinconnectionwiththeirworkontheTransaction,andtheSeller’slenders,andsuchdisclosureisacknowledgedbyanysuchrecipienttobesubjecttotheconfidentialityrestrictionsofthissection10.3.

Thelastclauseof theabovesentencedoesnotquitefit. Itneeds tobebrokenoutasaseparatesentence,eventhoughthetworesultingsentences,takentogether,arelongerthantheoriginalsentence:

SellershallnotdiscloseConfidentialInformationtoanyPerson,except itsprofessionaladvisors totheextentnecessaryinconnectionwiththeirworkontheTransaction,andtheSeller’slenders.Sellershall obtain an acknowledgment from each such party to whom disclosure of ConfidentialInformationismadethatsuchConfidentialInformationissubjecttotheconfidentialityrequirementsofthisSection10.3.

§4:3.2UsetheActiveVoice

Thisisanotheroldworkhorsefromwritingtexts,butasworthyindraftingcontractsasinanyotherformofwriting.Thepassivevoiceresultsinasentencethatiswordierandlessdirectthanitshouldbe.Notonlydoestheactivevoicekeepasentencesimpler,ittendstomakethesentenceclearer:

IftheSellerwishestodefertheclosingdate,noticethereofshallbegiventoBuyernolaterthantwobusinessdayspriortothescheduledclosingdate.

Isthissentenceasclearasitcouldbe?Notuntilitisrewrittenintheactivevoice,whichalsoremovesanyambiguityaboutwhogivestheextensionnotice:

IftheSellerwishestodefertheclosingdate,itshallgivenoticethereoftoBuyernolaterthantwobusinessdayspriortothescheduledclosingdate.

§4:3.3DeleteUnnecessaryWords

This rule is evenmore important in contract drafting than inother formsofwriting.Awordy fictionwriter may bore his reader; a wordy contract draftsperson, on the other hand, may create confusion,fuzzinessorambiguitythatcouldleadtolegaldisputes.

Awell-draftedcontractislikeawristwatchoranyotherwell-engineeredpieceofmachinery.Everyparthasitsroleinrelationtoeveryotherpart,andthepartsfittogethertoachieveacertainresultinthemostefficientmannerpossible.Thedesignerofawristwatchwouldnotintroduceanunnecessarypart.Atbest,itwouldjusttakeupspaceandaddtothecostofthewatch.Atworst,itwouldinterferewiththeoperationoftheotherpartsandresultinthewatchnotkeepingpropertime.Likewise,theuseofunnecessarywordsinacontractprovisionmayleadtounwantedbreakdownsininterpretation.Hereisanexampleofaprovisionthatincludesunnecessarywords:

LicensorherebyagreesandacknowledgesthatLicenseemayexercisetheOptioninaccordancewithits termsandconditions,uponLicensee’sdeliveryofadvancewrittennoticepromptlydelivered toLicensornolaterthan10dayspriortotheexpirationofsuchOption.

Thewords"Licensorherebyagreesandacknowledgesthat"addnothingtotheabovesentence.Licensor,

bysigningtheagreement,hasagreedtoallofitsprovisions,andthereforestatingitagaininthisprovisionisredundant.Further,couldtheuseofthesewordshereresultinanargumentbeingmadethatsomeotherprovisionthatomitsthesewordsisonelicensorhasnotreallyagreedto?Bestnottofindout.

Whatabout thereferenceto theoption’s"termsandconditions"?While thisphrase isoftenused, it istwiceaslongasitneedstobe.Areferenceto"terms"includesalloftheterms(includingconditions)andisthereforesufficient.

The words "advance" and "promptly" that modify the written notice requirement are potentiallytroublesome.Thesentenceclearlyrequiresthatthewrittennoticebedeliveredatleasttendayspriortotheoption’sexpiration.Whatcouldthe"advance"and"promptly"conceptsaddtothis?Anargumentcouldbemadethatthesewordsmusthavebeenintendedtomeansomething,perhapsthataseparatenoticemustbegivenbeforethe10-dayperiodprecedingtheoptionexpirationdate.Eliminatethepossibilityofthistypeofspuriousargumentbyomittingunnecessarywords.

§4:3.4AccretiveDrafting Accretive drafting, the process of making successive revisions to a contract, will often result in aprovisionbecomingawkwardandoverlycomplex.Thechangesmade to theprovisionateachstepseemreasonable,butthecumulativeeffectisahodgepodge.Thisproblemiscompoundedbythetendencyofabusydraftspersontotacknewconceptstotheendofaprovisionandnotharmonizetheoldandnewpartswithanoverallrewrite.Let’slookatfoursuccessiveversionsofacovenantinanotepurchaseagreement,blacklinedtoshowthechangesmadeineachversion.

Issuer shall not pay any dividends or make any distributions in respect of Capital Stock, orrepurchase,redeemorotherwiseacquireforvalueanyCapitalStock.

IssuershallnotpayanydividendsormakeanydistributionsinrespectofCapitalStock(except fordividendspaidinadditionalCapitalStock),orrepurchase,redeemorotherwiseacquireforvalueanyCapitalStock.IssuershallnotpayanydividendsormakeanydistributionsinrespectofCapitalStock(exceptfordividendspaidinadditionalCapitalStock),orrepurchase,redeemorotherwiseacquireforvalueanyCapital Stock, provided, however, that Issuer may repurchase Capital Stock from members ofmanagementinanamountnottoexceed$1millioninanyyear.

IssuershallnotpayanydividendsormakeanydistributionsinrespectofCapitalStock(exceptfordividendspaidinadditionalCapitalStock),orrepurchase,redeemorotherwiseacquireforvalueanyCapital Stock, provided, however, that Issuer may repurchase Capital Stock from members ofmanagement in an amount not to exceed $1million in any year, and provided, further, that suchrepurchasesshallnotbepermittedatanytimeanEventofDefaulthasoccurredandiscontinuing.

Thisisnotaterribleprovision,butitcanbesimplifiedbyputtingthetwoexceptionstogetherinserialformandchangingthesecondprovisotoacondition,asfollows:

Issuer shall not pay any dividends or make any distributions in respect of Capital Stock orrepurchase,redeemorotherwiseacquireforvalueanyCapitalStock,exceptfor(i)dividendspaidinadditional Capital Stock, and (ii) so long as no Event ofDefault has occurred and is continuing,repurchasesofCapitalStockfrommembersofmanagementinanamountnottoexceed$1millioninanyyear.

§4:4Consistency:LearntoLovetheHobgoblin According toRalphWaldoEmerson, a foolish consistency is thehobgoblinof littleminds.However,when it comes todraftingcontracts, there isno such thingas toomuchattention to consistency.Why isconsistency so important? Inconsistent contract provisions can be a breeding ground for differinginterpretations.

Consider thefollowing twosentencesfromthesameassetpurchaseagreement, thefirstprovidingforthe payment of the purchase price at closing, the second for a post-closing purchase price adjustmentpayment:

On the closing date, the Seller shall pay the Purchase Price to Buyer’s Account in immediatelyavailablefunds.

TheSellershallpaythePurchasePriceAdjustmentonthefifthBusinessDayfollowingthedeliveryoftheClosingDateBalanceSheet.

Underthesecondsentence,canthesellerpaythePurchasePriceAdjustmentbycheck,becausethereisnoreferenceto"immediatelyavailablefunds"?2Itisunlikelythatthepartiesintendedthepaymentmechanics

to be different for these two events. However, the treatment of similar requirements in an inconsistentmannerallowsthesellertotakethepositionthatthesecondpaymentmaybemadebycheck.Thebuyer’sprotests that there was no mutual understanding that payment could be made in this manner will beunavailing:theplainwordsofthecontractgovern.

Inconsistentuseofindividualwordscanalsocreateapotentialboobytrap.Considerthesetwosentencefromthesameguarantee:

GuarantorguaranteesthefullpaymentandperformancewhendueofallliabilitiesowingbyDebtortoCreditor,whethernowexistingorhereafterarising.

Guarantor shall not be obligated to make any payments hereunder in respect of indebtedness ofDebtortoCreditoratanytimethatDebtor’sNetWorthisatleast$20million.

A credible argument could be made that the word "liabilities" has a broader meaning than the word"indebtedness" and that therefore the second sentence suspends less than all of guarantor’s guaranteeobligations.

Draftsmenmustalsobewaryofinconsistencyintheuseofwordstrings:

Seller shall indemnify Buyer for all damages, liabilities and expenses to the extent arising fromSeller’sbreach.

BuyershallindemnifySellerforalldamagesandliabilitiestotheextentarisingfromBuyer’sbreach.

Theomissionoftheword"expenses"inthesecondprovisioncouldbequitesignificant.IfSellerissuedbya third party as a result of Buyer’s breach, any damage award against it would be covered by Buyer’sindemnity,butnotitslegalexpenses.

Anotherareawhereconsistencyshouldbethegoalisinthenumberingofacontract’sarticles,sectionsandsubsections.Anysystemchosenforthistaskisfine,butthedraftspersonshouldtakecaretofollowthesamesystem throughout.Thus, ifa subsection inArticle1 is "Section1(a)(5),"a subsection inArticle3should not be numbered as "Section 2.b.4" or "Section 2(B)(4)." Will the failure to follow the samenumberingsystemthroughouttheagreementreallycreateanyproblems?Probablynot,butanattentiontothiskindofdetaildemonstratesthatthedraftspersoncaresaboutherworkproductanditsreaders.

Manytransactionsinvolveanumberofrelatedagreementsthatareexecutedanddeliveredatthesametime. To the greatest extent possible, the draftsperson should avoid inconsistencies among relatedagreementsofthiskind.Forexample,itwillavoidconfusionifthepartiesarereferredtoconsistently.Ifaparty is referred to as "Borrower" in one agreement, "Debtor" in another and "Assignor" in yet another,confusionmaybetheresult.

Anothersourceof inconsistencyin thecontextofrelatedagreements is in theirboilerplateprovisions.Take an acquisition transactionwhere the seller agrees to provide transition services to thebuyer and tograntaneasementinrespectofthepropertytobesold.Thedraftspersonchoosestocoverthesemattersinseparate agreements. It is not at all unlikely that the boilerplate provisions, such as the governing law,notice, assignment and consent to jurisdiction provisions, will be different in form (and perhaps insubstance)ineachoftheprecedents.Thedraftspersonshouldworkatmakingtheseprovisionsconsistent.

§4:5Clarity Theultimategoalof contract drafting is clarity.Clarity is not a separate techniquebut flowsdirectly

fromtheapplicationoftheotherprinciplesadvocatedinthischapter.Ifacontractiswrittenwithprecision,simplicityandconsistency,itwillbeclear.Ifitisclear,itwillaccuratelyreflecttheagreementofthepartiesinawaythatwillbeunderstoodinthesamewaybyallreaders.

A rule of thumb to determine whether a contract has been clearly written: If a contract cannot beunderstood reasonably well by a reasonably intelligent judge who spends a reasonable amount of timereviewingit,thedraftspersonhasfailed.

It is easy to get swept up in the vortex of a transaction, to succumb to the tunnel vision that legalspecializationproduces,andtorevelintheabilitytodraftthicketsofoverlycomplicatedcontractlanguage.Oneshouldnot,however,losesightoftheprimarygoalofdrafting:tocreateanagreementthatisprecise,simple,consistentandclear—inotherwords,anagreementthatisuser-friendly.

____________________1STEPHENKING,ONWRITING,PocketBooks2001.2Theterm"immediatelyavailablefunds"meanscashoradepositorcredittoabankorinvestmentaccountthatcanbeimmediatelydrawn.

Chapter5

DraftingTechniques

§5:1Introduction The previous chapter explored the general principles of good drafting. These precepts are broad andabstract.This chapterdigs a littledeeper, by examininganumberof themost commonly-usedconcepts,techniquesandphrasesthatareuniquetocontracts.Facilityinusingthematterscoveredinthischapterwillnotbyitselfmakeyouagooddraftsperson.Ontheotherhand,theseitemsrepresentsomeofthebasictoolsofthetrade—youcan’tdraftcontactseffectivelywithoutthem.

§5:2SofteningtheEdges Oneofthemainthemescoveredintheprecedingchapterwastheneedforprecisioninthedraftingofcontracts.There aremanycircumstances, however,whereoneorbothpartieswillwant to limit contractlanguagethatwouldotherwisebeinflexibleorabsolute.Insomecases,thiscanbeachievedbymeansthatresult in no loss of precision: for example, the creation of a basket that permits a party to engage in arestrictedactivity,uptoacertaindollaramountorvalue.

Theadditionofflexibilitycannotalwaysbeachievedwithsuchprecision,however.Thedraftingtoolsexploredinthissectionareallsomewhatsubjectivestandardswhichnecessarilyintroducea"grayarea"intotheprovisionsinwhichtheyareused.

§5:2.1Materiality/MaterialAdverseEffect Theconceptofmaterialityisusedtomodifyprovisionsthatwouldotherwisebetooabsolute.Considerthefollowingcovenantfromthefirstdraftofacreditagreement:

Borrowerwillnotviolateanylaws,rulesorregulations.Thiscovenantpromptsthefollowingnegotiationbetweenaborrowerandalender:

The above discussion illustrates that softening concepts like materiality are used when more precisetechniques of creating flexibility are not effective. These create flexibility at the cost of introducing acertainlevelofuncertaintytotheinterpretationoftheprovisionsinwhichtheyareused,becauseconceptssuch as "materiality" are not defined in case law in a definitiveway.Here are a number of examples inwhichmaterialityqualificationsareappropriatelyused:

TheCompanyshallnotdefaultinitsobligationsunderanymaterialcontract.

PartyAshallprovidePartyBwithcopiesofallmaterialnoticesreceivedbyitundertheReceivablesPurchaseAgreement.SetforthonScheduleIisalistofallmateriallitigationtowhichtheLesseeisaparty.

In many cases, however, materiality qualifications like this don’t do the trick. Let’s go back to thenegotiationofthecovenantrequiringcompliancewithlaws.Thelendergrudginglychangesthecovenantinthenextdraftasfollows:

Borrowerwillnotviolateanymateriallaws,rulesorregulations.Thisapproachisstillunsatisfactorytotheborrower.Sheargues:"Whatifweviolatethetaxcode(whichisclearly amaterial law) in aminorway resulting in no significant loss or penalty? Thiswould trigger abreachunderthecovenantasrewritten!"Unabletorefutethislogic,thelenderoffersthisversion:

Borrowerwillnotviolateanylaws,rulesorregulationsinanymaterialrespect.

The borrower is not satisfied with this approach, either.What does it mean, she asks, for a law to beviolated"inamaterialrespect"?Inthecaseofthespeedingemployee,coulditbearguedthataticketfordoing 35 in a 40-mph zone is an immaterial violation, whereas one for doing 65 would be material?Shouldn’t the materiality standard focus on the effect on the borrower instead of the quality of theinfraction?Finally,thepartiesagreetothiswording:

Borrower will not violate any laws, rules or regulations in a manner that could reasonably beexpectedtohaveamaterialadverseeffectonBorrower’sbusinessorfinancialcondition.

"Materialadverseeffect"isastandardthatisoftenemployedinthesofteningofcontractprovisions.Itis

oftenusedinmorethanoneprovisioninacontract,andasaresultmaybeseparatelydefined:

"Material adverse effect" means any material adverse effect on the Borrower’s business, assets,liabilities,prospectsorcondition(financialorotherwise).

Inordertofallwithintheambitofthisdefinition,thematterinquestionmustbebothmaterialandadversetotheparty.Materialityisasubjectiveconcept;achangethatwouldbereasonablylikelytoaffecttheotherparty’sevaluationofthetransactionwillgenerallybeviewedasmaterial.Thechangemustalsobeadverse.Obviously,ifit’sachangeforthebetter,itisn’tcovered.

Thedefinitionrefers to theareaswhere thematerialadverseeffecthasoccurred: theparty’sbusiness,assets,liabilities,financialconditionandprospects.Let’slookatexamplesofeachofthese.Thelossofacustomer that represented 40% of the borrower’s earnings would have a material adverse effect on itsbusiness.Anuninsuredcasualtylossinrespectoftheborrower’sprimarymanufacturingplantwouldhaveamaterialadverseeffecton itsassets.Theenteringof a judgment against theborrower fordamages in anamountequaltoitstotalannualsaleswouldhaveamaterialadverseeffectonitsliabilities.Alossofsalesresulting in a diminution in cash flow that impairs the borrower’s ability to pay its operating expenseswould have a material adverse effect on its financial condition. Lastly, the development of proprietarytechnologybyacompetitorthatallowsittoproducegoodsatamorefavorablepricemayhaveamaterialadverseeffectontheborrower’sprospects,becauseitmaybeforcedtoreduceitsprofitmargins.

Inclusionoftheword"prospects"asacomponentofthedefinitionofmaterialadverseeffectisalmostalways a point of contention. The party towhom thematerial adverse effect standard is applicablewillarguethattheuseofprospectsgivestheotherpartytoomuchroomtospeculateaboutthefutureimpactofanevent.Theotherpartywillarguethatitscounterparty’sfutureconditionandperformanceisimportanttoit,andthepartyshouldnotberequiredtowaituntilareasonablyforeseeablebadresulthasoccurredbeforehavinganyremedies.

Closelyrelatedtomaterialadverseeffectismaterialadversechange,referredtocolloquiallyas"MAC."It isusedmostoften tomeasure thepresentconditionofapartyagainst itsconditionataprevious time.Thisrepresentationprovidesanexample:

Since December 31, 1999 there has been no material adverse change in the business, assets,liabilities,financialconditionorprospectsoftheCompany.

Indeterminingwhetheritcanmakethisrepresentation,thecompanywillnotevaluatethematerialityandadversityof individual events thathaveoccurred sinceDecember31,1999. Instead, itwill compare two"snapshots"ofitself:oneonDecember31,1999andoneonthedatethattherepresentationismade.Let’sassumethatthecompanylostone-thirdofitsnetworthinMarch2000duetoanuninsuredtortjudgment,butbroughtitsnetworthbackuptotheoriginalleveloverthenextfourquartersthroughincreasedprofits.OnMarch31,2001thecompanycouldmaketherepresentation,becauseonanetbasisitspositionhadnot

worsened."Materialadversechange"and"materialadverseeffect"areoftenusedinterchangeably.Thefollowing

usagecreatesapotentialpitfall,however:

SincetheClosingDate,noevent,actorconditionhasoccurredthatcouldreasonablybeexpectedtohaveamaterialadverseeffectontheCompany.

Thecompanydiscussedabovewhosenetworthdippedandthenrecoveredwouldnotbeabletomake

thisrepresentationaswritten.Thereductioninnetworthwasaneventthathadamaterialadverseeffectatthe time that it occurred. The increase in sales that subsequently counteracted it is irrelevant. Therepresentationwritteninthisfashionidentifiesindividualevents,notoverallchangesfromonepointintimetoanother.

§5:2.2Reasonableness The reasonableness standard is the devicemost frequently used to soften the hard edges of contractprovisions.Itturnsanabsoluterequirementintoonethatissubjecttothetestofwhata"reasonableperson"mightdoorrequire.Anexample:

TheCompanyshall reimburse theAgent forallof its reasonableout-of-pocketexpensesarising inconnectionwithitsactivitieshereunder.

Withouttheterm"reasonable"inthissentence,therewouldbenolimitonreimbursableout-of-pocket

expenses:officersof theAgentcould travel tomeetingsonachartered jet, for instance.Byvirtueof thereasonablenessstandard,theprovisionmustbeinterpretedinthecontextofwhatwouldbereasonableunderthecircumstances(suchastheuseofcommercialflightsasopposedtocharteredjets).

Another common appearance of the reasonableness standard is where one party has the ability toexerciseitsdiscretioninmakingadecisionorreachingaconclusionunderacontractprovision.Thepartywhohastherighttomakethedecisionwillwanttobeabletomakeit inits"solediscretion"orits"solejudgment."Iftheprovisioniswrittenthisway,whateveritdecidesmaynotbedisputedbytheotherparty.Thepartywhoisn’tmakingthedecisionwillpushfora"reasonablediscretion"or"reasonablejudgment"standard,whichwould give it the right to object to the decision of the other party on the basis that thedecisionwasnotreasonable.

§5:2.3ConsentNottobeUnreasonablyWithheld Thisisaspecificuseofthereasonablenessstandardinacontractprovisionthatrequirestheconsentofoneofthepartiestosomespecifiedaction.Lookattheunderlinedlanguageinthissentence:

PartyAmaynotconsummateanyProhibitedTransactionwithouttheconsentofPartyB.Asatechnicalmatter,theunderlinedlanguageisunnecessary,becausePartyAalwayshastheabilitytoaskPartyBtoconsenttosomethingthatisprohibitedbytheircontract.PartyA,however,mayanticipatetakingactions forwhich consentwill be required, andmaywant to soften PartyB’s absolute right to deny itsconsent.Thewayitdoesthisistousethe"consentnotunreasonablywithheld"concept:

PartyAmaynotconsummateanyProhibitedTransactionwithouttheconsentofPartyB,whichshallnotbeunreasonablywithheld.

Underthisprovision,PartyBmaynotwithholditsconsenttoaproposedtransactionwithoutareasonablebasis for doing so. If there is a concern that the party whose consent is needed may drag its heels inrespondingtorequestforaconsent,thephrasecanbewrittenas:

withouttheconsentofPartyB,whichshallnotbeunreasonablywithheldordelayed

§5:2.4Best/ReasonableEfforts Sometimes a party may be uncertain whether it will be able to satisfactorily perform one of itscontractual obligations. This issue usually arises in the context of a requirement that some third party’sactionorcooperationbeobtained.Forexample:

Themortgagor shall, no later thanNovember 15, 2007, cause each of its insurance policies to bemodifiedtocontaintheendorsementsdescribedonExhibit5.

Themortgagoranticipatesstiffresistancefromitsinsurerstotherequiredlanguage.Itknowsthatitdoesn’thavetheleveragetoforcetheinsurancecompaniestomakethechanges.Underthelanguagewrittenabove,themortgagorwouldbeinbreachifanyoneofitsinsurersrefusestoprovidetherequestedendorsement.Itargues,therefore,thatitshouldnotbeinbreachofthecovenantaslongasithasdiligentlypursuedgettingthechangesmade:

Mortgagorwill use its reasonable efforts to cause each of its insurance policies to bemodified tocontaintheendorsementsdescribedonExhibit5.

Themortgagor’sobligationunderthisprovisionisnottoobtainthepolicychanges,buttoexertreasonableefforts todo so.From themortgagee’s standpoint, this is obviously amuchweaker andmore subjectiverequirement. If, as a businessmatter, themortgagee feels itmust have these endorsements, itwill eitherinsistontheoriginalabsoluterequirementormakethepolicyendorsementsaconditiontoclosing.

Althoughthecaselawonthesubjectismixed,mostpractitionerstaketheviewthatanobligationtousebesteffortsincludestheobligationtomakeeverypossibleeffort,andtouseallpossiblefinancialresources,toachievethedesiredgoal.Ifthemortgagorintheaboveexamplewererequiredtousebesteffortstoobtainthepolicyendorsements,itwouldberequiredtopayanyfeeorpremiumdemandedbytheinsurer.Forthisreason,a"bestefforts"standardisoftenresisted.Sometimes,thefollowingapproachisutilizedinordertoimposethemorestringent"bestefforts"standardwithoutcreatingopen-endedfinancialrisk:

Mortgagorwilluseitsbestefforts(withoutbeingrequiredtopayanyadditionalfees,premiumsorotheramounts) to cause eachof its insurancepolicies to bemodified to contain the endorsementsdescribedonExhibit5.

§5:2.5TotheBestofItsKnowledge

Comparethefollowingtwovariationsofthesamerepresentationinanacquisitionagreement:

SellerisnotinviolationofanyEnvironmentalLaw.

Tothebestofitsknowledge,SellerisnotinviolationofanyEnvironmentalLaw.

The first representation is a statement as to a fact. The second representation is a statement about therepresentingparty’sawarenessofafact.

What if,after theclosing, thebuyerdiscoversapreexistingviolationofenvironmental lawrelatingtothepurchasedpropertythatresultsinsignificanteconomicharmtoit?Itspostureasagainstthesellerwouldbemarkedlydifferentunderthesetwoprovisions.Underthefirstprovision,theexistenceofthepreexistingviolationmakes the representationuntrue,providing thebuyerwithaclaimagainst the seller forbreach.Underthesecondprovision,however,thebuyer’sclaimforbreachofrepresentationwillonlysucceedifthebuyercandemonstrate that the sellerknewof theviolationat the time that the representationwasmade.Obviously,itismuchmoredifficulttoproveaparty’sstateofawarenessofafactthanitistoprovethefactitself.

Thesellermaymakethefollowingargumenttosupportitsneedforthisknowledgequalification:"Ourbusinessconsistsofassetsthatwereobtainedinnumerousacquisitionsoverthelastfewyears,sowemaynot know about all previous events thatmay continue to give rise to potential environmental violations.Howcanyouaskustomakearepthatwedon’tknowistrue?"

Thisargumentusuallyfallsondeafears.Oneoftheprimarypurposesofrepresentationsis toallocateriskbetweentheparties.Intheaboveexample,thebuyerwillrespond:"Wedon’tcarewhetheryouknowthestatementistrueornot.Whatwewantisrecourseagainstyouifthestatementturnsouttobewrong.Yourfailuretodoadequateenvironmentalduediligencewhenyouboughtpropertiesinthepastshouldbeyourproblem,notours."

§5:2.6SubstantiallyintheFormOf Sometimesacontractwillrefertoanotheragreementthatisexpectedorrequiredtobesimilartoanotheragreement or to an exhibit to the contract. For example, a condition to closing may require a party toexecuteanddeliveranotheragreement,theformofwhichhasbeennegotiatedandwhichisattachedasanexhibit.Or, theremaybea requirement that ifPartyAenters intoanagreementwitha thirdparty in thefuture,itmustenterintothesameagreementwithPartyB.Incaseslikethis,thephrase"substantiallyintheformof"isanimportantone.Withoutit,performanceoftheconditionorcovenantmaybethwartedduetoimmaterial inconsistencies between the two documents. Such inconsistencies may be necessary, forexample, toproperlyidentifytheparties, tocorrect typographicalerrors,andthelike.Readthefollowingconditionprecedentfromaleasebothwithandwithout theunderlinedwordtounderstanditssubstantiveeffect:

As a condition to the effectiveness of thisLease, theLessee shall execute and deliver a solvencycertificatesubstantiallyintheformofthesolvencycertificatedeliveredbytheLesseetoXYZRealtyCo.onSeptember20,2005.

§5:2.7TotheExtentPermittedbyLaw

A contract should never require a party to violate the law. There are two approaches to address thepossibilitythatapartywillhavetoviolatethelawbycomplyingwithacontractprovision.First,thelawatissue can be researched and the provision modified to ensure that compliance would not result in aviolation.Abroaderapproachistomodifytheprovisionwiththephrase"totheextentpermittedbylaw."Thisalsohastheadvantageofaddressingpotentialconflictswithneworchangedlaws.Hereisanexample:

Companyshall, to theextentpermittedby law,close facilities and reduceemployeeheadcountbyJanuary31,2008soastoreduceitsaggregateexpensesonanannualizedproformabasisbyatleast$2million.

§5:2.8Promptly Thistermisemployedtocreateamodestdegreeofflexibilityinthetimerequiredforperformanceofacontractualrequirement.It isusedwheresometimemaybeneededforperformanceandwhereaprecisenumberofdaysforperformancemaybedifficulttospecify.The"promptly"standardmayalsobeimposedwithanoutsidedateforthespecifiedperformance.Examples:

TheBorrower shall notify the Lender promptly of any notice of default received by it under theMezzanineNotes.

Following the Lender’s request, the Company shall promptly, but in any event within 30 days,providetheLenderwithappraisalsoftheSpecifiedRealEstate.

Often,theconceptofpromptnessisanegotiatedcompromisefromfirstdraftswhichrequiressomeactiontobe taken immediately. This term should be used sparingly; very few things can be made to happenimmediately.

§5:2.9InFormandSubstanceSatisfactory This phrase is used to give a party the right to be satisfiedwith a particular document.Compare thefollowingtwoprovisions:

TheContractorshalldeliveraplumbingsubcontracttotheOwner.

TheContractorshalldeliveraplumbingsubcontractinformandsubstancesatisfactorytotheOwner.

Underthefirstprovisionthecontractorhassatisfieditsobligationbydeliveringaplumbingsubcontracttotheowner,regardlessofwhetheritiscorrectlydrafted,orwhetheritisotherwisesatisfactorytotheowner.Inthesecondprovision, thecontractor’sobligationisnotsatisfiedunlesstheownerissatisfiedwithboththeformandsubstanceofthedocument.Ifthecontractorbelievesthatthisgivestoomuchdiscretiontotheowner,itwouldinsistontheinsertionofareasonablenessstandard:

TheContractorshalldeliveraplumbingsubcontractinformandsubstancereasonablysatisfactorytotheOwner.

Sometimesadistinctionshouldbedrawnbetweentheformandthesubstanceofadocument.Forexample,abankagreeingtoissuealetterofcreditonbehalfofitscustomermaynothaveaninterestinthetermsorsubstance of the letter of credit butmay have an interest in its form or appearance. In such a case, therelevantprovisionwouldreadasfollows:

The Bank will, at the request of the Borrower, issue one or more letters of credit in a formsatisfactorytotheBank.

§5:2.10SubstantiallyAll/SubstantialPortion

Two parties are negotiating a covenant restricting asset sales. The parties have agreed that only

extremelysignificantassetsaleswillberestricted,butarenotwillingtoagreetoaprecisedollarlimitation.Therefore,theyagreeonthislanguage:

TheCompanymaynotsellorotherwisedisposeofallorsubstantiallyallofitsassets.Aslightlylooserversionwouldbeasfollows:

TheCompanymaynotsellorotherwisedisposeofalloranysubstantialportionofitsassets.Adraftspersonemployingthesephrasesshouldbeawareofcaselawthatsuggeststhatthesestandardsarenotaslooseastheymayappear.1

§5:2.11IntheOrdinaryCourseofBusiness Thisphrase isused in restrictiveprovisions topermitactivities thatarecustomaryand typical for therestricted party. Take, for example, the following provision in a note purchase agreement involving aconstructioncompany:

TheIssuermaynotincuranycontingentliabilityinrespectofsuretybonds,exceptforthoseobtainedintheordinarycourseofbusiness.

Theissuerisroutinelyrequiredtoprovidesuretybondsinconnectionwithitsconstructioncontracts.Thislanguagepermits it tocontinuethatpractice.But theprovisionwouldnotpermit the issuanceofasuretybondtosecurethepaymentofafinancialobligation(asopposedtotheperformanceofitsobligationsunderaconstructioncontract),becauseatthetimethattheagreementwassignedtheissuerdidnotregularlyusesurety bonds for such purposes. The ordinary course of business standard is used to prevent flexibilitygrantedtooneofthepartiesfrombeingusedbyitinanunusualorunanticipatedway.

§5:2.12ConsistentwithPastPractice Unlike"intheordinarycourseofbusiness,"whichfocusesonwhetheraspecifiedactioniscustomaryforaparty,thisphraseputsmoreemphasisonhowanactionistaken.Hereisanexample:

Guarantor shall not make capital contributions to its foreign subsidiaries, except in a mannerconsistentwithpastpractice.

Iftheguarantoroverthelastfiveyearshadmadecapitalcontributionstoitsforeignsubsidiariesonlytotheextentnecessarytosatisfy localminimumcapitalizationrules, thisprovisionwouldprevent theguarantorfrommaking capital contributions to its foreign subsidiaries to acquiremachinery and equipment. If theapplicablestandardwere"intheordinarycourseofbusiness"ratherthan"inaccordancewithpastpractice,"theguarantorwouldhaveaneasiertimearguingthatitwascustomaryforittomakecapitalinvestmentstoitsforeignsubsidiaries,andthereforethatitcoulddosoevenfornewpurposes.

§5:2.13NotMoreRestrictive Thisphraseanditsvariationsareusedinprovisionsthatimposelimitationsonaparty’sabilitytoagreeto restrictions under other agreements. Thismay come up, for example,where the contract permits onepartytoincurindebtednessinordertorefinanceexistingobligations.Ratherthantrytooutlinethespecific

termsthatanacceptablerefinancingwouldinclude,thepartiesagreeonthefollowinglanguage:

DebtormayincurIndebtednesstheproceedsofwhichareusedtorepaytheSeniorNotes,solongastheagreementgoverningsuchIndebtednessisnotmorerestrictivetoDebtorthantheSeniorNotes.

Thedifficultywiththisapproachisthatitisnotclearhowitisapplied.Ifoneoutof15covenantsintherefinancing agreement is tighter while the other 14 are looser, has the requirement been satisfied? Thisconcerncanbeaddressed,toacertainextent,bymodifyingthephrasetoread"notmorerestrictive,takenasawhole."

§5:2.14Wouldvs.Could:LevelsofProbability PartyA is reviewing a first draft of an agreement prepared by PartyB that requires PartyA to give"noticeofthecommencementofanyaction,suitorproceedingthatcouldresultinamaterialadverseeffectonPartyA."Thefollowingdiscussionensues:

Thisnegotiationillustratesthedifferencebetweentheuseofcould/would/reasonablybeexpectedto.(Awordofwarning:thefewerdiscussionsamongthelawyersonthisparticulartopicaclienthears,thebetter.Notwithstanding the important substantive result that is at stake, the typical client, perhaps notunderstandingtheissue,mayviewitasaridiculous(andcostly)legalcul-de-sac.)

§5:3TrumpingProvisions Contractsoftencontaininconsistentprovisions.Ageneralrestrictioninoneprovisionmayconflictwithanotherthatrequiressomespecificaction.Broadprinciplesthatgenerallyapplytotheentirecontractmayneed tobeoverridden inspecificcircumstances.Thecarefuldraftspersonwillalwaysnote thesepossibleinconsistenciesandemploytrumpingprovisionstoindicatewhichprovisionoverridestheother.Otherwise,

confusionandpotentialdisputesaretheresult.

§5:3.1Provisos Aprovisoisaclausethatbeginswitheither"provided"or"provided,however."Oftenthesewordsareunderlined,whichisdonemerelytomaketheprovisostandoutfromtherestofthesentence.Thepurposeofaprovisoistooverridetheconceptthatimmediatelyprecedesit:

SellershalldeliversalesreportstoBuyeronthelastbusinessdayofeachweek,provided,however,thatsuchdeliverymaybemadeonthefirstdayofthefollowingweekifthenumberofbusinessdaysintheweekcoveredbythereportislessthanfive.

Here,theprovisocreatesanexceptiontothegeneralrulethatthereportbedeliveredonthelastbusinessdayoftheweek.

Provisosaresometimesincorrectlyusedasasubstitutefortheterms"totheextentthat"or"if":

Seller may enter into leases with respect to the Subject Assets, provided, however, that Seller’sinterestundersuchleasesistransferabletoBuyer.2

The proviso in the above sentence does not override the concept that the Seller can enter into leases; itcreatesaconditiontotheSeller’srighttodoso.Abetterrenditionofthissentencewouldbe:

Seller may enter into leases with respect to the Subject Assets if Seller’s interest therein istransferabletoBuyer.

Hereisanotherexampleoftheincorrectuseofaproviso,withamodificationcorrectingtheerror:

Employee shall be entitled to reimbursement for Covered Expenses provided that it producesreasonablysatisfactorydocumentationthereof.

EmployeeshallbeentitledtoCoveredExpensestotheextentthatitproducesreasonablysatisfactorydocumentationthereof.

§5:3.2NotwithstandingAnythingtotheContrary The severalvariationsof thisphrase eachacts as a signal thatwhat followswill be inconsistentwith(andtrumps)othercontractualprovisions.Onesuchvariation,thephrase"notwithstandingtheforegoing"hasthesameeffectas theproviso, inthat it trumpstheimmediatelyprecedingconcept.Forexample, thesentence:

Borrowershallpayaccruedinterestonthelastbusinessdayofeachmonth,provided,however,thatonuptothreeoccasionsduringthetermofthisagreement,Borrowermay,bypriornoticetoLender,delaysuchpaymentsbyaperiodnottoexceedineachcase5businessdays.

couldbeexpressedequallywellasfollows:

Borrower shall pay accrued interest on the last business day of eachmonth. Notwithstanding theforegoing,onuptothreeoccasionsduringthetermofthisagreement,Borrowermay,bypriornoticetoLender,delaysuchpaymentsbyaperiodnottoexceedineachcase5businessdays.

Unlike the proviso, this phrase can be used to trump sentences other than the one in which it is

contained.Consider a stockpurchase agreement containing covenants that restricts the target’s ability toengageinavarietyoftransactions.Thepartiesagreethatthetargetmayengageinaspecificjointventuretransaction, different aspects of which would be blocked by several of the restrictive covenants. Thispotentialconflictcouldbeaddressedbyeither(a)addinganexceptionforthejointventuretoeachoftherelevantcovenants,or(b)moresimply,byaddingthefollowingattheendofthecovenantsection:

NotwithstandinganythinginthisSection5(Covenants)tothecontrary,TargetshallbepermittedtoenterintothePortugueseJointVenture.

Thistoolcanalsobeusedtotrumpinconsistentprovisionsappearingthroughoutanentireagreement.In

the above example, thepartiesmaybe concerned that theremaybeotherprovisions in the contract thatwould restrict the target’s ability to enter into the joint venture. They could therefore use the abovelanguage,modifiedtoreferto"anythinginthisagreementtothecontrary...."Sincethisreferstotheentireagreement,theplacementofthislanguageisirrelevant:itcouldbeplacedatthebeginning,themiddleortheendoftheagreement.

§5:3.3ExceptasOtherwiseProvided Thisphraseisusedtoindicatethattheprovisioninwhichitisincludedistrumpedbyotherprovisionsintheagreement.Often,aprovisionthatincludesthisphrasedirectsthereadertothespecificprovisionthatoverridesit:

ExceptasprovidedinSection4,theShareholdermaynottransferanyofthePreferredShares.

Anotheruseofthisphraseistoindicatethatageneralstatementissubjecttobeingoverriddenbyother,morespecificprovisions,withoutspecificallyreferringtosuchotherprovisions.Anexamplewouldbeanagreementwhichgenerallyprovidesthatallpaymentsthereunderaretobemadeindollars,butwithseveralspecificprovisionsrequiringpaymentineuros.Thegeneralprovisionwouldreadasfollows:

Exceptasotherwiseprovidedherein,allpaymentsmadehereundershallbemadeinU.S.dollars.Thus,itisnotnecessaryinthisagreementtospecifyineachpaymentprovisionthatpaymentistobemadeindollars.Thatistakencareofbytheabovegenerallanguage;onlythepaymentprovisionsrequiringeurosneedtobespecific.

§5:3.4WithoutLimitingtheGeneralityoftheForegoing One ruleofcontract interpretation is that thespecificoverrides thegeneral.Aconcernmayarise thatwherethestatementofageneralprincipleisfollowedbyaspecificapplicationofthatprinciple,thegeneralprinciplemaybeignored.Thismayariseinthecontextofaprovisionlikethisone:

Debtor shallmaintain insurance at levels andwith deductibles consistentwith customarybusiness

practicesinDebtor’sindustry.Debtor’sinsuranceforcasualtylossesinrespectofitsDeerfieldplantshallatnotimebelessthan$5million.

Thisprovisionraisestheconcernthat,atleastasitrelatestocasualtyinsurance,thesecondsentencetrumpsthefirst.Theprovisioncouldberewrittenasfollows:

Debtor shallmaintain insurance at levels andwith deductibles consistentwith customarybusinesspractices inDebtor’s industry.Without limiting thegeneralityof the foregoing,Debtor’s insuranceforcasualtylossesinrespectofitsDeerfieldplantshallatnotimebelessthan$5million.

ThischangepreventsDebtorfromarguingthatithascompliedwiththecovenantbyinsuringtheDeerfieldplantfor$5million,evenifindustrystandardswouldsuggestalargeramountofcoverageisrequired.

§5:3.5InconsistencyAmongAgreements Sometimesaconcernwillarisethatoneormoreagreementsamongthesamepartiesmaybeinconsistentwitheachother.Ifitisclearwheretheconflictlies,oneofthemethodsreferredtoabovecanbeused.Forexample:

Notwithstanding anything to the contrary in Section 5.4 of the Stockholders Agreement, theCompanymaynottransferanyofitsSharestoanAffiliatewithoutpriorwrittennoticetoXYZInc.

Inothercases,theconcernaboutconflictsmaybemoregeneral.Thiscallsforamoregeneraltrumping

provision:

TotheextentthereisaninconsistencybetweenaprovisionintheCreditAgreementandaprovisioninanyoftheTransactionAgreements,theprovisionintheCreditAgreementcontrols.

Theseonlywork to the extent theparties to the agreement that is beingoverridden areparties to the

agreement containing override language. A provision in a contract between Party A and Party B thatpurportstooverrideaprovisioninacontractamongPartiesA,BandCisnotenforceableagainstPartyC.

§5:4AccountingTerms/TermsofMeasurement It is easy for a lawyer facedwith a numerical or accounting issue in a contract to disclaim: "I’m alawyer, not a numbers person—have the accountants look at this." There are situations where this isappropriate.Totheextent theresolutionofan issueor theproperdraftingofacontractrequirescomplexcalculationoranunderstandingoftheeffectofGAAPorotheraccountingrules,thelawyershoulddefertoaccountingorfinancialexperts.

On the other hand, a lawyer’s claim of a complete lack of numbers skills is often a cop-out. Mostcontractsare, tooneextentoranother,aboutmoney.Complexcommercialcontracts involvecomplicatedtreatmentofmonetaryandothernumericalissues:howpaymentsarecomputed,howfinancialconditionistested,howpermittedeconomicactivitiesaremeasured.Theskillfulbusinesslawyermustmasterthebasicsofaccountingandtheabilitytoexpressquantitativeideasinwords.

§5:4.1Formulas Contracts often containmathematical formulas expressed inwords.The key issue here is clarity; theprovisionmustclearlyspecifythemathematicalfunctionsandtheirorder.Let’ssaythepartiestoacontract

wanttoprovidethatonepartywillmakeapaymenttotheotherequaltohalfofcertainassetsaleproceedsthataren’trequiredtobepaidtotherecipient’sbanks.Theprovisioncouldbewrittenasfollows:

PartyA shall pay toPartyB50%of (a) an amount equal to the excess of (i) the proceeds of theAllentownSalereceivedbyPartyAover(ii)theamountofsuchnetproceedsthatPartyAisrequiredtopayitslendersunderSection5.02oftheCreditAgreement.

Thiscouldberewritteninalgebraicstyleasfollows:

Whyisthephrase"anamountequalto"included?Thepurposeofthesentenceistocreateadevicetocompute theamountofa requiredpayment,not to identify theactualmoney thatwillbepaid.Money isfungible; PartyBwants to be paid the required amount but doesn’t carewhether it receives themoneyactuallypaidinconnectionwiththeassetsale.

Hereisanexampleofaformulathatneedstoclarifiedbytheuseofappropriatenumbering:

TheamountofcapitalexpendituresthatBorrowermaymakeinanyfiscalyearisanamountequalto10% of Borrower’s net income for such fiscal year plus the amount of all capital contributionsreceivedbyBorrowerinsuchfiscalyear.

Doesthe10%applytoonlytheBorrower’sannualnetincomeoralsotothecapitalcontributionsthatit

hasreceived?Withoutnumbering, theprovisionisfatallyunclear.Hereisarevisedversionthatmakesitclearthatonlythenetincomeissubjecttothe10%multiplier:

TheamountofannualcapitalexpendituresthatBorrowermaymakeinanyfiscalyearisanamountequal to (i) 10%ofBorrower’s net income for such fiscal year plus (ii) the amount of all capitalcontributionsreceivedbyBorrowerinsuchfiscalyear.

Acommonelementofformulasis thequantificationofsomeamountbyreferencetothepassageofa

certainamountoftime.Take,forexample,aprovisionthatprovidesforthepaymentofliquidateddamagesbasedonhowlongasellerdelayedtheclosingofanacquisition:

SellerwillpaytoBuyerasliquidateddamagesanamountequalto(a)Target’sEBITDAforthefiscalyearendingDecember31,2007,multipliedby(b)afraction,thenumeratorofwhichisthenumberofdaysintheperiodbeginningontheExpectedClosingDateandendingontheactualclosingdate,andthedenominatorofwhichis365.

Thisprovisionhastheeffectofproratinganannualnumberforaperiodoftimethatislessthanayear.

Thisformulacouldbeexpressedalgebraicallyasfollows:

§5:4.2FloorsandCeilings

Therearemanycircumstancesinwhichacontractmustsetafloororaceiling—thatis,aminimumormaximumamount.Thisdeviceisusedtocreateamaximumamount:

OnthetenthBusinessDayofeachmonthLicenseewillpaytoLicensoranamountequaltothelesserof(a)$100,000and(b)30%ofthegrosssalesoftheLicensedProductsduringthepriormonth.

Underthisprovision,amaximumamountof$100,000isrequiredtobepaid;if30%ofgrosssalesexceeds$100,000,only$100,000isdue.Iftheaboveprovisionismodifiedtochangetheword"lesser"to"greater,"theeffectoftheprovisionistosettheamountoftheminimumpaymentat$100,000.

This same approach can be usedwith respect to dates, where it is necessary to specify the latest orearliestdatethataparticularactionmaybetaken:

Seller shall complete thePostClosingAuditby theearlierof (i)March31,2008and (ii)30daysaftertheaccountantshavedeliveredthePreliminaryInventoryCalculation.

§5:4.3OnaConsolidatedBasis

"Consolidated"isanaccountingtermindicatingthatfinancialmeasurementsaremadetoincludebothaparentcompanyanditssubsidiaries.Ifsomethingismeasuredonaconsolidatedbasisitismeasuredforanentity and its subsidiaries, taken as a whole, as if they were a single entity. One effect of this type ofmeasurement is that intercompany transactions (such as intercompany investments, receivables andpayables) are eliminated.Most financial statements (including those required to be disclosed by publiccompanies)arepreparedonaconsolidatedbasis.

§5:4.4OnaConsolidatingBasis Thisphraseisusedtodescribefinancialstatementsthatarebrokenoutseparatelyforanentityandeachofitssubsidiaries.

§5:4.5CompanyandItsSubsidiaries,TakenasaWhole This is a similar concept to "on a consolidated basis," but is used in non-accounting contexts. Forexample:

Since December 31, 2007 there shall have occurred no material adverse effect on the financialconditionoftheParentanditssubsidiaries,takenasawhole.

This language is intended to ensure that thematerial adverse standard is not applied individually to theparentoranysubsidiary.Theeffectofthiscouldbeunfair.Consideranexampleinvolvingaparentthathasonehundredsubsidiariesofequivalentvalue.A20%reductioninonesubsidiary’sannualnetincomewouldbematerialtothesubsidiary,butimmaterialtotheconsolidatedgroup.

§5:4.6FrozenGAAP Financial computations in contracts are frequently required to bemade in accordancewith generallyaccepted accounting principles (GAAP).An issue thatmust be addressed in this context is how to treatchangestoGAAPthatoccurafterthecontractisenteredinto.ItisoftenagreedthatsuchchangestoGAAPwillbeignoredforpurposesofmakingthecomputations.Thisissueis typicallyaddressedwithlanguagealongthefollowinglines:

ChangesinGAAPaftertheEffectiveDateshallnotbegiveneffectforpurposesofthecalculations

madeunderSection4.4.The benefit of this approach is that the parties’ intent as to the operation of the covenant won’t beunderminedbyachangeinaccountingmethods.ThedisadvantageisthatbecauseachangeinGAAPwillhavetobefollowedinthepreparationofaparty’sfinancialstatements,therewillbeadiscrepancybetweenthefinancialstatementsandthecovenantcalculations.Inthiscase,thepartyprovidingfinancialstatementswill usuallybe required toprepare anddeliver a reconciliation, showinghow the financial computationswouldhaveappearedhadthechangeinGAAPnotoccurred.

§5:4.7Outstanding Theuseoftheterm"outstanding"canhaveaveryimportanteffectwhenusedtodescribetheprincipalamountofindebtednessorotherobligations.Comparethefollowingtwoprovisions:

TheCompanymayissuenotesasconsiderationforacquisitionsinanaggregateprincipalamountnottoexceed$5,000,000.

TheCompanymayissuenotesasconsiderationforacquisitionsinanaggregateprincipalamountnottoexceed$5,000,000outstandingatanytime.

Underthefirstexample,iftheCompanyissuesa$5,000,000noteinconnectionwithanacquisition,andthenrepaysit,itwillbeunabletoissueanyfurthernotesinconnectionwithacquisitions.Theintroductionofthe"outstanding"concept,ontheotherhand,resultsintheprovisionnotrestrictingtheamountofnotesthathavebeenissuedovertime,butinsteadtheamountofnotesthatareoutstandingatanyparticularpointintime.IftheCompanyissuesa$5,000,000note,andrepays$1,000,000,itwillhave$4,000,000ofnotesoutstanding.Underthisprovision,itwillthenbepermittedtoissueanother$1,000,000ofnotes.

§5:4.8PerAnnum Thisphraseisusedinconnectionwithratesofinterestorotheramountsthataremeasuredonanannualbasis.So, for example, an interest rateof "5%perannum" in respectof aprincipal amountof$100,000wouldmean that foranentireyear theaccrued interestwouldbe$5,000, for sixmonths,$2,500,andsoforth.

§5:4.9AbsentManifestError Thisphraseisusedwhereonepartyispermittedtomakeacalculationordeterminationthatisbindingontheotherpartyunlessthecalculationordeterminationisincorrect:

Investor’s calculations of accrued and unpaid commitment fees shall be binding on Issuer, absentmanifesterror.

Itisnotentirelyclearwhattheword"manifest"meansinthisphrase,butitsuggeststhattheerrormustbedemonstrably false. The use of this language places the burden of proving that a calculation ordeterminationisfalseonthepartynotmakingthecalculationordetermination.

§5:4.10InArrears/InAdvance Paymentsthataremadeinrespectofaspecifiedperiodoftime(forexample,thepaymentofinterestor

thepaymentofaquarterlymanagementfee)arepaideitherinarrearsorinadvance.Paymentattheendofaspecifiedperiodofamountsthathaveaccruedduringsuchperiodispaymentinarrears.Paymentinadvanceismadeatthebeginningofaperiodinrespectofamountsthatwillaccrueduringsuchperiod.

Regardless ofwhich approach is used, the draftspersonmust addresswhat happens if the contract isterminated between payment dates. In the case of a provision requiring quarterly interest payments inarrears,aterminationofthecontractonJune20willleavethelendershortchangedfor20days’ofinterest.Conversely,thepartythatreceivesquarterlymanagementfeesinadvancewillreceiveawindfallastothefeesalreadycollectedforthelast10daysofJune.Thedraftingrequiredtoaddresseachoftheseconcernsisstraightforward. The provision requiring payment quarterly in arrears should provide that accrued andunpaidinterestshouldbepaidonthedatetheagreementisterminated.Conversely,theagreementprovidingforthepaymentofmanagementfeesquarterlyinadvancemayprovidethatiftheagreementisterminatedinthemiddleofaquarter,aproportionateamountofthelastpaymentmademustberefunded.

§5:5TermsofInclusionandExclusion Contract provisions often take the form of a general prohibition, subject to one ormore exceptions,whichinturnmayhaveexceptionsoftheirown.Thistracksthewaytheseissuesarenegotiated:onepartysuggestsanabsoluteruletobeapplicabletotheotherparty,whointurnsuggestsnumerousbroadcarveoutsto the absolute rule, which may be accepted (subject to limitations) by the first party. Let’s look at ahypotheticalnegotiationofaprovision inashareholdersagreement relating to theabilityof theminorityshareholder ("LittleCorp.") to transfercertain sharesof stock.Counsel to themajority shareholder ("BigCorp.")haspreparedafirstdraftof theshareholdersagreement that reads:"LittleCorp.maynot transferanySharesduringthetermofthisagreement."Thefollowingdiscussionensues:

Theresultingprovisionisasfollows:

LittleCorp.maynottransferanySharesduringthetermofthisAgreement,exceptfor(i)transfersatanytimetoitsAffiliates(including,withoutlimitation,MicroCo.)otherthanMediumCorp.,and(ii)so long as an Event of Default attributable to Big Corp. shall have occurred and be continuing,transferstoanyPerson(including,fortheavoidanceofdoubt,MediumCorp.).

Whatfollowsbelowisadiscussionofsomeofthetermsofinclusionandexclusionthatarenecessary

toolsofthedraftsperson’strade.

§5:5.1MakeExceptionsConsistent Inconsistenciesoftenariseasaprovisionisdraftedandredraftedinthenegotiationprocess.Acommonexampleofthisisarepresentationorcovenantsubjecttoalistofexceptions.Particularlyiftheexceptionsare added at different stages in the drafting process, they may not be expressed in a consistent orgrammaticalfashion.Hereisanexample:

TheBorrowermaynotincurorpermittoexistliensonanyofitsassets,except: (i)mechanics’liensarisingintheordinarycourseofbusiness;

(ii) the Borrower may grant liens on equipment to secure indebtedness incurred to finance thepurchasepriceofsuchequipment;and (iii)liensdescribedinSchedule1.04shallbepermitted.The approach represented by each of these three exceptions is fine; the problem is that each of the

approaches is inconsistentwith theothersandasaconsequence theprovision ismoredifficult to follow.Thedraftspersonshouldhaveeither(a)madeeachexceptionconformwithclause(i) (whichhasnoverbphrase),(b)madeeachexceptionconformwithclause(ii),byusing"theBorrowermay,"or(c)madeeachexception conform to clause (iii), by using "shall be permitted." In the above example, the approachrepresentedbyclause(i)ispreferable,becauseiteliminatesunnecessarywords.

§5:5.2SpecificExclusionstoAvoidDoubt If it is unclear whether a particular matter is covered by a provision, it may be necessary to addclarifyinglanguage.Forexample,adraftemploymentagreementmaycontainthefollowingprovision:

Employee will not engage in any outside activities that significantly reduce her attention to herresponsibilitiesasChiefExecutiveOfficer.

Theemployeeisplanningtowriteabook.Shedoesn’tbelievethatthisprojectwillsignificantlyreduce

her attention to her job.Her lawyer, however, is concerned that a disputemay arise over this issue. Toaddressthisconcern,theemployer’slawyerproposesaddingthefollowingproviso:

provided, however, that Employeemaywrite a book about her experiences as a rising star in theplasticsbusiness

Theemployeeisunhappywiththislanguage,however.Itsuggeststhatherbookwillcreateasignificant

distraction.Herlawyerthenproposesthefollowinglanguage,whichbothpermitsherbook-writingprojectandacknowledgesthatitdoesn’tinterferewithherjobresponsibilities:

it being understood that Employee’s writing a book about her experiences as a rising star in theplastics business will not constitute an outside activity significantly reducing her attention to herresponsibilitiesasChiefExecutiveOfficer

§5:5.3UnnecessaryExceptions Unnecessaryexceptionsmaycreateambiguitiesandconfusion.Ifitisclearthatthescopeofaprovisiondoesn’tcoveraparticulareventorcircumstance,itiscounterproductivetoincludeanexception.Includingtheexceptioninthiscircumstancemerelypermitsanargumenttobemadethatthescopeoftheprovisionisreallyintendedtobebroaderthanitappears;otherwisewhywouldtheexceptionbenecessary?

Let’slookatanexample.Hereisaprovisionfoundinanequipmentlease:

LesseewillcausetheEquipmenttobekeptingoodoperatingcondition,exceptthatLesseeshallnotbe required to comply with any safety regulations to the extent such noncompliance is beingdiligentlycontestedbyLessee.

The underlined language is unnecessary. Compliance with safety regulations is not required by the

provision,but inclusionof this languagecreates theimplicationthatcompliance is required. Itallows thelessor to argue that the covenant generally requires compliancewith regulatory requirements; otherwise,whydidthepartiesconsiderthisexceptionnecessary?Thisexampleillustratesthekindofmischiefthatcanresultfromtheuseofunnecessaryexceptions.

Thisissuealsoarisesfrequentlyinconnectionwiththepreparationofdisclosureschedules.Considerarepresentationinaloanagreementthattherearenoenvironmentalissuesthatcouldreasonablybeexpectedtohaveamaterialadverseeffectontheborrower,exceptthosethataresetforthonaschedule.Itisanormalreactionfortheborrowertoincludeasmuchinformationaspossibleonthatschedule,inordertominimizethe risk of making a misrepresentation by omission. However, this representation requires only theschedulingof items thatcould reasonablybeexpected tohaveamaterialadverseeffect.Therearemanyreasonswhytheborrowerwouldnotwanttocharacterizeimmaterialmattersasmaterial.Forexample,suchadisclosurecouldbeharmfultoit inlitigationrelatingtothemattersdisclosed.Therefore,thedisclosureshouldbelimitedtomaterialitems.

§5:5.4IncludingWithoutLimitation Afrequently-useddevicetoclarifythescopeofaprovisionistheuseofthephrase"includingwithoutlimitation" followed by one or more specific examples of items that the draftsperson intended to beincluded.Forexample,lookatthefollowingprovisionfromanassetpurchaseagreement:

SellerwillobtainallconsentsorapprovalsnecessaryinconnectionwiththetransferofthePurchasedAssetstoBuyer,includingwithoutlimitation(a)theconsentofXYZLandlordCo.totheassignmentoftheParamusLeasefromSellertoBuyerand(b)theconsentoftheFoodandDrugAdministrationtothetransferofthePharmaceuticalLicensesfromSellertoBuyer.

Theadditionoftheunderlinedlanguagedoesn’tchangethemeaningoftheprovision,becauseitmerely

lists items that are already included by virtue of the broad introductory language. So why use thistechnique?Foronething,intheexamplethebuyermaywanttheunderlinedlanguageincludedtoactasareminder to the seller of exactlywhat consents are required. (Of course, if there are others that are notenumerated, the seller is responsible for those too.) Furthermore, this technique can be used to clarifyuncertaintyas towhataparticularprovision issupposed tocover. In theaboveexample, theremayhavebeendiscussionsbetweenbuyer and seller as towhichof themhad the legal responsibility toobtain theconsents.Specificallyreferringtothemhereresolvesthequestionofallocationofresponsibility.

What is the significance of the words "without limitation"? Arguably, the omission of these wordscreatestheimplicationthatthelistthatfollowsisacompletelistofwhatthepartiesintendtocover.Intheaboveexample,thiswouldmeanthatthetwoconsentsreferredtoweretheonlyconsentsrequired.Thisisnotaveryconvincingposition,buttoavoidanyambiguity,iftheintentistocreateanon-exhaustivelist,usethewords"withoutlimitation."Someagreementsprovideexplicitlythattheuseoftheword"including"

istobeinterpretedas"includingwithoutlimitation."Never follow"including"or "includingwithout limitation"with something that isnot covered by the

provision.Anexampleofthiswouldbethefollowing:

Companymaynotmakeanyinvestmentsinitssubsidiaries,includingthepaymentofcashdividendsbyasubsidiarytoCompany.

Thepaymentofdividendsbyasubsidiarytoaparentisnotaninvestmentbytheparentinthesubsidiary.Withouttheunderlinedlanguage,thepaymentofdividendswouldnotberestricted.Whatistheresultoftheinclusionofthislanguage?Oneargumentwouldbethatthepaymentofcashdividendsisprohibited.Ifthisview iscorrect,whatabout thepaymentof stockdividends? It couldbearguedeitherway.On theotherhand,apositioncouldreasonablybetakenthatthepaymentofdividendsisnotcoveredbytheprohibitionon investments, that the reference to it in theunderlined languagewasdone inerrorandshouldhavenoeffect.Whatisthecorrectanswer?Theremaynotbeone.Avoidmakingthismistake.

§5:5.5DisorganizedExceptions Sometimesasentencewillbecomesubjecttoanumberofexceptionsandqualificationsthatdonotworkwelltogetherandaredifficulttofollow.Hereisanexample:

Exceptfortheissuanceofadditionaloptionspursuanttothe1999OptionPlan,theSellershallnotincreasethecompensationofanyemployee(otherthanhourlyworkers)fromthelevelsineffectonthe Effective Date, provided, however, that increases in cash compensation may be made if theaggregateamountspaidinrespectofsuchincreasesdonotexceed$1million.

This sentencewill readmuchbetter if thebasic point of the covenant—that theSellermaynot increasecompensation—isputatthebeginningandalltheexceptionsareplacedtogetherinaseriesattheend:

The Seller shall not increase the compensation of any employee from the levels in effect on theEffectiveDate, except that (i) theSellermay issueadditionaloptionspursuant to the1999OptionPlan, (ii) the Seller may increase the compensation of hourly workers, and (iii) the Seller mayincreasecashcompensationinanaggregateamountnotexceeding$1million.

§5:6MiscellaneousDraftingIssues

§5:6.1IncorporationbyReference Thereareoccasionswhenitisnecessaryforonecontracttoincorporateallorsomeoftheprovisionsofanother contract. There are two ways to achieve this: repeating the other provisions verbatim, or"incorporatingbyreference."Hereisanexampleofincorporationbyreference:

TheCompanyagreestoperformandbeboundbyallcovenantsinthePittsburghLeaseAgreementthatrelatetoit,andallsuchcovenantsareincorporatedbyreferenceasifsetforthatlengthherein.

Thislanguagehasthesamelegaleffectascopyingallofthecovenantsthatappearintheleasethatrelate

to the company, but is obviously easier from a drafting standpoint. This shortcut may make life moredifficult in the future for someone reviewing this agreement, however, particularly if a copy of thePittsburghLeaseAgreementisnotreadilyavailable.

Whatifthedraftspersonwouldliketoincorporateprovisionsbyreferencethatareclosebutnotanexactfit for the purpose forwhich they are to be incorporated? For example, what if the goal is to have thecompanyperformcovenantsthatappearinanotheragreementthatrelatetoathirdparty,asiftheycoveredthecompany?Insuchacase,theprovisionwouldbewrittenasfollows:

TheCompanyagreestoperformandbeboundbyallcovenantsintheBuffaloLeaseAgreementasifsuchprovisionsappliedtoit,andallsuchcovenantsareincorporatedbyreferencemutatismutandis,asifsetforthatlengthherein.

Theterm"mutatismutandis"meansthattheprovisionthatisbeingincorporatedbyreferenceisdeemed

tobemodifiedasnecessary to fit thepurposedescribed.So, forexample, ifoneof thecovenants that isbeing incorporated by reference is a covenant tomaintain corporate existence, such covenant would beconstrued to refer to partnership existence if the company is a partnership instead of a corporation.(Warning:theuseof"mutatismutandis"islikelytoelicitsarcasticcommentsfromclientsandothernon-lawyers.)

§5:6.2OnanArm’s-lengthBasis Thisphrase isused todescribea transactionwith terms thatareequivalent to fullynegotiatedmarketterms. It is usually used in the context of transactions thatmight not be fully and fairly negotiated. Forexample,hereisaprovisionrestrictingtransactionswithaffiliatesfoundinmanytypesofagreements:

TheCompanywillnotenterintoanytransactionwithanaffiliate,exceptonanarm’slengthbasis.Thisprovisionwouldpreventthecompanyfromenteringintoasweetheartdealwithanaffiliate.

§5:6.3AsDeterminedbytheBoardofDirectors SometimesPartyAwillbewillingtopermitPartyBtotakeanactiononlyiftheactionisspecificallyapproved by Party B’s board of directors, or if Party B’s board of directors makes some specificdeterminationregardingtheaction.Thebasisforthisapproachisthataboardofdirectorsislesslikelythanan individual officer to stretch the limits of a particular contract restriction. For example, look at thefollowingprovision:

TheCompanymaynotamendtheprovisionsofanyofitssecuritiesunlesstheCompany’sboardofdirectorsshallhavedeterminedthatanysuchamendmentdoesnotadverselyaffect the interestsoftheNoteholders.

Thisprovidesthenoteholderswithanextralevelofprotectionagainstanadverseamendmentbeingagreedto,asaresultoftheentireboardofdirectorslookingattheissueandmakingtherelevantdetermination.

§5:6.4Upon theOccurrenceandDuring theContinuanceofanEventofDefault Manyagreementsprovidethatremediesmaybeexercisedif thereisaneventofdefault.Onemustbecarefulinthewaythatthisisexpressed.Take,forinstancethefollowingprovision:

LendermayacceleratetheLoansifanEventofDefaulthasoccurred.

Let’ssaythattheborrowerhasfailedtodeliveritsannualfinancialstatementstothelenderbythedateitisrequired to do so under the contract. As a result, an event of default has occurred. Five days later, theborrowerdeliversthefinancialstatements.Canthelenderacceleratetheloanstwoweeksafterthat?Underthelanguageabove,arguablyitcan.Thislanguagestatesthattheremedyofaccelerationisavailabletothelenderifaneventofdefaulthasoccurred,evenifsubsequentlycured.Toavoidthisundesirableresult,thelanguageshouldberevisedasfollows:

LendermayacceleratetheLoansifanEventofDefaulthasoccurredandiscontinuing.

§5:6.5GrossNegligenceandWillfulMisconduct An issue that comesup frequently in indemnificationprovisions iswhether the indemnitee shouldbeindemnifiedfortheresultsofitsownmisbehavior.Acommonapproachistoexcludecoststhatresultfromtheindemnitee’s"grossnegligenceorwillfulmisconduct."Inotherwords,costsincurredbytheindemniteeasaresultofitsowngrossnegligenceorwillfulmisconductarenotsubjecttoindemnification.

Anexampleofthisisthefollowing.Acompanyhasindemnifiedaninvestorforalldamagesincurredbytheinvestor"arisinginanymannerasaresultoftheinvestor’smakingtheinvestment,exceptfordamagesarisingfromtheinvestor’sgrossnegligenceorwillfulmisconduct."Theinvestorandthecompanyagreeonaplanforthecompanytomakeanillegalpayofftoapublicofficialinordertowinagovernmentcontract.Theinvestorisfinedforitsparticipationinthisscheme.Itturnstothecompanyforindemnification,onthebasisthatthepayoffwasmadebythecompanywithfinancingprovidedbytheinvestor.Thecompanyisnotresponsibleformakingthe indemnificationpaymentunder the"grossnegligenceandwillfulmisconduct"carveout,becausetheinvestor’sdamagesweretheresultofitsownmisconduct.

Whatif,undertheabovefacts,theexclusionwaswordedasfollows:"arisinginanymannerasaresultof the investor’s making the investment, except for damages arising solely from the investor’s grossnegligenceorwillfulmisconduct"?The inclusionof theword "solely" isoftenanegotiatedpoint in thisprovision, and the example showswhy. If the indemnification provision had beenwritten this way, theinvestorwouldhaveapersuasiveargumentthatitisentitledtoindemnification,sincethebadactwasonewhichboththeinvestorandthecompanyparticipatedin.

Asanalternativetotheuseoftheterm"solely,"amiddlegroundonthisissuecanbeachievedbythefollowinginsertion:

arisinginanymannerasaresultofinvestor’smakingtheinvestment,exceptfordamagesarisingtotheextentoftheinvestor’sgrossnegligenceorwillfulmisconduct.

This requires the comparative fault of the parties to be analyzed in determining the level of

indemnificationtobeprovided.An issue that arises with respect to this provision is whether the proper standard should be gross

negligence or merely negligence. Under the gross negligence standard, the indemnitee’s claim forindemnificationcanonlybedenied if itsbehavior isgrosslynegligent.Clearly, the indemniteewillpushhard for this standard because it requires indemnification even where the damages are the result of itsordinarynegligence.

§5:6.6FromTimetoTime Thisphraseisusedtoclarifythatanactionisrequiredorpermittedmorethanonce:

PartyAmayfromtimetotimerequirePartyBtoprovideitwithacertificateofinsuranceshowingPartyAaslosspayee.

Without the underlined language, Party A may only request this certificate once. With the underlinedlanguageincluded,PartyAmayaskforthecertificateasmanytimesasitlikes.

§5:6.7AstheCaseMayBe Thisphraseisusedinasentencethatpresentsmorethanonealternative,andindicatesthat thereadershouldapplythecorrectalternative.Anexample:

EachoftheSubsidiarieshasbeendulyorganizedandisvalidlyexistingasacorporationoralimitedliabilitycompany,asthecasemaybe.

§5:6.8Respectively

Thiswordisusedinsentencesthatcontaincorrespondingseries,andisusedtoindicatethattheitemsinthesecondseriescorrespondinordertotheitemsinthefirstseries:

CompanyA,CompanyBandCompanyCmaymakepoliticalcontributionsinanyfiscalyearinanamountnottoexceed$1million,$2millionand$1million,respectively.

§5:6.9ForaParty’sAccount

Thisphraseindicatesthatacertaincostorpaymentistobebornebythespecifiedparty.Forexample,ifaprovisionstates"AllofthecostsandexpensesofsyndicationshallbefortheIssuer’saccount,"itmeansthattheissuerisagreeingtopayallsuchcostsandexpensesortoreimburseanyotherpartyforanysuchcostsorexpenses.

____________________1See,e.g.,Gimbelv.SignalCos.,Inc.,316A.2d599,606(Del.Ch.1974);SharonSteelCorp.v.ChaseManhattanBank,691F.2d1039(2dCir.1982),cert.denied,460U.S.1012 (1983);Katzv.Bregman,431A.2d1274(Del.Ch.1981).2Theuseoftheword"provided"asasynonymfor"if"or"ontheconditionthat"isacceptable,butitshouldnotbeunderlined."Provided,however"maynotbeusedthisway.

Chapter6

ReviewandInterpretationofContracts

§6:1Introduction Itisamistaketothinkthatacontractcanbefiledandforgottenaboutonceitisexecutedanddeliveredand the related closing is completed. Lawyers are frequently required to review and interpret existingagreements.Threetypesofcircumstancesgiverisetoaneedforsuchreview.Thefirstisasapartofthe"due diligence" process, in which one or more contracts must be reviewed in connection with anothertransaction.Thesecondisalawyerbeingaskedbyherclienttoreviewacontracttodeterminewhetheraparticular action is requiredor permitted.The last is really anoffshoot of the first: a lawyer is asked toadviseherclientonstructuringtransactionsorcoursesofactioninamannerthatcomplieswiththeclient’sexistingcontracts.

Oneofthemoredifficultaspectsofreviewingcontractsisthatmoreoftenthanonemightexpectthereisaquestionastowhatparticularlanguagemeans.Oftencontractprovisionsaredifficult tointerpret—theymaybeambiguous,overlycomplicated, imprecise,orcontainconfusingerrors.Sometimesaprovision isperfectly clear but contains a subjective element, such as a materiality or reasonableness qualification.Clients, particularly thosewho arenot very experiencedwith complex agreements, canbe surprised andimpatientwhenthereisnoblack-and-whiteanswertoaquestionunderacontract.Often,theinterpretationofasinglecontractprovisionwilldictatewhethertheclientcanenterintoatransactionortakesomeotheraction.Insomecases,thelawyerisrequiredtorenderalegalopinionastoaninterpretationissue.Forallofthese reasons, the interpretationofcontractsgives rise tosomeofa transaction lawyer’smostsignificantchallenges.

§6:2BasicPrinciples

§6:2.1LookattheRightAgreement Thefirsttaskofalawyerinthereviewofacontractistoensurethathehasthecorrectcontract,andthemostcurrentversion.Itissurprisinghowoftentherearemisstepsatthisstage.Ifaclientrequestsareviewofitscreditagreement,forexample,thelawyershouldbesurethatthecreditagreementthatishandedtohimor that is in his files is the one the client is concerned about.Does the agreement involve the rightparties?If thedocumentinquestioninvolvesonlyaholdingcompanyandtheclientwantstoknowwhatrestrictionsexistastoasubsidiary,thelawyershoulddeterminewhetheraseparatecreditagreementforthatsubsidiaryexists.Thedateoftheagreementmaybeatip-offthatthereisamistake—theremaybefactsandcircumstancesthatsuggestacontractshouldbeofrecentvintage,butitdatesbacktenyears,forexample.

Evenwhen it is clear that the correct agreement is in hand, the lawyermust be sure that he has allamendments,waiversandconsents.Adviceastotheoperationofaparticularprovisionmaybewrongifamodificationtothatprovisionhasbeenoverlooked.Ifthecontractisinthelawyer’sfiles,thisissueshouldbeaddressedbythelawyer’sownfilingsystem(assuminghehasreceivedcopiesofallmodifications).(Seesection7:4forsomepracticaltipstomaintainaccesstoallmodificationstoacontract.)

Iftheagreementisinsteadprovidedbytheclient,thelawyershouldinquirewhetheranymodificationshaveoccurred.Thisquestionmustbeaskedcarefully: sometimesamodificationmayhavebeeneffectedthroughsomethingthatisnotcalledanamendment,waiverorconsentbutmayonitsfaceappeartobemerebusinesscorrespondence.Inothercases,anamendmenttoseveralrelatedcontractsmayhavebeendoneinasingleamendmentdocument.

Ifthereisanydoubtastotheexistenceornonexistenceofamendmentsofacontracttowhichapubliccompany is a party, it is a good idea to examine the schedule of material agreements attached to thecompany’s SEC filings. In addition, if there are other counsel involved in the situation, it may beappropriate to askwhether they have anymodification documents. For example, a lawyer asked by hisclient to review its credit agreement in connectionwith a proposed amendment should confirmwith thebank’scounselthathehasthemostrecentandcompletesetofdocuments.

The lawyer should not follow the client blindly when instructed to review a specific contract. Forinstance,ifthelawyerisaskedtoreviewawarrantagreementtodeterminewhetherthereareanytransferrestrictions,heshouldaskforcopiesofthewarrantsthatwereissuedunderthewarrantagreement,aswellas any shareholder agreements,because it is conceivable that restrictionsmight appear in eitherof thosedocumentsinsteadof(oraswellas)inthewarrantagreementitself.

§6:2.2ScopeoftheReview The lawyer should make sure that he fully understands the issues or transactions giving rise to thereview,sothatthereviewwillbecomplete.Forexample,ifalawyeristoldtosummarizethenoncompeteprovisionsinanemploymentcontract(butisnottoldthattheclientisplanningtoterminatetheemployee),thelawyerwillmisstheopportunitytoadvisetheclientofanissuearisingunderanotherprovisionofthecontractgivingthe terminatedemployeetheright tosellhisstockoptions to thecompany.Oftenaclientbelievesitsinterestsarebestservedbynarrowingthescopeofalawyer’sassignmentinordertominimizefees.Thisbackfiresinmanycases,duetoclients’frequentfailuretoanticipatewhatalloftheissuesareormaybe.

Often, a junior lawyer instructed to perform due diligence is not given any specific guidance as topreciselywhathe is lookingforashesifts throughmountainsof legaldocuments.His taskmaybequitedifferentifthediligenceisbeingdoneinconnectionwithanassetsaletransactionasopposedtoasecuredfinancing, for example. The lawyer in this position has two initial responsibilities: to learn asmuch aspossible regarding the transaction inconnectionwithwhich theduediligence isbeingperformed,and tounderstand the specific issues thathe ismeant tobe lookingat.1Thediligenceprocessand someof thedifferentfocusesthereofarediscussedingreaterdetailbelowinsection6:4.

§6:2.3LookattheRightProvisionsandEverythingElse Let’ssayyouareaskedtoreviewanindenturetodeterminewhetheritrestrictstheabilityofyourclienttorepurchasepreferredstockfromitsfounder.Ifyouhavereviewedafewindentures,youmayknowthatthisissueislikelytobecoveredintherestrictedpaymentscovenant.Sureenough,youdeterminethattherepurchaseispermittedunderthatcovenanttotheextentofroomintherestrictedpaymentsbasket,whichisdeterminedbyareferencetoadetailedformula.Stoppingyourreviewatthispoint,however,wouldbeamistake.The indenture also contains a covenant restricting transactionswith affiliateswhich, asdefined,would include the founder fromwhom the shares are being purchased. This covenant requires that thetransactionbedoneonanarm’s lengthbasis and if the sizeof the transactionexceedsa specifieddollaramount requires the delivery of a third party fairness opinion. This example illustrates a fundamentalprincipleinthereviewofcontracts:particularissuesmaybeaffectedbymorethanoneprovision.

Does thismean thateach timeacontract is reviewedeverywordmustbe read?Thisquestionhasnoclearanswer;itdependsonthecircumstances.Alawyerwhohasextensiveexperiencewithaparticulartypeofcontractwillbeabletodoamorefocusedreviewthananovice,sinceshecanpredictwithahighdegreeofcertaintywhichprovisionsarelikelytoberelevant.Evenanexperiencedlawyer,however,facedwithacontractoutsideherscopeofexpertise,willprobablyread(oratleastskim)theentiredocumenttoensure

thatnorelevantprovisionisoverlooked.Thisdiscussionbringsintoplayafrequently-repeatedconcept:theimportanceofacontract’sbeinguser-

friendly.Auser-friendly contract is easier to reviewbecause things are locatedwhere the reader expectsthem to be. Covenants are not buried in the representation section. Defined terms are helpfully named.Obligations are not hidden in definitions. The agreement is organized and drafted clearly and logically.Headingsarerelevantand the tableofcontents iscomplete.Unfortunately, theserulesaresometimesnotfollowedandthetaskofreviewingthatcontract ismademoredifficult.Further, thelawyerwhoassumesthattheseruleshavebeenfollowedinacontractthatsheisreviewing,doessoatherown(andherclient’s)risk.

§6:2.4Don’tForgettheDefinitions A contract provision has not been completely reviewed unless the definition of each defined termcontainedinithasbeenreviewed.Flippingbackandforthbetweenaprovisionandthedefinitionssectionmayseemtediousanddistracting,butthefailuretodosomayleadtosignificantoversights.

§6:3ReviewandInterpretation

§6:3.1TheImperfectionofContracts Aclient’s fondest hope is that after a contract is executed anddelivered thebusiness transactionwillprogress as it is supposed to without any issues and, most particularly, without the need for furtherinteractionwith the lawyers. If thishope isdashed, theclientwill thenexpect the lawyer toquicklyandconciselyopine,withabsolutecertainty,thatthecontractsayswhattheclientwantsittosayregardingtheissueathand.

Unfortunately for the client, neitherof thesedesires is always satisfied.There aremany reasonswhycontractsmaynotworkperfectly: • It is impossible toanticipateeveryeventuality.Asacontract isbeingnegotiatedanddrafted, the

partiesandtheircounselwillengageinanimplicitcost-benefitanalysisweighingtheeconomicandtime costs against the need to anticipate and draft for unlikely scenarios. Even if the parties arewillingtocovereverypossibleconceivedsituation,theymayfail.Oneoftherisksofbusinessistheriskofunanticipatedconditionsandevents. •Transactions arebeingconsummatedat ever-increasing speed.The less time that theparties andlawyershavetoreviewandreflectoncontractdrafts,themorelikelyitisthatgapsandambiguitieswillresult. • Word processing and e-mail technology has led to greater pressure to draft, circulate, review,commenton,redraftandrecirculatedocumentsinever-fastercycles.Asaresult,manyprovisionsaregraftedontoacontractinanisolatedfashion,increasingthelikelihoodthattherippleeffectsofsuchprovisionsonotherpartsofthecontractorthetransactionmaynotbeadequatelyconsidered. •Inrecentyears,businesspeopleandlawyershaveshownanincreasingwillingnesstodeviatefromstandardtransactionstructuresandcontractprovisions.Inmanycases,thesecondaryeffectsofsuchinnovationsaren’treadilyapparent. •Finally,lawyersarehumanandfallible.Wemakemistakes.

§6:3.2TheLifeofContracts Differenttypesofcontractsgiverisetodifferinglevelsofpost-signingreviewandanalysis.Ononeendofthespectrum,therearecontractsthatarefullyperformedbyallpartiesatclosing.Anexampleisatypical

residentialrealestatepurchasecontract—oncetheclosingoccurs,thecontractualrelationshipiscompleted.There are no continuing obligations, and as a result, no need for the lawyers to review or discuss thecontractpost-closing.Atypicalcorporateacquisitionagreementhasalongershelflife.Thesellerwillhavemaderepresentationsregardingthesoldbusinessandwillhaveagreedtoindemnifythebuyerintheeventsuch representations are untrue. Often the agreement will provide for a post-closing purchase priceadjustment based on a determination of the target’s working capital at or after closing. All of theseprovisionsarelikelytorequirecontinuedreviewandinterpretationbythelawyers.

Another type of contract that may involve regular involvement by the lawyers is an agreement thatrequires regular performance by one or more parties over its term. An example is a supply agreementpursuanttowhichaselleragreestoshipgraintoabuyer.Thisagreementwillhaveprovisionswithrespectto quantities,methods of delivery, quality of product, risk of loss, pricing and payment. In the ordinarycourse, the parties will transact business under contracts like this without their lawyer’s input, but asdisputesorunusualcircumstancesarise,thelawyerswillbecalled.

At thefarthestendof thespectrumarecreditagreementsandotherdebtagreements that impose tightrestrictions on a company’s operations and activities over the life of the agreement. Unlike the supplyagreement andother similar agreements,which as ageneral rulewill regulate theparties’ activitieswithrespect to thesubjectmatterof thecontractonly,debtagreementswill tovaryingdegrees restrictawiderange of a company’s activities and operations. As a result, the lawyers’ input is frequently required,particularlywhentheborrowerwishestoconsummateasignificanttransactionorisinfinancialdifficulty.Seesection9:3.

§6:3.3TimingIssues Thereisasimpleguidelineastothebesttimeforalawyertoreviewpotentialissuesunderacontract:theearlierthebetter.Unfortunately,inmostcasesthelawyerwillnotcontrolthetiming,particularlyifanissueonlycomes tohis attentionwhenhis clientdecides it is appropriate.Often, thatmaybeat the lastmoment,asaresultofavarietyoffactors:theclientmaywanttominimizelegalfees;theclientmaynotrecognize the potential issue early enough; or the client may believe that she is capable of reviewing,interpretingandunderstandingtherelevantcontractprovisionswithouttheadviceofcounsel.

These factorsmay result in a scenariowhere the lawyer receives a frantic phone call from the clientsaying"WeareabouttosignanagreementthatdoesX,YandZ.Thatdoesn’tcreateanyproblemsunderourindenture,doesit?Bytheway,ifwedon’tsignthisinthenexttwohours,wewilllosealargesecuritydeposit."Thisisatrickysituationforthelawyer—hewantstobehelpfulandresponsive,butatthesametimehewants toprovidecorrectadvice.Thatadvicecannotbeproperlygivenunless the lawyerhas theopportunitytounderstandandreviewthecontractthattheclientisabouttosign,andtocarefullyanalyzeitseffectundertheindenture.Furthermore,theremaybeotherissuesthatthelawyermayidentifyduringtheprocessthatarebeyondthefourcornersofthetwoagreementsathand—forexample,thelawyermaybeawareofothercontractsthatmaybeaffected.

Howcanthisconflictbetweentheclient’stighttimetableandthelawyer’sneedforadequatetimetodoaproperjobbereconciled?Unfortunately,theremaynotbeagoodanswertothisquestion.First,theclientshould be pressed to determine if the urgency is legitimate: often, the deadline is artificial and/or self-imposed. If the lawyer is forced to provide advicewithout sufficient information andwithout sufficienttime,heshouldmakeitclearthatthisisthecaseandthatissuesthatmayhavebeenidentifiedinamorethorough reviewmay bemissed. Failure to provide this caution to the clientmay result in blame beingunfairlylaidatthelawyer’sdoorstepifanyissueslatercometolight.

Ofcourse, thebestmedicine ispreventative.What steps can the lawyer take toprevent this situationfromoccurring? • At the time any contract is being drafted and negotiated, the client should be sensitized to the

variouscircumstanceswheretheprovisionsofthecontractarelikelytocomeintoplay. • If the client is a company, the lawyer should endeavor to make the right company officers oremployees aware of contract provisions that are relevant to their roles. For example, the proper

peopleintheclient’streasurydepartmentshouldbeawareofanyfinancialreportingrequirements(infact,theyshouldbeencouragedtoprovideinputontheseprovisionsduringthenegotiationprocess). •Thelawyershouldbealerttoanyindicationsfromtheclientthattherearecircumstancesthatmayaffectorbeaffectedbyacontract.Thelawyerthenshouldaskforinformation.Abitofpushinessandintrusivenessbythelawyerinsuchacasemayprovideasignificantbenefittotheclient,byallowingthelawyertoaddressanyissuesattheearly,ratherthanthefinalstages,ofanewsituation. •Lawyerswhoareresponsibleforoneareaofaclient’slegalneedsshouldbealerttodevelopmentsthatmayberelevanttoanotherarea.Forexample,afinancinglawyerwhoisaskedwhetheraroundoflayoffswillbepermittedundertheclient’sdebtdocumentsshouldasktheclientifalaborlawyeratherfirmshouldbeconsulted.

§6:3.4LevelsofReview Thereviewofcontractprovisionsinresponsetoaclient’squestionmaytakeaminuteortwo,oritmayrequire hours or even days of review and discussion. The depth and complexitywill depend on severalfactors: the typeof issuebeing raised, thenumberofagreements tobe reviewed, thenumberofcontractprovisions that are implicated, the level of advice that is being requested, and whether the contractprovisions’treatmentoftheissueisclearorambiguous.

[A]TypesofIssuesThesimplest situation isanarrowquestion forwhich thecontractprovidesaclearanswer.Theclient

askswhatitshoulddounderaleasethatrequiresarentpaymenttobemadeonNovember30,aSaturday.Thesectionoftheleasetreatingpaymentrequirementsprovidesthatanyrentpaymentthatisstatedtobedue on a day that is not a business day shall be paid on the next preceding business day. Under thedefinition of business day, Saturdays are treated as non-business days. The advice, therefore, isstraightforward:maketherentpaymentonFriday,November29.

Thequestionposed to the lawyermaybemuchmore complicated. Itmaybeopen-endedorgeneral:whatarethelessor’sremediesifwefailtomakeapaymentrequiredunderthelease?Anappropriateanswerto a question like this will involve a more thorough review of the contract and a much more detailedresponse, since the leasewill provide for several different remedies, each ofwhich involves a differentprocessandleadstoadifferentresult.

Sometimesthelawyermustadvisetheclienthowtostructureatransactionorconductitsactivitiesinawaythatcomplieswithacontract’srestrictions.Whatif,forexample,aclientwantstoacquireacompanywhosesoleassetisawarehousefacility.First,thelawyerwillidentifythecontractprovisionsthatmayhaveanimpactontheclient’sabilitytoachievethisgoal.Next,thelawyerwillidentifywaysofstructuringthetransaction that will not run afoul of these provisions. For example, the client’s credit agreement mayprohibittransactionsinvolvingtheacquisitionofcontrollingequityinterestsinanotherperson.Thelawyerwould advise the client that it may avoid the need to obtain the lender’s consent by structuring thetransaction as an acquisition of the warehouse, rather than an acquisition of the entity that owns thewarehouse.Ofcourse,thelawyerwillalsoneedtobecertainthattherearenootherprovisionsthatmightaffecttheclient’sabilitytostructurethetransactioninthisfashion.

[B]WhatIsatStake?Withoutsuggestingthata lawyershouldeverprovidehisclientwithinadequateor incompleteadvice,

the circumstances of each situationwill dictate the level of intensity that is required in the review andanalysisofacontract.Contrastthefollowingtwoexamples.Inthefirst,theclienthasaskeditslawyerabouttheproperoperationofaprovisioninareceivablessaleagreementthatpermitsit todeferthedeliveryoffinancial information as a consequence of force majeure, defined to include acts of war. The client’sMexican subsidiary (which represents nomore than 3% of the client’s sales, profits or assets) has been

unabletocompileitsyear-endnumbersbecauseoftechnologyglitchesresultingfromrevolutionaryattacks,andasaresulttheclientwillnotbeabletodelivertherequiredfinancialinformationuntilaweekafteritisrequiredundertheagreement.Failuretocomplywiththefinancialinformationdeliveryrequirementsdoesnotgiverisetoanyspecificremedies.

Inthesecondexample,theclienthasenteredintoanagreementtomergewithanotherpubliccompany.The merger agreement is subject to a condition that allows the client to terminate the contract if itreasonablydeterminesthattherehasoccurred"oneormoreevents,actsorconditionswhich,individuallyorintheaggregate,couldreasonablybeexpectedtohaveamaterialadverseeffectonthefinancialcondition,assets, liabilitiesorbusiness"of the target.The targethasannounced that it isunder investigationby theJusticeDepartmentforpossibleviolationsoftheForeignCorruptPracticesAct,andhasannouncedthatitsquarterlynetincomeisoff15%fromthelevelreportedforthesameperiodinthepreviousfiscalyear.

Both of these situations involve potentially tricky interpretation issues. In the first example,was thesituationinMexicoanactofwar?WastheclientrequiredtoincludetheMexicansubsidiary’sresults,orcouldithavedeliveredallofthefinancialinformationotherthanthatrelatingtotheMexicansubsidiary?Inthesecondexample,doesthemereexistenceof theinvestigationhaveanyeffectonthetarget’sfinancialcondition,assets,liabilitiesorbusiness,andifso,howcanitsmaterialitybemeasured?Doesitrequireananalysis and estimate of the potential liability for violating the federal statute? What are the possibleremediesunderthestatute?Isthedropinnetincomebyitself,ortogetherwiththepotentialliabilityforthepossiblestatutoryviolation,material?

While each of these situations involve potentially difficult interpretation issues, the first situation ismuch easier to address because there is far less at stake. The risk to the client of beingwrong ismuchsmaller,becausethecontractdoesnotprovideanydefinedremedy.Ofcourse,anotherpartytothecontractcouldassertabreachbytheclient,buttheclient’sabilitytocurethebreachquicklybluntsthisconcern.

Theothersituationisfardifferent.Sincebothpartiestothemergeragreementarepubliccompanies,thedeal hadbeenpublicly announced.A terminationof this agreement by the clientwould alsobepubliclyannouncedandwouldprobablybe the focusofnegativemediaattention.Because theotherparty’sstockpricehadfallensincethedatethemergeragreementwassigned,anyterminationbytheclientunderthesecircumstanceswould probably lead to litigation. This situation presents amuch greater challenge to thelawyeraskedforadviceon themeaningandeffectof the relevantcontractprovisions.The lawyer in thesecondexampleislikelytopursuemorelinesofinquiryandanalysisthanthelawyerinthefirstexample.Thesewould include: (a) consultingwith other lawyers (including litigators and those familiarwith theForeignCorruptPracticesAct);(b)researchingcaselawrelatingtomaterialadversechangeclauses;and(c)reviewingnotesanddraftsfromthetimethatthecontractwasinnegotiationforanyrelevantbackgroundonwhatwasintendedbytheprovision.

These examples illustrate that every situation involving the review and interpretation of a contractinvolvesacost-benefitanalysisweighingthescopeofthereviewagainstthesignificanceoftheissuebeingexamined.

[C]DegreesofCertaintyBothlawyersandtheirclientsarehappiestwhenaquestionunderacontracthasaclearanswer.When

theanswerisnotentirelycertain,boththelawyerandclientmustmakethebestofthesituation.Thelawyermust do her best to provide the greatest amount of guidance to her client, taking into account anyuncertaintyinherconclusions,andtomakesurethattheclientisawareoftheexistenceandtheextentoftheuncertainty.Theclientultimatelywillhavetocometotermswithnothavinga100%clearanswer.

There are different sources of uncertainty. Some are a result of contract terms that are inherentlysubjective.Termssuchas"reasonable,""material"and"couldreasonablybeexpectedto"arealwaysgoingtobesubjecttodifferinginterpretationsatthemargins.Anothersourceofuncertaintyiscontractprovisionsthataredraftedunclearlyorambiguously,orthatdonotspecificallyaddressthesituationathand.

Different circumstances require different levels of certainty. In a casewhere the lawyer believes thatthereisnoabsolutelyclearanswertoaquestionunderacontract,hecanprovidehisbestadvicetotheclientandhelp theclient formulate its response. If the lawyerbelieves thatan interpretation isalmostcertainlycorrect,heshouldhavenoqualmsaboutlettingtheclientactinrelianceonsuchinterpretation,aslongas

the client ismadeawareofpossibleother interpretations and their consequences.Evenwhen the lawyerbelievesthathisconclusionastotheinterpretationofacontractprovisionismorelikelythannottobethecorrectone,theclientmustbegiventheopportunitytodecideforitself,onacompletelyinformedbasis,toactornottoactbasedonthisconclusion.

Adifferent situation ariseswhere the lawyer’s conclusionmust be provided in a formalwritten legalopiniontoathirdparty.Contractinterpretationissuesoftenarisewhenalawyerisrequiredtoopinethattheexecution,deliveryandperformancebyhisclientofacontractdoesnotviolate,conflictwithorresultinabreachofoneormoreothercontracts(a"no-conflictopinion").Aresponsiblelawyerwillneverrenderanunqualified no-conflict opinion (a "clean opinion") unless he is reasonably certain that his conclusion iscorrect.2Thismustbethecaseevenifthelawyerbelievesthatheandhisfirmbearnoriskiftheopinionturnsouttobeincorrect;alegalopinionconstitutesalawyer’sbestconclusionsastospecifiedmattersoflaw,notaninsurancepolicy.

Whatifthelawyerbeingaskedforano-conflictopinionbelievesthattheissueisnotentirelyfreefromdoubt,andisthereforeunabletorenderacleanopinion?Hemaydelivera"reasonedopinion,"inwhichhisanalysisandconclusionsareexplicitlysetforth.Thestrongestformofreasonedopinionstatesthatacourt,iffacedwiththeissue,"should"reachaparticularresultbasedontheanalysisdescribedintheopinion.Ifthelawyerrenderingtheopinionis lesscertain, theopinionmaystate thatacourtwouldbe"morelikelythannot"toreachtheresult.

Inmanycases,theinabilityofthelawyertodeliveracleanno-conflictopinionwillresultinthepartiesbeing unwilling to complete the transaction. Take, for example, amortgage financingwhere there is anissue as to whether one of the mortgagor’s contracts would permit the granting of a mortgage to themortgagor.Mortgagor’scounseliswillingtodeliverareasonedopiniononthisissue,butinmostcasesthemortgageewouldbeunwillingtocloseonthisbasis.Itwouldpotentiallybeexposingitselftoaclaimbythecounterpartytotheothercontractthatbytakingthemortgagethemortgageetortiouslyinterferedwiththe mortgagor’s rights under the contract and induced its breach. Additionally, a contract may beunenforceableifitisenteredintobypartiesawarethatitconflictswiththeprovisionsofanothercontract.3

Asaresultofthesedynamics,theexistenceofconflictsshouldbeidentifiedasearlyaspossibleinthecourseofatransaction.Theclientthatconsultsitslawyersafteratransactionhasbeenstructuredandtheprincipaltermsnegotiatedriskshavingtorestructureitstransactionaspotentialconflictsareuncovered.

§6:4DueDiligence Due diligence is a broad concept that generally describes the process in which a buyer or investorinvestigates factualmatters important to its decision to enter into the transaction.A largeportionof duediligence performed by junior lawyers is reviewing contracts. This can run the gamut from a completereviewofthematerialcontractsofacompanyinconnectionwithadetaileddescriptionofthecompanyanditsbusinessinasecuritiesofferingdocument,forexample,toafarmorelimitedreviewofcertaincontractsrelatingtoaleasingtransaction.

§6:4.1ScopeoftheAssignment Because due diligence is such an open-ended concept, it is insufficient for a senior lawyer to send ajuniorlawyertoconductaduediligencereviewwithoutgivingspecificguidanceastowhatthescopeandgoalsoftheprocessare.

Specifically,thefollowingquestionsshouldbeanswered: •Whatwork product is expected to be produced?Should each contract reviewedbe summarized,

and,ifso,inwhatlevelofdetail?(Itishelpfultoasktheassigninglawyerforcomparablesummariespreparedinprevioussimilarduediligenceexercises.) •Whatspecificcontractsorcategoriesofcontractsshouldbereviewed? •Whatentities’contractsaretobecovered?Oneimportantthingtokeepinmindisthatcontractsof

aparentcompanyoftencontainrestrictionsontheactivitiesofitssubsidiaries(and,lessfrequently,thereversemaybethecase). •Ispartoftheassignmentlocatingthecontracts?Ifso,whatisthestrategyforthatprocess?Whatarethepossiblesources? •Whatisthepurposeoftheexamination?Isittogainageneralunderstandingofthecontractsbeingreviewed,orisittodeterminethepossiblecontractualrestrictionsonaproposedtransaction?Ifso,whatarealloftheelementsofthetransaction? In no event should any due diligence exercise be commenced without a clear understanding of the

answerstothesequestions.Followingisanoverviewofcertainareasofcontractduediligencethatcomeupinthecontextofcertain

typesoftransactions.4,5

§6:4.2DueDiligenceofSeller’sContractsinanAssetAcquisition Aduediligencereviewofthecontractsofanentitythatissellingassetsshouldincludeareviewofthefollowinggeneralissuesandspecificprovisions: TransferRestrictions

•Provisionsrestrictingthesale,lease,transfer,encumberingorotherdispositionoftheassetstobesold. •Dueonsaleclauses:typicallyfoundinrealestatemortgages,theseprovidethatindebtednessautomaticallybecomesdueuponthesaleofthecollateral. •Iftheassetstobetransferredincludeacontractoracontractright,anti-assignmentprovisionsinthecontractitself. •Clauses providing that a sale of assets triggers an event of default, event of termination orotherremedialrights.

ExistingEncumbrances •Provisionscreatingliens,pledges,mortgages,securityinterests,easementsorotherrestrictions

ontheassetstobetransferred. •Leasesorlicenseagreementscoveringtheassetstobetransferred. •Provisionspermittingthereleaseoftheassetsfromanyapplicableencumbrancesorcontractrestrictions. •Provisionspermittingorrequiringthefilingofafinancingstatementregardingtheassetstobetransferred.

MandatoryPaymentProvisions •Provisionsrequiringpaymentsupontheconsummationofassetsales.

ChangeofControlProvisions •Provisionsinwhichremedialorotherrightsaretriggeredbyasaleof"allorsubstantiallyall"

or"asubstantialportion"ofanentity’sassets.

§6:4.3DueDiligenceofPurchaser’sContractsinanAssetAcquisition

Issuesandprovisionstolookforinaduediligencereviewofapartythatisbuyingassetsinclude: RestrictionsonPurchase

•Restrictionsonthepurchaseoracquisitionofassets.6

RestrictionsonCapitalExpenditures •Restrictionsonthemakingofcapitalexpenditures,iftheassetsbeingacquiredincludefixedor

capitalassets.

RestrictionsonInvestments •Sometimes"investments"isdefinedtoincludecertainassetacquisitions,suchasthepurchase

of the assets of an ongoing line of business, or the purchase of all or substantially all of theassetsofanotherentity.

LienRequirements •Provisionsrequiringafter-acquiredpropertytobepledgedtoacreditor.Thismaybeanissueif

theacquiredassetsaresupposedtosecureacquisitionfinancing. •Negativepledgeclauses,whichprohibitthecreationofliensonproperty.Again,anissuemayariseif theassetstobeacquiredaretobepledgedtosecuretheacquisitionfinancingorotherfinancingofthepurchaser.

ReceivablesAgreements • If the purchaser is a party to a factoring agreement, receivables transfer agreement or

receivables securitization transaction, its effect on the acquisition of assets consisting ofreceivables,generalintangiblesorcontractrightsmustbeanalyzed.

LineofBusinessRestrictions • If a business is being acquired and is different from the purchaser’s existing business,

covenantsrestrictingthescopeofthepurchaser’sbusinessmustbereviewed.

§6:4.4DueDiligenceofaTarget’sContracts7inaStockAcquisition8

Intheacquisitionofanentitythroughthepurchaseofallofitsoutstandingstock,athoroughreviewofthetargetentity’scontractsisadvisabletodeterminewhetherthey(a)impedeorprohibittheacquisition,(b)conflictwithanyofthepurchaser’scontracts,or(c)interferewithanyproposedfinancing. ChangeofControlProvisions

•Theseprovisionsmaybetriggeredby(a)thetransferofshares(usuallyvotingshares),(b)theexistenceofcontractualagreementspursuant towhichvotingrightsorcontrolare transferred,and (c) the changing of themembership or composition of the board of directors or similargoverningbodyofthetarget. •Certainagreements(particularlyrealestateleases)providethatachangeofcontrolisdeemedtobeatransferofanassettotheentitytowhichcontrolistransferred.Theeffectofthisisoftentotriggeradefaultorprepaymentundertheagreement.

SubsidiaryRestrictions •Thepurchaser’s contractsmaycontainanumberofprovisions that apply to thepurchaser’s

subsidiaries. Most of these will relate to the subsidiaries’ business and activities (these arediscussedingreaterdetailinsection6:4.6).Theseprovisionsarepotentiallyrelevantinastockacquisition, because the target will become a new subsidiary of the purchaser uponconsummationofthesale.Onefrequentlyoccurringcovenantrelatestosubsidiaries’contracts.This provision is usually entitled "PaymentRestrictionsAffectingSubsidiaries" or somethingsimilar.Itprohibitstheexistenceofcertainrestrictionsinthesubsidiaries’contracts,onthebasisthatsuchrestrictionsimpedethefreeflowofassetsandcashfromthesubsidiarytoitsparent.Thetypesofcontractualrestrictionsinthecontractsofthetargetanditssubsidiariesthatmayconflictwiththisprovisionarethefollowing: •Restrictionsondividends. •Restrictionsonassetsalestoitsparentcompany. •Restrictionsonmakingloanstoparent. •Restrictionsonmakingpaymentsonindebtednessorotherobligationsoftheparent.

RestrictionsonTransactionswithAffiliates • Restrictions on the target’s ability to conduct transactions with its affiliates may impede

transactionsbetweenthepurchaserandthetargetthatareplannedasaresultoftheacquisition,suchassalesofassets,assumptionsofliabilities,andthelike.

DebtProvisions • If the target has debt that is to be repaid or refinanced in connectionwith the acquisition,

provisionsrelatingtothetarget’sabilitytorepaysuchdebtandthemechanicsthereof.

ExistingEncumbrances •Provisionscreatingliens,pledges,mortgages,securityinterests,easementsorotherrestrictions

onthetarget’sassets. •Leasesorlicenseagreementscoveringthetarget’sassets. •Provisionspermitting the releaseof the target’s assets from theapplicable encumbrancesorrestrictions. • Provisions permitting or requiring the filing of a financing statement under the Uniform

CommercialCoderegardingthetarget’sassets.

Financing-relatedProvisions •Ifthetargetisexpectedorrequiredtoborrow,guaranteedebtand/orgrantliensonitsassetsas

apartoftheacquisitionfinancing,provisionsrestrictingsuchactionsmustbereviewed.

§6:4.5DueDiligenceofaSeller’sContractsinaStockAcquisition

Asellerofstockmayhavecontractualrestrictionsonitsabilitytosellthestock,ormayhavepledgedthestocktoacreditor. TransferRestrictions

•Provisionsrestrictingthesale,lease,transfer,encumberingorotherdispositionofthestocktobesold.Thesewouldincludeanygeneralprohibitiononassetsales,unlessthattermisdefinedtoexcludestock.Thiscouldalsoincludedragalongandtagalongrights. •Clauses providing that a sale of assets triggers an event of default, event of termination orotherremedialprovision.

ExistingEncumbrances •Provisionscreatingpledges,liensorotherrestrictionsonthestocktobetransferred.

•Provisionspermittingthereleaseofthestockfromanysuchlienorotherrestriction. • Provisions permitting or requiring the filing of a financing statement under the UniformCommercialCodeinrespectofthestocktobetransferred.

MandatoryPaymentProvisions •Provisionsrequiringpaymentsupontheoccurrenceofassetsales.

ChangeofControlProvisions •Provisionsinwhichremedialorotherrightsaretriggeredbyasaleof"allorsubstantiallyall"

or"asubstantialportion"ofanentity’sassets.9

§6:4.6DueDiligenceofaPurchaser’sContractsinaStockAcquisition

Apurchaserofstockmayhavecontractualrestrictionsonitsabilitytopurchasethestock.Furthermore,ifasaresultoftheacquisitionthetargetbecomesasubsidiary,theremaybeissuesunderprovisionsinthepurchaser’scontractsthatapplytosubsidiaries. RestrictionsonPurchase

•Restrictionsonthepurchaseoracquisitionofequityinterests.

RestrictionsonInvestment •Provisionsrestrictinginvestments(apurchaseofsharesisusuallydefinedasaninvestment).

ExistenceofSubsidiaries •Provisionsrestrictingthecreation,acquisitionorexistenceofsubsidiaries,iftheacquisitionof

stockresultsinthetargetanditssubsidiariesbecomingsubsidiariesofthepurchaser(asdefinedineachofthepurchaser’scontracts).

RestrictionsonSubsidiaries •Iftheacquisitionofstockresultsinthetargetanditssubsidiariesbecomingsubsidiariesofthe

purchaser (as defined in eachof thepurchaser’s contracts), eachprovision that applies to thepurchaser’ssubsidiariesmustbeanalyzedtodeterminewhetherfactspertainingtothetargetandits subsidiarieswould result in a breach of such provision.A list of examples (by nomeansexhaustive): •Restrictionsondebt and liens thatmaynotpermitdebt and liensof the target that are

expectedtocontinueinplaceaftertheacquisition. • Covenants that require subsidiaries to provide guarantees, to pledge assets, or to takesimilaractions. •Restrictionson asset sales thatmayblock salesof assetsby the target that are alreadycontractedfororthatareanticipated. •Representationsthatapplytothepurchaser’ssubsidiaries,coveringmattersasdiverseasgoodstanding,litigation,violationsoflawandcontracts,employeebenefitplans,absenceofmaterialadversechange,amongothers.

PaymentRestrictionsAffectingSubsidiaries •Theremaybeprovisionsinthepurchaser’scontractsthatprohibitcertainrestrictiveprovisions

in its subsidiaries’ agreements. See the discussion above in section 6:4.4 under "SubsidiaryRestrictions."

LienRequirements •Provisionsrequiringafter-acquiredpropertytobepledgedtoacreditor.Thismaybeanissueif

theacquiredstockissupposedtosecureacquisitionfinancing. •Prohibitionsonthecreationofliensonproperty.Again,anissuemayariseifthestocktobeacquiredistobepledgedtosecuretheacquisitionfinancing.

§6:4.7DueDiligenceoftheContractsofanIssuerofStock

Inatransactioninvolvinganissuanceofstock,whetherinapublicofferingoraprivateplacement,theissuer’scontractsmustbereviewedforprovisionsthatrelatetoequityissuances. RestrictionsonIssuanceofSecurities

•Provisionsprohibitingorrestrictingtheissuanceofequitysecurities.

ChangeofControlProvisions •Provisionsthattriggerremediesiftheidentitiesofshareholdersordirectorschange.

MandatoryPrepayments •Provisionsrequiringpaymentstobemadewiththeproceedsoftheissuanceofequity.

PreemptiveRights • Provisionsgranting existing shareholders the right topurchase shares on the same terms as

purchasersinanystockoffering.

§6:4.8DueDiligenceoftheContractsofaBorrowerinanUnsecuredLoan

orDebtIssuanceTransaction When a company is borrowing money on an unsecured basis, either under a bank credit facility orthroughaprivateplacementorpublicofferingofdebtsecurities,thefollowingcontractualissuesmustbeexamined. DebtRestrictions

• Provisions restricting an entity’s ability to borrow or to incur indebtedness (particular careshouldbegiven to thedefinitionof"debt"or"indebtedness,"whichoften includes thingsnottraditionallyconsidereddebt,suchaslettersofcreditandguarantees).

• If the new debt is to be guaranteed by subsidiaries or other related entities, provisionsrestrictingsuchentities’abilitytoguaranteeanother’sobligations(sometimesthereareseparaterestrictions on "contingent obligations" that may cover guarantees and, if applicable,reimbursementobligationsinrespectoflettersofcredit). •Financialcovenantsthatmaybeaffectedbytheincurrenceofindebtednessorthepaymentofprincipalandinterest.

Prepayments • Provisions restricting the ability of the entity to make payments or prepayments of the

indebtednesstobeincurred. • Provisions requiring that the proceeds of certain events (such as the issuance of equity, thereceiptof insuranceorasset saleproceeds, the receiptofexcesscash flow)beapplied topayspecifiedobligations.Iftherearesuchprovisions,theagreementgoverningthenewdebtcannotrequiresimilarprepaymentswiththesameproceeds. • A provision that requires the proceeds of indebtedness to be applied to the payment of anexisting obligationmay apply to the debt to be incurred. This may be inconsistent with theproposedusesofthemoneytobeborrowed.

Liens •Provisionsprovidingforthegrantingofsecurityinterestsorotherliens—theunsecuredlender

willwanttoknowaboutotherobligationsthataresecured.

PaymentRestrictionsAffectingSubsidiaries •Iftheagreementgoverningthenewdebtlimitstheborrower’ssubsidiariesfromagreeingtoor

permittingpayment restrictions (see the description of this under "SubsidiaryRestrictions" insection 6:4.4 above), the subsidiaries’ contracts must be reviewed to determine if any suchrestrictionsexist.

§6:4.9DueDiligenceoftheContractsofaBorrowerinaSecuredLoanor

DebtIssuanceTransaction In addition to the items enumerated above for unsecured loan and debt issuance transactions, thefollowingissuesmustbeaddressediftheloanordebtobligationsaretobesecuredbyliensontheassetsoftheborrower/issuer: LienCovenants

• These are provisions that restrict a party’s ability to grant security interests,mortgages andotherliensonitsassets.

EqualandRatableSecurityClauses •Theseareprovisionsthatrequireexistingobligationstobe"equallyandratably"securedtothe

sameextentandwiththesamecollateralthatnewobligationsaresecured.Thegrantingofsuch

securitytopreexistingdebtwouldnormallybeprohibitedbythetermsofthenewdebt.

Anti-assignmentProvisions •Ifthesecuritypackageincludescontractsorcontractrights,allcontractsmustbereviewedfor

provisions thatprohibit thegrantingofa security interest in them.Prohibitionsor restrictionsagainsttheirassignmentmustalsobelookedfor,asassignmentwillberequiredifthesecuredlendermustforecloseonthecollateral.10

____________________1Thisisofteneasiersaidthandone.Theseniorlawyergivingtheassignmentmayassumethatthejuniorlawyerhasagreaterknowledgeorskilllevelthanheactuallydoes,ormaybeinabighurryandthereforenot take the time to explain the assignment fully. In any event, it is preferable to incur a senior lawyer’s short-termannoyancebypressing for clear instructions, insteadofhis long-termdissatisfactionwithanassignmentnotproperlyperformed.2Thisprincipleappliestoallopinions,notjustno-conflictopinions.

3RESTATEMENT(SECOND)OFCONTRACTS§194(1981).4N.B.Theselistsarebynomeansexhaustive;theyaremerelyastartingpoint.Inaddition,thisdiscussionfocusesonlyonthereviewofcontracts.Mostduediligencereviewsincludeaswellsuchthingsas organizational documents (e.g., charters and by-laws), policymanuals, minutes of board of directors’ meetings, litigation papers, SEC and other governmental filings and the like. Although adiscussionofthereviewofsuchmaterialsisbeyondthescopeofthischapter,manyoftheprinciplesdescribedareapplicable.Inaddition,thescopeoftheduediligencewillvarydependingonthesituationandtheclient’spreferences.5Manyanti-assignmentprovisionshavebeenrenderedunenforceablebySections9-406and9-408oftheUniformCommercialCode.Seesection10:2.10.6Totheextenttheassetsconstitutecontracts,seenote5astotheunenforceabilityofcertainanti-assignmentprovisions.7Aduediligencereviewofatarget’scontractsmaygowellbeyondwhatisoutlinedhere.Forinstance,thepotentialpurchaserofachemicalcompanymayrequestareviewandsummaryofallofthetarget’ssupplycontractstodeterminethereliabilityofitsrawmaterialssourcing.8Referenceshereto"stock"and"shares"aremeanttoencompassotherequityinterestsincludingpartnershipinterestsandlimitedliabilitycompanyinterests.9Seenote3.10SuchprohibitionsmaybeunenforceableundertheUniformCommercialCode.Seesection10:2.10.

Chapter7

Amendments,WaiversandConsents

§7:1TheAmendmentProcess Itisnotunusualtomakechangestoacontractafterithasbeenenteredinto:thecontractmaycontainmistakes that need to be corrected; circumstancesmay arise thatwere not anticipated and therefore notaddressed;orthepartiesmaywanttochangethedeal.

In these situations, a newnegotiationwill occurwhichwill dictate how andwhether an amendment,waiverorconsentisenteredinto.Undermostcircumstances,neitherpartyisunderanylegalcompulsiontoamend the contract and the normal principles of leverage apply: a rational person will not agree to aconcessionunlesssheiscompensatedinsomefashion.Forexample,alandlordwillnotagreetoreducetherent under a long-term lease, even though market rent levels have decreased, unless it receives somereciprocalconcessionfromthetenant.1

Anamendment,waiverorconsentisanewcontractastowhichallofthelegalrequirementsofcontractcreation and enforceability apply. Additionally, amendments, waivers and consents containmany of thesamebuildingblockprovisionsfoundinotheragreements.Theamendmentmayhaveoneorbothpartiesbringdowntherepresentationsmadeintheoriginalcontract,ornewrepresentationsmaybemade.Theremaybeconditionsprecedenttotheeffectivenessoftheamendmentsimilartothoseinanyotheragreement.Ontheotherhand,covenantsappearinginamendmentsaremostoftennewcovenantsthatwillbecomepartof theamendedcontract,asopposed tocovenants thatexistonly in theamendment itself.Likewise, it isquite unusual for an amendment to contain its own remedial provisions.Once an amendment,waiver orconsent is effective, the underlying contract continues to be effective, as modified by the amendment,waiverorconsent.

§7:2 Amendments, Waivers and Consents: Different Tools for DifferentTasks Technically,thedifferencebetweenanamendment,awaiverandaconsentisthefollowing: •Anamendment isachangetoaprovisioninanexistingcontract,or thedeletionoradditionofa

provision.Example:anemploymentcontractisamended(a)toincreasetheemployee’sbasepay,(b)to provide for a new option package, and (c) to delete restrictions on the employee’s outsideactivities. •Awaiverisaparty’sagreementnottoenforceacontractualright.Example:anemployeragreesnottoenforceitsrightunderanexistingemploymentcontracttopreventtheemployeefromengagingincertainunrelatedactivities. •A consent is an agreement by one party to permit something that is prohibited by the contract.Example: an employer consents to an employee’s engaging in certain unrelated activities that arerestrictedunderanemploymentcontract.

You will notice that a single result may be achieved through the use of any of these techniques.Sometimestheformofaparticularmodificationmaybedictatedbycustomorcourseofconduct.Inothercases, theformmaybeselected tocreateacertain impression:forexample,adocumentcalledaconsentmaycastthedesiredmodificationinabetterlightthananagreementcalledanamendmentorawaiver.

Waivers and consents do not modify the underlying contract but instead suspend enforcement ofspecifiedprovisions.Forthisreason,awaiverisoftenusedwhereatemporarysolutiontoaproblemundera contract is needed. An example of this is a limited partnership agreement that requires each limitedpartnertodeliverannualfinancialstatementstothegeneralpartnerbyMarch31ofeachyear.Ifoneyearalimitedpartnercan’tmakethisdeliveryuntilApril30,thegeneralpartnermightexecuteawaiverbywhichthedelinquentlimitedpartner’sperformanceofthiscovenantiswaiveduntilApril30.Ofcourse,thesameresultcouldbeachievedbypermanentlyamendingtheagreementtospecifythatthefinancialstatementsofthatlimitedpartnercouldbedeliveredonApril30insteadofMarch31ofthatyear.Theone-timenatureoftheoccurrence,however,andtheparties’interestinnotmakingthisexceptionpartoftheagreementitself,wouldmilitatetowardtheuseofawaiverandnotanamendment.

Astandstill(alsocalledaforbearance)isawaiverofaparty’srightstotakeremedialactioninrespectofanotherparty’sbreach,insteadofawaiverofthebreachitself.Thismaybelessfavorabletothebreachingparty than a completewaiver.A breach of a contract provisionmay have several ancillary legal effects:among these, it may trigger defaults under other agreements ("cross-defaults") or it may give rise todisclosureobligations.Ifapotentialbreachisaddressedbyamendingtheagreementtopermittheoffendingactionorcircumstanceorbywaivingthebreachitself,therewillbenoviolationandsuchnegativeancillaryeffectswill be avoided. Thiswill not be the casewhere a standstill is given and the underlying breachsurvives; aparty’s agreementnot to exercise its remediesdoesnot eliminate the fact that thebreachhasoccurredandiscontinuing,andthecontinuingbreachmayhaveindependentlegalconsequences.

§7:3AmendmentTechniques Amendments that change existing provisions can be drafted either to amend specific language or torestatetheentireprovision.Forexample,takethefollowingprovision:

TheLessee shall not enter into any subleaseof the32nd floor, except to entities approvedby theLessor(suchapprovalnottobeunreasonablywithheld).

ThepartieswanttoamendthisprovisiontopermitsubleasestotheLessee’saffiliateswithouttheneedfortheLessor’sconsent.Thiscanbedraftedintwoways.Thefirstismoresurgicalinnature:

Section 10.14 is amended by adding the phrase "to affiliates of the Lessee and" after the word"except"appearingtherein.

Thesecondapproachistorestatetheprovisioninitsentirety:

Section10.14isamendedinitsentiretyasfollows:

TheLesseeshallnotenterintoanysubleaseofthe32ndfloor,excepttoaffiliatesoftheLesseeandtoentitiesapprovedbytheLessor(suchapprovalnottobeunreasonablywithheld).

Thebenefitofthefirsttypeofamendmentdescribedaboveisgreaterbrevity.Thedisadvantageisthatit

ishardertoread.Thereisnowayforareadertounderstandthefirstexamplewithoutcross-referencetotheoriginalagreement.Thisiswhyitisoftenpreferabletoemploythesecondapproach—itresultsinalongeramendmentbutitismuchmoreuser-friendly.

Deletingandaddingprovisionsisamorestraightforwardtask.Hereisanexampleofthedeletionofaprovision:

Section3(b)(ii)isdeletedinitsentirety.Hereisanexampleofanamendmentprovisionwhichaddsanewsentence:

Section7isamendedbyaddingthefollowingclause(d)attheendthereof:"(d)AlldeterminationsmadebySellerinthisSection7shallbemadepromptlyandinareasonablemanner."

In the context ofmodifying, deleting or adding provisions, the lawyer should always be attentive to

cross-references.If,forexample,thedeletionofasectionwouldrequireanumberofsubsequentprovisionstoberenumbered,itmaybeagoodideatoreplacethedeletedtextwiththewords"IntentionallyOmitted."Thisleavesallthesubsequentnumberingintactandeliminatestheriskofablowncross-reference.

Similarly, it is usually preferable to add a new item to a series of items of the end of the list. Forexample, ifsection5ofanagreementrestrictsaparty’sactionsbutsetsfortha listofexceptions tosuchrestrictioninclauses(a)through(f),thenthebestwaytoaddanewexceptionisasfollows:

Section5isamendedby(i)deletingtheword"and"attheendofclause(e)thereof,(ii)deletingthe"."attheendofclause(f)thereofandreplacingitwith";and",and(iii)addingthefollowingnewclause(g)attheendthereof:"(g)actionsrequiredbyapplicablelaw".

Notethatthechangesbeingeffectedbyclauses(i)and(ii)oftheprecedingexamplearenotsubstantive,

but are included to place the word "and" correctly before the last item in the series and to adjust thepunctuation accordingly. (It is the author’s view that these changes, while technically correct, are notsubstantively necessary and can be omitted in order to streamline the amendment.) By adding the newexceptionattheendoftheseries,thedraftspersoneliminatestheneedformorereletteringoftheexistingexceptionsandreducestheriskofcreatingincorrectcross-references.

Theformoftheactualmodificationdocumentisamatterofchoiceorcustom.Anamendmentmayhavethe appearance of a formal contract, with a heading, whereas clauses, section headings, and the like.Alternatively, thesamegoalcouldbeaccomplishedbythedeliveryofa letteragreementfromoneof thecontractingpartiestotheothers(solongasallpartiessignit).Typically, thelatterformatwouldbemorecommonforsimpleramendments.

A choice also needs to be made between an amendment and an amendment and restatement. Anamendmentand restatement is anamendmentwhichamends theagreementby restating it in its entirety,withtheamendmentsincorporatedintothebodyofthenewcontract.Thisapproachisusedwheretherearemanychangestobemade,wheremodificationsflowthroughtheagreementinapervasiveway,orwheretherehavebeenanumberofamendmentsthatarebecomingincreasinglyunwieldytomonitor.

§7:4KeepingTrack Alawyerreviewinganagreementmustalsoreviewallpreviousamendments,waiversandconsents.Thefailure to do so could result in a misreading of the agreement. The key to avoiding this problem is todevelopagoodsystemforkeepingtrackofallsuchmodifications.

Onemethod is to annotate aworkingcopyof an agreement to indicate amendedprovisions.Anothertechnique is to create a "conformed copy," that is, a version inwhich all of the amendments have beenactuallyruninthedocumentasifitwerearestatement.However,onimportantissuesitisunwisetorelyonthiswithoutreferringdirectlytotheamendmentsandtheoriginalagreement.

Whereanagreementhasbeen the subjectofmultipleamendments itmaybemoreefficient todo the

next amendment in the form of an amendment and restatement.After it becomes effective, the restatedcontract will act as the complete and operative document incorporating the original agreements andamendments.Thisisparticularlyhelpfulforcontractsthatmustbereviewedregularly.

Inanyevent,itisanextremelysensibleandefficientpracticetoputeachamendmenttoanagreementphysicallytogetherwiththeagreementitself.Iftheagreementiskeptinthefilesasaseparatedocument,put the amendments in the same file. If the agreement is in a velobound set, insert the amendmentimmediatelybehindtheagreementandhavethesetre-bound.Iftheoriginalagreementisinahard-boundvolume, note the existence of the amendment onwith the agreement itself. The goal of all of this is tofacilitateacompleteandaccuratereviewofthecontractinthefuturewhencircumstancesrequire.

§7:5SatisfyingAmendmentRequirements Agreementsusuallyhaveprovisionsgoverninghowmodificationsmaybeeffected.Usually thesewillstatethatallamendments,waiversandconsentsmustbeinwriting.Irrespectiveofwhethersuchaprovisionisenforceable,itisbetternottomakeanymodificationtoanagreementotherthaninawritingthatsatisfiesalloftherequirementsofanenforceablecontract.Sometimestheseprovisionswillrequirethatamendmentsmustbeexecutedby"thepartytobecharged,"i.e.,thepartywhoseinterestsarebeingmodifiedadverselybytheamendment.Mostoften,theamendmentprovisionwillrequireamendmentstobesignedbyallofthecontractparties.

Multipartyagreementssuchassyndicatedcreditagreementsmayhaveamendmentprovisionsspecifyingwhichparties’ approval is required fordifferent typesof amendments.Typically, only changes to certainimportant economic terms require approvalof all the lenders: extensionsofmaturitiesorpaymentdates,forgivenessofprincipalor interest, reductionof interestor fees,or releaseofmaterialcollateralorothercredit support. Otherwise, amendments, waivers and consents under these types of agreements usuallyrequireanaffirmativevoteoflendersholdingsomestatedpercentage(usuallymorethan50%or662/3%)of the commitments and loans. In some cases, different percentages may apply to different types ofamendments.Inloanagreementswithmultiplecreditfacilities,theremaybeclassvotingastoamendmentswhich affect particular facilities—for example, an amendment changing the minimum amount of anyrevolvingadvancemayrequireapprovalfromamajorityoftherevolvinglenders.

Thevotingprovisionsinanytypeofdebtagreementplayasignificantroleindictatingthedynamicsofdebt restructuringsandworkouts.An individual lenderwhohasa smallpieceof thecreditmayhavenonegotiating leverage as to the resolution of an issue requiring amajority vote. On the other hand, eachlenderhashugenegotiatingleverageonanissuethatrequiresaunanimousvote.Thisleverageisamplifiedby the universal reluctance of borrowers and lenders to pay out a lender who "holds out" against anamendment.Suchpayoutsonlyencouragemoreholdoutsintroubledsituations.

Amendments under debt indentures are entered into in a differentmanner.The noteholders are not apartytotheindenturethatcontainstheoperativeprovisionsgoverningthenotes.Instead, theindentureisenteredintobetweentheissuerandatrusteeforthenoteholders.Anamendmenttoanindentureiscalleda"supplementalindenture"andisexecutedbytheissuerandthetrustee.However,inmanysituations,suchassubstantiveamendments,thetrusteemayactonlyatthespecificinstructionofthenoteholders.Therefore,adocument called a consent solicitation is sent to noteholders. The consent solicitation describes therequestedamendment,usuallyattachestheactuallanguageoftheamendmentandrequestseachholdertoindicatebyastateddatewhetheritconsentstotheproposedamendments.Uponreceiptofsignedconsentsfrom the requisite number of noteholders and satisfaction of other conditions precedent to supplementalindentures specified by the amendment provisions in the indenture, the trustee will enter into thesupplementalindenturewiththeissuer.

Like other debt documents, the amendment section of an indenture will make the usual distinctionbetween amendments requiring the approval of all of the noteholders and those requiring less thanunanimousapproval.Additionally,indenturesusuallyauthorizethetrusteetoenterintoamendmentstocuremistakes,typographicalerrorsandambiguitieswithoutthenoteholders’consent.Indenturessometimesalsopermitamendmentswithoutthenoteholders’consentwhichimposeadditionalrequirementsontheissuerorwhichareotherwisefavorabletothenoteholders.

§7:6AmendmentstoAssignedContracts Section 9-405 of the Uniform Commercial Code creates a trap for the unwary in the context ofamendmentstoacontractwheretherightsunderthecontracthavebeenassignedbyoneoftheparties(seesection10:2.10).Anassigneeisnotboundbyamendmentsthatareenteredintowhentheassignee’srightstopaymentunder thecontracthavebeen fullyearnedbyperformance.Anassignee isalsonotboundbyamendmentsiftherightstopaymentundertheassignedcontracthavenotbeenfullyearnedbyperformanceandtheotherpartyhasnotbeennotifiedoftheassignment.Apartytoacontractthatisbeingamendedwillwanttoprotectitselfagainsttheriskthattheotherparty’srightsunderthecontracthavebeenassignedtoathird partywhomay not be bound by the amendment. This is achieved by asking the other party for arepresentationthatithasn’tassignedanyofitsrightsunderthecontract.Iftherequestfortherepresentationresults in disclosure of the existence of an assignment, the assignee is bound by the amendment if theassignedrightshavenotbeenfullyearnedbyperformance.Iftheassignedrightshavebeenfullyearnedbyperformance,theassignee’sconsenttotheamendmentwillberequiredforittobeboundthereby.

____________________1Sometimesacontractwillobligatethepartiestonegotiateamendmentstoaddresscertaineventsorcircumstances.Thisisanexceptiontothegeneralrulethatnopartytoacontractisunderanylegalcompulsiontoamendthecontract.Aprovisionlikethisusuallyrequiresthepartiesto"negotiateingoodfaith"towardaparticularend.Note,however,thateachparty’sobligationissatisfiedbytheactofgoodfaithnegotiation,andifsuchgoodfaithnegotiationshavetakenplacethelackoffinalagreementwillnotconstituteabreach.

Chapter8

FormandFormalities

§8:1Introduction Thedifferencebetween"form"and"substance"incontractsisoftenaverysubtleone.Thewayanideais expressed can often affect its perceived meaning, so good lawyers take the form of a contract veryseriously. The substance of an agreement is a collaborative effort among the lawyers and the businesspeople;thereductionofthatsubstanceintoawrittencontractistheprovinceofthelawyers.

Somepeoplemaybelievethatlawyerspaytoomuchattentiontotheform,thedetails,thetypos,theso-called"nits."Thismaybetrue,buttouseacliché,thedevilisinthedetails.Lawyerswhohavesweatedover an interpretation issue that turned on amisplacedword, incorrect punctuation or amistaken cross-reference(thatis,anylawyerwhohasregularlyworkedwithcontractsformorethanafewyears)willbehesitanttodismissanythingasmerelyformoversubstance.

Ourlegalsystemtodayrequiresfewerformalitiesthanatanytimeinitshistory.Theconceptof"formsof action," which dictated that a plaintiff failing to use the proper form of pleadings would lose itsopportunity toproceed,hasgivenway toasystemwhere thesubstanceof thepleadingsrather than theirformwilldeterminewhethertheplaintiffhasanactionablecase.Similarly,inmedievalEnglandthetransferofaninterestinrealpropertywasaccompaniedbythetransferor’spresentationtothetransfereeofapieceofturf,atreebranchorthelikeinordertosignifydeliveryofseisin.Seesection8:2.2.1

Itwouldbeamistake,however,tothinkthatallformalitiescanbedispensedwith.Thereareanumberofreasonswhycertainofthemareofcontinuedimportance: •someformalitiesarelegallynecessary

•manyoftheformalitiesdescribedinthischapterarecustomary,andthustheirabsencemaycauseareadertowonderwhetherthedraftspersonknewwhathewasdoing •someformalitiesarefollowedbecausetheymakethecontracteasiertoread—inotherwords,theypromotetheuser-friendlinessofthecontract. Agoodcraftspersoncaresaboutboth theappearanceandutilityofhisorherwork.Likewise,agood

lawyercaresabouttheappearanceaswellasthesubstanceofhisorherworkproduct.Rightlyorwrongly,lawyers are often evaluated by third parties (including other lawyers) by the appearance of their work.Further,adraftspersonwhocannotmaintaininternalconsistencyinanagreement,whofailstoproduceanaccuratetableofcontents,orwhoproducesanagreementwithheadingsthataremisleading,willoftenbethesamelawyerwhoisunabletoanalyzeissuescompletelyandwhofailstodrafttheparties’agreementsclearlyandeffectively.

§8:2LegalRequirements Certainformalitiesare,intheinstancesdescribedinthissection,legallyrequired.2Forthatreason,itisextremelyimportanttoemploythemwherenecessarytoensuretheeffectivenessandenforceabilityofthe

contract.Ontheotherhand,donotuse themwherenot legallynecessary; there isnoneed tocomplicatethingswithunneededformalism.

§8:2.1Execution Everywrittencontractmustbesigned,or"executed"byeachpartytothecontract.Thisisanabsoluterequirement: failure tohave thepartiesexecute thewrittencontractmeans that thecontracthasnotbeenenteredintoandmaynotbeenforcedbytheparties.

Thereareseveralwrinklestothisabsoluteprinciple.Althoughawrittencontractmaynotexistbecauseoneormoreofthepartieshavenotexecutedit,oralagreementsmaybevalidandenforceable.Thereareanumberof legal issues that arise in connectionwithdetermining the enforceability of oral agreements—includingthestatuteoffraudsandtherulesofevidence—thatarebeyondthescopeofthisbook.Sufficeittosaythatitisalwayspreferabletohaveeveryagreementembodiedinasignedwriting.

Some contracts as a legal matter only require the signature of one party: for example, guarantees,promissorynotesandsecurityagreements.However,ifthecontractisnonethelessdesignedtobesignedbybothparties,theabsenceofeitherparty’ssignaturewouldraisesignificantdoubtsastoitsenforceability.

Whatdoesitmeanforapartytoexecuteacontract?Inthecaseofaperson,theanswerisobvious:hemustsignhisnameattheendofthecontract.3Theanswerismorecomplicatedinthecaseofagreementsbeingsignedbycorporations,partnerships,limitedliabilitycompaniesandotherlegalentities.Acontractisexecutedonbehalfofanentitybyanindividualwhoisproperlyauthorizedtoexecutethecontractonitsbehalf. A basic due diligence function is determining that the person who signs for an entity has theauthority to do so. In the case of a corporation this involves a review of the corporation’s certificate ofincorporationandby-lawsandtheresolutionsoftheboardofdirectorsauthorizingthecorporationtoenterintothecontract.Similarreviewsarenecessaryinthecaseofothertypesofentities.Thelegalprincipleofapparentauthoritymaybeapplicable,buttheresponsiblelawyerwillnotrelyonsomethingasephemeralasthis;shewillwanttoreviewthedocumentarychainofauthority.Inmanytransactions,legalopinionsarerequiredwithrespecttowhethertheagreementshavebeen"dulyexecuted."

[A]PowerofAttorneyAn individual or entitymaybe authorized pursuant to a power of attorney to execute and deliver an

agreementonbehalfofanotherpersonorentity.Thisindividualorentityisreferredtoasan"attorney-in-fact." The scope of the attorney-in-fact’s authority must be clearly described in the power of attorney.Additionally,thereareveryspecificlegalrequirementsrelatingtopowersofattorneythatvaryfromstatetostate.Incaseswhereanagreementisexecutedbyanattorney-in-fact,thelawyerprovidingalegalopinionastothedueexecutionofanagreement,andthelawyerrepresentingtheotherparty,willeachreviewthepower of attorney carefully tomake sure that it is itself enforceable. In the case of a power of attorneyexecuted by an entity and not a natural person, all of the requirements of authorization discussed abovemustbesatisfied.

[B]SignatureBlocksThere are conventions for the preparation of the signature blocks to be signed by the parties. For a

naturalperson,alinewiththeperson’snameunderneathisused:____________________

JohnK.Smith Foracorporateorlimitedliabilitycompanysignatory,thesignatureblockwillbesetuptoidentifyboththeentitythatissigningandtheidentityandcapacityofthepersonactuallysigningforsuchentity.

ABCCORPORATION

By:____________Name:

Title:

Notethatthedraftspersonshouldneverfillinthe"name"and"title"linesunlessheisabsolutelycertainasto the individualwhowillsign thedocumentonbehalfof theentity;otherwise,hurriedrevisionswillberequiredatclosingifadifferentpersonsigns.

Ifthesignatoryisapartnership,thesignatureblockmustreflectthattheagreementisbeingexecutedbythe partnership’s general partner on behalf of the partnership. If the signing general partner is a naturalperson,thesignatureblockcanfollowtheformatoftheoneseenabove,withtheperson’snameandtitleasgeneral partner being indicated below the signature line. If the general partner is itself an entity, itcomplicatesmatters a bit. Here is how the signature block should look for a partnershipwhose generalpartnerisacorporation:

ABCPARTNERS,alimitedpartnership

By:ABCIncorporated,itsgeneralpartner

By:____________Name:Title:

Thissignatureblocktracksthechainoflegalauthoritythatpermitstheultimatehumansignatorytoexecutethedocumentonbehalfof,and inamanner thatbinds, theentity that isaparty to theagreement. In theaboveexample,theindividualisanofficerwhohasbeenproperlyauthorized(underthecorporategeneralpartner’s certificate of incorporation, by-laws and board of directors’ resolutions) to sign agreements onbehalf of the corporate general partner.The corporate general partner, in turn,must be authorized underapplicable partnership law and/or the partnership agreement to bind the partnership by executingagreementsonitsbehalf.

The last andmost complicated example, for purposes of this discussion, is a partnership the generalpartnerofwhichisanotherpartnership,whichinturnhasacorporategeneralpartner.Hereitis:

ABCPARTNERS,alimitedpartnership

By:ABCPartnersII,alimitedpartnership,

itsgeneralpartner

By:ABCIncorporated,itsgeneralpartner

By:____________Name:Title:

[C]OriginalorNot?

Isitnecessarytoobtainanoriginalexecutioncopyofacontract,asopposedtoafax,PDForphotocopyshowingthesignaturesof theparties?Manylawyersattachatalismanicimportancetohavinganoriginalsignedcopyofanagreement.Thetruth,however,isthatpossessionofthesignedoriginalisimportantonlyinafewnarrowcircumstances.Thefirstoftheseiswhenpossessionoftheoriginalsigneddocumenthas

independentlegalsignificance.Thisisthecaseinthefollowinginstances: •Anegotiabledocumentoftitle,possessionofwhichgivestheholderrightstothegoodscoveredby

thedocument. •Aletterofcreditthatrequiresthatthebeneficiarydelivertheoriginaldocumenttotheissuingbankinordertoreceivepayment. •Asecuredpromissorynoteora lease ("chattelpaper"under theUniformCommercialCode), thepossessionofwhichiseffectivetoperfectasecurityinterestinthechattelpaper. •Aninstrumentorstockcertificate,thedeliveryofwhich(togetherwithanappropriateendorsementorstockpower)constitutesatransferofownership. Signedoriginalsareoftenrequiredforcertainagreementsthatmustbepubliclyfiled,suchasmortgages.

Also, having an original signature is helpful if the authenticity of the signature is in question. This is arelativelyrareoccurrence.4

Itiscustomaryataclosingforthepartiestoexecuteasufficientnumberofcopiesofeachagreementsothateachpartyanditscounselcanreceiveanoriginalset.Inmostcasesthis isareasonablepractice,butthere are circumstanceswhen it can be taken to extremes. For example, in a syndicated bank financinginvolving40lenders,theborrowerwillobjecttosigning40extracopiesofeveryclosingdocument.

§8:2.2Delivery A contract that has been executed by the parties is still not effective until it has been delivered. Fordeliverytooccur,thepartiesmusttakestepsindicatingthattheyauthorizetheotherpartiestoacontracttotakepossessionofthesignedcontractandtotreatitaseffective.Howisdeliveryevidenced?Itcantakeavarietyofforms: • Physical exchange of original signed agreements (this ordinarily occurs only in circumstances

involvingasingleagreement). • Delivery at a closing. This usually involves all of the contracts being executed and left on theclosing table or held by one or more participants in the transaction, usually lawyers, and beingdeemed by the parties’ agreement to be mutually and simultaneously delivered when the closingoccurs. •Deliverybythirdparty,suchasamessenger,mailordeliveryservice. •Deliveryoutofescrow.Ina formalescrow,signedagreementsaredelivered toa thirdparty(theescrowagent),whichisauthorizedtodeliver theagreements to thepartiesuponthesatisfactionofspecified conditions. An informal escrow is created where one party (or its counsel) delivers itsexecutedagreementtotheotherparty(oritscounsel),ontheunderstanding(preferablywritten)thatthe agreement is in escrow andmay only be released upon thewritten or oral instructions of thesigner(oritscounsel). •DeliverybyPDForfax.Thisisanincreasinglycommonmethodnowthatin-personclosingshavebeenreplacedtoagreatextentby"virtual"closings. Whenhasn’tdeliveryoccurred?Themostcommonsituationwherethisquestionarisesisataclosing.

Theexecutionofdocumentsbythepartiesataclosingisaprocessthatcanbespreadoutovermanyhoursorevendays.Thesignatoriesexecute thedocumentsas theyarefinalized,afterwhichthedocumentsareplacedinfoldersandleftontheclosingtable, inthecaseofanin-personclosing,orsent tooneormorepeople who have been designated as the signature page collectors, in the case of virtual closings. It isgenerallyunderstoodthateachoftheseexecuteddocumentsisnotdelivereduntilthemomentintimewhenthepartiesmutuallyagreethatthetransactionisclosed.

§8:2.3Notarization The vast majority of contracts do not as a legal matter require the signatures to be notarized, or"acknowledged."Certaincontractstobefiledpublicly,suchasrealestateconveyancesandU.S.PatentandTrademark Office filings, require acknowledgments. Powers of attorney also typically requireacknowledgments.While requiring a notarizationmay reduce the risk that the agreementwill be signedfraudulentlybysomepersonotherthanthestatedsignatory,thisisrarelyariskinlargetransactions.

§8:2.4CorporateSeals Corporateseals, likeacknowledgments,are rarelya legal requirement,andareusedmostoften in thecontextofagreementsthatrequirefilingintherealestaterecords.Anyonecanpurchaseacorporateseal,sothebenefitsofinsistinguponasealasaprotectionagainstfraudarealmostnonexistent.Ifagreementsaretobeexecutedunderseal,makesurethatthesealexistsandthatitisbroughttotheclosing.Thebestreasontoresistanyunnecessary requirement thatagreementsbeexecutedunderseal is that it introducesonemoreelementtoaclosingthatcangowrong—forexample,wherethesealapparatusislostorforgotten.

§8:2.5ForeignAgreements All bets are off when it comes to the formalities that are required in connection with agreementsgoverned by laws of jurisdictions outside theUnitedStates, and local counselmust be consulted.Manyjurisdictions retain formalistic requirements that may strike American lawyers as quaint or archaic. Forexample,someGermanagreementsmustbereadaloudfrombeginningtoend(includingschedules)byanotary.

§8:3Form:theContract’s"Package" A 100-page agreementwould be enforceable, as a strict legalmatter, without a cover page, table ofcontents,paragraphs,sectionsorheadings—inotherwords,100pagesfilledupsolidlywithwords.Thereisnodoubt,however,thatsuchanagreementwouldbeanightmareforthosehavingtoworkwithit.Certainlyajudgewouldnotbefavorablydisposedtowardthelawyerwhocreatedsuchanabomination.

Mostoftheissuesdescribedinthischaptermaybeavoidedbythechoiceofagoodprecedent.Alawyerstarting with a well-developed model for a stock purchase agreement won’t have to spend much timemaking decisions regarding where and how to employ section headings, whether to employ whereasclauses,andsoforth.Thosedecisionswillalreadyhavebeenmadebythecreatoroftheform.However,thedraftspersonshouldnotbeboundbytheprecedentas tothesematters if theprecedent is inadequateor ifthere isagood reason forgoing inadifferentdirection.Furthermore, lawyersare sometimes required todraft of contracts from scratch. In such a case, a decisionwill need tobemade as to eachof thepointscoveredinthissection.

§8:3.1LetterAgreements Ashortagreementwilloftenbeintheformofaletter,addressedtoonepartyfromtheother,andsignedby the senderwith a separate signature line for the receivingparty.Agreements in this formare usuallyshorterandlessformalthancontractsnotinletterform—althoughlengthynotepurchaseagreementsusedintheprivateplacementofdebtsecuritiestraditionallyemploytheletterformat.

Aswithanyother letter, a letteragreementwillhaveadateat the top.This is thedate that the letteragreementissignedbythesender,butwillnotnecessarilybethedatethatitissignedbytherecipient.Ifthereisanyreasonwhytherecipientwantstomakeitclearthatitsignedtheagreementonadateotherthanthedate referred to at the topof the letter its signature blockmust have a line indicating the date of itssignature,oralternativelytherecipientcaninsertthedatebyhandbeneathitssignature.

Someletteragreementsrefertothepartiesas"you"and"we."Thismakesitverydifficultforthereadertorememberwhoiswho,andshouldbeavoidedinallbuttheshortestletteragreements.Definetheparties

inthenormalfashion,asSeller,Borrower,Lessee,orbyreferencetotheparty’sname:"ABC"forAlphaBindingCo.,forexample.

§8:3.2Title Mostagreementshaveatitle,forthesamereasonthatanythingelsehasaname:soweknowwhattocallit.Becauseoftheirformat,letteragreementsdonotusuallyhavetitles,butthepartieswilleventuallystartcalling it something, even "the letter agreement." The naming of agreements is often taken care of bycustomorbytheprecedentusedtodrafttheagreement.Aregistrationrightsagreementisalwayscalledaregistration rights agreement. An agreement to sell assets can be called an asset purchase agreement, apurchaseagreement,anassetsaleagreement,orasaleagreement.Anagreementtoproviderevolvingloanscan be called a loan agreement, a credit agreement, a revolving loan agreement, or a revolving creditagreement.

An agreement’s name should reflect its subjectmatter to decrease the likelihood of confusion in thefuture. If a contract among a corporation’s shareholders covers a number of subjects includingconfidentiality,itwouldbeamistaketocallit"ConfidentialityAgreement."Alawyerlookingfortransferrestrictionsmightskipovera"ConfidentialityAgreement,"assumingthatitdoesnotdealwithotherissues;iftheagreementisentitled"StockholdersAgreement,"however,itsignalsthereaderthatitcoversmattersconcerningtherelationshipamongthestockholders,includingtransferrestrictions.

§8:3.3CoverPage Whetheracontracthasacoverpageisamatterofstyle.Whenanagreementhasatableofcontents,itiscustomarytohaveacoverpageso that thefirstpage isnot the tableofcontents.Short letteragreementsusually do not have cover pages. A cover pagemay either refer solely to the name of the contract, oradditionallyrecitethenamesofthepartiesandthedateoftheagreement.

§8:3.4TableofContents Carefullycraftedsectionheadingsandagoodtableofcontentsmakeanagreementeasierforitsuserstoworkwith.Thetableofcontentsallowsthereadertoseewhatsubjectmatteriscoveredbytheagreementandtofindspecificprovisionswithrelativeease.Thetableofcontentsshouldalsolistallof theexhibitsandschedulesattachedtotheagreement.

Ifaprovisionwarrantsaseparatesectionheadinginthetext,thatsectionheadingshouldbereflectedinthe tableofcontents.Onewell-knownfirmhasuseda formofcredit agreementwhose tableofcontentsmerely refers to "negative covenants" (a section of the agreement covering at least 20 pages), withoutidentifyingeachoneseparately.Asaresult,areaderwhowantstofindaspecificcovenantisforcedtoflipthrough the entire 20-page section to find it; this is obviously inefficient.Thegoalmust be tomake thecontractasuser-friendlyaspossible.

Atableofcontentsshouldnotbeinsertedonlyatthetimeofexecution;itshouldbeincludedfromthefirstdraft,fortheconvenienceofthepartiesastheyreviewandnegotiatesuccessivedrafts.Ifsectionsofthecontractaredeletedoradded,theagreementshouldreflectsuchchangesinthetableofcontentsastheyoccur.Also,afterthedealisclosedcheckthatthesectionsreferredtointhetableofcontentsactuallybeginonthepagesthatarespecifiedforthem.Manyagreementshavetablesofcontentsthataremisnumbered.

§8:3.5Date Acontractmusthaveadate.Theagreementmayprovidethatitbecomeseffectiveorthatperformanceisrequiredonalaterdate—but(exceptasdescribedbelow)thedateofthecontractisthedatethatitisfirstexecutedanddelivered.

Thedateofacontract isusuallyrecitedinthefirstparagraph.Sometimesthedateisat theendofthecontractwiththesignaturelines.Inatransactionwhichinvolvesanumberofrelateddocumentsoraformalclosing,allagreementsanddocumentsareusuallydatedthesamedate.Unlesstheclosingdateisknownin

advancewithabsolutecertainty(thisisrare),itisagoodpracticetoleavethedateblank,andfillitinonlyaftertheclosinghasactuallyoccurred.Otherwise,thedateineachdocumentmustbechangediftheclosingisdelayed.(Somelawyers,includingtheauthor,superstitiouslybelievethatfillinginthedatestooearlyinthesecircumstancesmayincreasethelikelihoodofadelay.)Similarly,referencesinanagreementtoothercontracts that are to be dated the same date should refer to them as being "dated the date hereof."Thisavoidstheneedtorefertoaspecificdatethatwillneedtobefilledinwhentheclosingoccurs.

Acontractdated"asofDecember31,2000"maynothaveactuallybeenenteredintoonthatdate.Thisdevicemay be used where the parties don’t want to fuss with putting the actual date of execution anddeliveryinthecontract—forexample,anemployersendinganexecutioncopyofanemploymentagreementtotheemployeeonNovember23whoexpectsthatitwillbesignedbytheemployeewithinthenextweekmaydatethecontract"asofNovember30."

Sometimesan"asof"dateisusedtoaddressasubstantiveconcern.Anexampleiswherethepartiestoacontractwishtoamendaprovisionrequiringperformanceofanobligationbyadatecertain,say,December31, 2000 and the obligationwas not performedby that date. If the amendment extends the date for thisperformancetoJune30,2001,buttheamendmentitselfisdatedJanuary7,2001,therewouldbeaquestionastowhetherthebreachexistedduringtheperiodfromthedateperformancewasrequiredthroughthedateoftheamendment.Onewaytoaddressthisissueistohavetheamendmentexplicitlyprovideforawaiverof this breach. On the other hand, neither party may want to acknowledge that a breach existed. Analternativeapproachistodatetheamendment"asofDecember31,2000"sothattheeffectoftheextensionwillberetroactive.5

Caremustbe takenwhereacontract isdatedother than thedateofexecutionanddelivery, includingwherean"asof"dateisused.Ifrepresentationsaremade"asofthedatehereof"orcovenantsareeffective"fromandafterthedatehereof,"thelawyermustensurethatnotechnicalproblemsensue.Forexample,ifacontractdatedasofSeptember15isactuallysignedbyapartyonSeptember30,andthecontractcontainsarepresentation that the party "is in good standing in its state of incorporation on the date hereof," therepresentationwouldbebreachedbyafailuretobeingoodstandingonSeptember15,eveniftheproblemwascuredbySeptember30.Anotherexampleisacontractthatprovidesforthepaymentofafeeorinterestmeasured for a period "commencing on the date hereof"—if the contract bears an "as of" date, such aprovisionmaynotreflectthetrueintentofthepartiesbecausethemeasurementperiodwillcommencetoolateortooearly.Also,thedateoftheconveyanceofpropertymaynotbealteredbytheuseofan"asof"date.

§8:3.6WhereasClauses The"recitals"orthe"preamble"aretheparagraphsatthebeginningofacontractthatlistthepartiesandrecitethefactualbackgroundofthecontract.Theyarefrequentlyreferredtoas"whereas"clausesbecausethey take the form of one or more paragraphs starting with the word "whereas" (usually capitalized),followedbya sentencesuchas: "Now, therefore, thepartiesheretoagreeas follows."Often thewhereasclauses are preceded by the heading "WITNESSETH." The words "witnesseth," "whereas" and "nowtherefore"areanachronismsandarenotrequiredforanylegalreason.

Thewhereasclausesarenotintendedtohaveanysubstantiveeffect.Theirpurposeistosetthestagefortheagreement,togivethereaderanideaofwhatisgoingon.Thisisanimportantfunctioninacontractthatis justonecomponentofacomplicatedtransaction.It isalsohelpful toprovideorientationtosubsequentreadersofthecontract.

§8:3.7Headings Theuseofheadingsisanotherdevicenotintendedtohaveasubstantiveeffect,butinsteadtomaketheagreementamoreuser-friendlytool.Aheadingshouldaccuratelyreflect thecontentsofaprovision, inamannerthatwillbeusefultothereader.Theheadingsshouldbesufficientlyabundantsothattheusercanfindprovisionswithouttoomucheffort.Forexample,aten-pagesectionofrepresentationswith22separateprovisionswillbedifficult touse if theonlyheading is "representations" at thebeginning. Instead, each

separateprovisionshouldbeidentifiedwithitsownheading.Sometimesonesectionofanagreementwillhaveprovisionscovering twoormore topics.Thebetter

practiceherewouldbetocreatedifferentsections,eachwithitsownheading.Ifnot,thenitisimportantthattheheadingreflectthefactthatmultiplesubjectsarecovered;otherwisethereadermaybemisdirected.Forexample, a single section which sets forth requirements as to both insurance and the maintenance ofpropertyshouldbeartheheading"Insurance;MaintenanceofProperty."

Thereisoftenaboilerplateprovisioninthemiscellaneoussectiontotheeffectthattheheadingsare"forconvenienceofconstructiononlyandnotintendedtohaveanysubstantivepurpose."Seesection10:2.5.

§8:3.8SectionNumbering Themainpurposeforemployinganumbering6systemistomakethecontracteasiertoreadanduse.Asdescribedearlier,a100-pagecontractwrittenasasingleparagraphwithoutdivisionsorguidepostswouldbeenforceablebutalmostimpossibletouse.Contractsoftencontaininternalcross-references;thesewouldbe impossible without a numbering system. The key feature of an effective numbering system isconsistency. Articles, sections, subsections, and sub-subsections should all be numbered consistently.Maintainingthisnumberinghierarchyforcesthedraftspersontobetterorganizethedocumentandhelpsthereaderfollowthetext.

§8:3.9OrganizationoftheAgreement Themannerinwhichthedifferentpartsofacontractareorganizedandorderedisanareawherestyleandfunctionalitycomejointlyintoplay.Thedraftspersonusingaprecedenttodraftanagreementwillnotneedtothinkabouttheorganizationoftheagreement;itwillbedictatedbytheprecedent.Butthelawyerwhocreatesanagreementfromscratchshouldgivesomethoughttohowitshouldbeorganized—inotherwords,whichprovisionsgowhere.Anagreementofanysignificantlengthshouldfirstbedividedintolargesections,theequivalentofchaptersinabook.Theseareoftenreferredtoas"Articles"butcanalsobecalled"Sections."Theprovisionsofanagreementshouldbedividedintoarticlesbasedonthepurposetheyserve.Inmanycases,eachdifferentarticlewillcoveradifferenttypeofbuildingblockprovision—forexample,representationswillbecontainedinonearticleandcovenantsinanother.

Inmostagreementsthedefinitionsappearimmediatelyafteranywhereasclauses.Theadvantageofthisis that the reader knowswhere to find them, since this is their traditional spot.Thedisadvantage is thatsomeonereadingtheagreementfromfronttobackcaneasilygetboggeddowninthedefinitions.Ofcourse,there isnothingthatstopsthereaderfrompostponingthedefinitionsandmovingto theotherprovisions,goingback to thedefinitions to readdefined termsas theyarise in the text (usually thebestapproach inreviewing an agreement, by theway).Where possible, the first article(s) appearing after the definitionsshould contain the operative provisions—i.e., the subject matter of the agreement. Then, the articlescontaining the building blocks are set forth. The last article in an agreement usually contains themiscellaneousprovisions.Sometimesaprovisionwillnotfitneatlyintoanyoftheagreement’sarticles.Thedraftsperson’sfirstinstinctinthissituationmaybetoaddtheprovisionattheendoftheagreement,inthemiscellaneoussection.Thisisusuallyabadapproachbecauseitincreasesthelikelihoodthatasubsequentreader(includingthedraftsperson,whomayeventuallyforgetwheresheputtheprovision)willnotfindit.Thissituationjustreinforcestheneed,whenreviewingacontract,toreviewthewholething.

§8:4Aesthetics Contractsarethetangibleembodimentofthetransactionallawyer’swork.Significantskillisrequiredtostructureandnegotiateatransactioneffectively,tocounselaclientproperly,andtobringthetransactiontoclosing.Butalloftheseareephemeral;thewrittenagreementisthedistillationofallofthiswork.That,ofcourse,iswhyitiscriticalthatitbesubstantivelycorrectandprecise.Thatisalsowhymostlawyerstakeextremecaretomakesurethatacontract’sformandappearanceareaspristineasitscontent.Inadditiontotheelementsofform,certainaestheticconsiderationsmustbetakenintoaccount.

§8:4.1Font The lawyer should select a font that the readerwill notnotice.Traditional styles suchasTimesNewRoman,Bookman,CenturyandGaramondallfallwithinthisdescription.Thesizeofthetypeusedisalsoaconsideration. In order to maximize the agreement’s readability under normal circumstances, nothingsmallerthan12pointshouldbeused.

§8:4.2Spacing Agreements are almost always single spaced. Although thismakes them somewhatmore difficult toread,itispreferabletodoublespacing,whichwoulddoublethelengthofdocuments,raisingenvironmentalandlogisticalconcerns.Ontheotherhand,thereisnoreasonthatthelinespacinginanagreementshouldn’tbesetat1.1,1.2or1.3.Thisincrementinspacingmayreduceeyestrain.

§8:4.3Margins Themarginsshouldbeset to leaveamplespaceat the top,bottomandsides.Apagewith inadequatemargins is unfriendly to the reader. The eye tends to get lost following a line of type that is too long.Narrowmarginsalsomakemarkingcommentsmoredifficult,and lead toacrampedmarkupthatwillbemorechallengingtofollow.

§8:4.4Paragraphs Thereisalmostnothingmoredauntingtothereaderofanagreementthantoconfrontanentirepageofsingle-spaced textwithout paragraphbreaks. Such a page is visually andpsychologically difficult to getthrough.Theantidoteissimple:breakupthetextintosmallersectionsorparagraphs.Inadditiontomakingthedocumenteasiertoread,thiswillmakeiteasiertodiscussandnegotiate.Itismuchsimplertorefertoaprovisionthatisinthefirstsentenceofthethirdparagraphonthepage,forexample,thantotrytoprovideverbaldirectionstoaprovisionthatisburiedinafullpageofunbrokentext.Thedraftspersonwhofailstobreakupalongparagraphwillnotbeveryhappywhen,inthefuture,hefindshimselfwadingthroughit.

____________________1 At the beginning of the author’s career, he often was required to prepare a collateral assignment from a form that started with the following statement: "KNOWALL YEMEN BY THESEPRESENTS."Afterawhile,herealizedthatthisphrasewasnotlegallynecessary,andprobablyhadagenealogytracingbacktotheMiddleAges.2Differentjurisdictionsmayhavespecificrequirementsastocertainrequirementsorformalitiesthatarenotaddressedhere.3 It is somewhatmisleading to say that the signaturesgoat theendof thecontract: theygoat theendof themain textof theagreement,butusuallybeforeexhibits, schedules, annexesandotherattachments.4Itisincorrectlybelievedbysomethatthe"bestevidencerule"requiresthatacopyofanagreementmaynotbeadmittedintoevidence.Thisisnotthecase.Thisrulerequiresanoriginaltobesubmittedasevidenceifitexists.Ifnooriginalisavailable,acopyisadmissible.5Thistechniquemaybeineffectivetonegateotherramificationsoftheexistenceofthebreach(cross-defaultprovisions,forexample).6Theterm"numbering"isusedtoencompasstheusenotonlyofidentifyingnumbersbutalsoidentifyingletters.

Chapter9

BuildingBlocksinDetail

§9:1Introduction In this chapterwe look in detail at theway certain of the building block provisions are used in twodifferenttypesoftransactions:abankloanandanacquisitionofonecompanybyanother.Together, theyprovideanopportunitytoexploreabroadarrayofimportantcontractprovisions.Bothtransactionsinvolveonepartymakingasignificant investment inanother,butarequitedifferent in termsof thenatureof thebusinessrelationshipthattheycreate.Thecreditagreementcreatescontractualobligationsthatrunbetweenthe parties for years,while under the acquisition agreement the business relationship ends (for themostpart) at the closing. By examining the way that representations, covenants, conditions and remedyprovisions are used in typical credit and acquisition transactions, the reader will develop a deeperunderstanding of the ways that these provisions are used to address particular business objectives andconcerns.

First,however, this chapterwilldiscussa setof representations that are familiar to everypractitionerwhoworkswithcontracts,regardlessoftype.

§9:2EnforceabilityRepresentations Many contracts contain representations relating to facts that could affect the enforceability of thecontract(referredtohereas"enforceabilityrepresentations").Whetherornottheserepresentationsaremadeis usually amatter of custom and negotiating leverage. In addition,where performance is only requiredfromoneparty,usuallyonlythatpartywillmakethese(oranyother)representations.

Itisalsoimportanttounderstandthespecificpurposeofasubsetoftheenforceabilityrepresentations:therepresentationsregardingorganization,powerandauthorityandcorporateorotheraction(sections9:2.1through9:2.3below).Theserepresentationsgotothecapacityofanentity(asopposedtoanaturalperson)toenter into thecontract.Acorporation, limitedliabilitycompany, limitedpartnershiporotherentityhasnotvalidlyexecutedanddeliveredanagreementunless(a)itvalidlyexistsasanartificiallegalperson,(b)ithasthelegalpowerandauthoritytoenterintotheagreementand(c)allnecessaryorganizationalactionhasbeentakentoauthorizetheentity’senteringintotheagreement.Notonlyaretheserepresentationsusuallyrequiredofcontractingentities,theyareoftenthesubjectoflegalopinionsandclosingconditionsaswell.

§9:2.1Organization TheCompanyisadulyorganizedandvalidlyexistingcorporationingoodstandingunderthelawsof

thejurisdictionofitsorganizationandisdulyqualifiedandauthorizedtodobusinessandisingoodstanding in all jurisdictionswhere it is required to be so qualified andwhere the failure to be soqualifiedwouldreasonablybeexpectedtohaveaMaterialAdverseEffect.

Thisrepresentationgoestowhetherthepartymakingtherepresentationhasbeenproperlyorganized,is

validlyexistingasanentityandisingoodstanding.1Duediligenceforthisrepresentationwouldincludeordering a certified certificate of incorporation (or analogous filing for a limited partnership or limitedliability company) and a good standing certificate from the state where the entity is organized. Thisrepresentationisrequestedtoavoidtheriskthatanentitydoesnotlegallyexistasanartificialperson.

Thisprovisionoftenalsocoverstheentity’sgoodstandinginitsstateoforganizationandqualificationtodobusinessinstatesotherthanitsstateoforganization.Failuretobesoqualifiedinastatedoesn’taffecttheentity’scapacitytoenterinthecontract,butmayimpairitsabilitytoappearinthecourtsofthatstatetoenforcethecontract.Oftenthisportionoftherepresentationissubjecttoamaterialityqualification,asintheaboveexample.

§9:2.2PowerandAuthority TheCompanyhasthecorporatepowerandauthorityto(a)ownitspropertyandassetsandtotransact

thebusiness inwhich it is engagedandpresentlyproposes to engageand (b) execute,deliver andperformthisAgreement.

An entity’s ability to enter into and perform different kinds of contracts may be limited by its

organizationaldocumentsor,inthecaseofregulatedentities,bystatuteorregulation.Thisrepresentationisastatement that therearenosuchrestrictionson theparty’sability toconduct itsbusinessor toexecute,deliverandperformthecontract.Enforcementofanagreementagainstanentitythatlacksthelegalrightorpowertoenterintotheagreementmaybesubjecttoanultraviresdefense.Theduediligencerequiredtoensurethatthisrepresentationismadecorrectlyisareviewoftheorganizationaldocumentsand,ifthepartyisaregulatedentity,ofallapplicablestatutesandregulations.

§9:2.3NecessaryAction TheCompanyhastakenallnecessaryactiontoauthorizetheexecution,deliveryandperformanceof

thisAgreement.

This is another representation that applies only to entities. It states that all actions required by itsorganizationaldocumentsandbyapplicablelawinconnectionwiththeexecution,deliveryandperformanceof the contract by the entity have been properly taken. In the case of a corporation, this representationwouldbecorrectifthecorporation’sboardofdirectorshaddulyadoptedaresolutionauthorizingittoenterinto the agreement. In the case of a limited or general partnership, a general partner must execute anddelivertheagreement.Thepartnershipagreementmustbereviewedtodeterminewhetherotheractionsorconsentsmayberequired.Ifthegeneralpartnerisitselfanentity,theremustbeappropriateactiontakenbysuch entity. For example, if the general partner is a corporation, its board of directors must adopt aresolutionauthorizingitsexecutionanddeliveryofthecontractonbehalfofthepartnership,initscapacityasgeneralpartner.

LimitedliabilitycompanystatutesprovideagreatamountoflatitudetotheorganizersofanLLCastohowactsoftheLLCmaybeauthorized.Thelimitedliabilitycompanyagreementmaygrantthispowertoeachmember,asinglemember,aboardofmembers,oroneormoremanagers.

§9:2.4DueExecutionandDelivery TheCompanyhasdulyexecutedanddeliveredthisAgreement.

This representation states, first, that theagreementhasbeenproperlyexecuted byor onbehalf of thepartymaking the representation. In the case of an entity, itmeans that the agreementwas signed by anofficerorrepresentativewhowasproperlyauthorizedtodoso.Toensurethatthisrepresentationistrue,the

lawyers should (a) review the organizational documents to ascertain whether there are any specificrequirementsrelatingtoexecutionanddeliveryofcontracts(forexample,arequirementthatcertainkindsofcontractsbesignedbyspecificofficers),(b)determinewhethertheofficerorrepresentativesigningonbehalfoftheentityisauthorizedtodoso,byinspectingtheorganizationaldocumentsandanyauthorizingresolutions, and (c) obtain evidence that the signer’s signature is genuine, usually in the form of anincumbencycertificate,inwhichthesecretary(orotherofficer)oftheentitycertifiestheauthenticityofthesignaturesoftheindividualsigners.Seesection3:5.1[A].

Therepresentationalsocoversduedeliveryof theagreement.Anexecutedcontract isnotenforceableuntil it has been delivered by each of the parties. Deal-specific delivery requirements may exist. Forexample,inthecaseofanagreementsignedbythepartiesandplacedinescrowsubjecttothesatisfactionofstatedconditions,validdeliveryof thecontractwouldnotoccuruntil theconditions todeliveryof theagreementoutofescrowweresatisfied.

§9:2.5NoConflict Theexecution,deliveryandperformancebytheCompanyof thisAgreementdonot(i)contravene

any applicable provision of any law, statute, rule or regulation, or any order, writ, injunction ordecreeofanycourtorgovernmentalinstrumentality,(ii)conflictwithorresultinanybreachofanyagreement to which the Company is a party or (iii) violate any provision of the Company’sCertificateofIncorporationorBy-Laws.

Thisisarepresentationthattheexecution,deliveryandperformanceofthecontractdoesnotviolateor

conflictwithotherlegalrestrictionsorarrangementstowhichtherepresentingpartyissubject.Itcannotbemade if thereareanyprovisions in theentity’sorganizationaldocumentsorotheragreements thatwouldprohibit,orimposeconditionsthathavenotbeensatisfiedon,theexecution,deliveryorperformanceoftheagreement.Therepresentationalsocannotbemadeiftherearerestrictionsontheparty’sabilitytoexecute,deliverorperform2theagreementunderstatutes,rules,regulations,judgmentsororders.Toensurethatthisrepresentation iscorrect requiresacarefulanalysisoforganizationaldocuments,contractsandapplicablelaws,rules,regulations,judgmentsandorders.Itshouldbeobviouswhythisisastandardrepresentation:thepartyreceivingtherepresentationwantstobecertainthatenteringintothecontractisnotgoingtogiverisetoaconflictwhichcouldbethebasisforlitigationorworse.3

§9:2.6GovernmentalApprovals Noauthorizationorapprovalorotheractionby,andnonotice toor filingwith,anygovernmental

authority or regulatory body is required for the due execution, delivery and performance by theCompanyofthisAgreement,otherthanthosethathavebeendulyobtainedormadeandareinfullforceandeffect.

Thisrepresentationcoversgovernmentalapprovalsrequiredinconnectionwiththeparty’senteringinto

thecontractorperformingunderit.Therepresentingpartymustdeterminewhetheranysuchapprovalsarerequiredand,ifso,obtainthem.Examplesofgovernmentalapprovalsthatmayberequiredinconnectionwith particular transactions include the following: Federal Communications Commission approval of acontract to sell a radio station; the passage of the necessarywaiting period under theHart-Scott-RodinoAntitrust Improvements Act in connection with certain mergers and acquisitions; and the receipt of anecessaryzoningvarianceinconnectionwithanagreementtopurchaseanddeveloprealproperty.

Theprovisioncontainsanexclusionforapprovals"thathavebeendulyobtainedormadeandareinfullforce and effect."Without this language, the representationwould be untrue if necessary approvals hadalreadybeenobtained.Ofcourse,thisrepresentationmayrequireexceptionsonthedatethatanagreementis signed if approvals are required for performance (as opposed to execution anddelivery). In this case,

obtainingtheapprovalswouldbeaddedasaconditionprecedent.

§9:2.7Enforceability This Agreement constitutes the legal, valid and binding obligation of the Company enforceable

againsttheCompanyinaccordancewithitsterms,excepttotheextentthattheenforceabilitythereofmay be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar lawsaffectingcreditors’rightsgenerallyandbyequitableprinciples(regardlessofwhetherenforcementissoughtinequityoratlaw).

This representation states a legal conclusion that inpartdependsoneachof theother representations

discussedabove.Inotherwords,theenforceabilityofacontractmaybeimpairedifapartydoesn’texist;ifitdoesn’thavethenecessarypowerandauthority;ifithasn’ttakenthenecessaryorganizationalactionstoenterintothecontract;ifthecontracthasn’tbeendulyexecutedanddelivered;ifthecontractconflictswithothercontractstowhichitisapartyorwithitsorganizationaldocumentsorotherlegalrequirements;orifthe contract requires governmental consents that aren’t obtained. Additionally, the enforceabilityrepresentation constitutes a conclusion that the necessary legal elements of a valid contract formation—consideration, mutuality, offer and acceptance and the like—are present, and that no other defenses toenforcementexist.

The qualifications at the end are known as the bankruptcy and equitable principles exceptions. Thebankruptcyexceptionsrecognize thatacontractmaybewhollyorpartlyunenforceable if thepromisor isthe subject of a bankruptcy proceeding, notwithstanding that all enforceability requirements have beensatisfied.Bankruptcy law provides, among other things, for the application of the automatic stay,whichpreventsenforcementofcontractclaimsagainstthebankruptcydebtorexceptthroughspecificproceduresprovidedforundertheBankruptcyCode.Theequitableprinciplesexceptionisneededbecauseit isoftenimpossibletogetacourttospecificallyenforcecontractobligaitons.

The representations discussed in this section are often the subject of legal opinions required as aconditionprecedenttotheeffectivenessorclosingoftheagreementinwhichtheyarecontained.Sincethesubjectmatter of these representations consists primarily of legal conclusions, it is appropriate for theselegalopinionstoberequested.Whetherornottheseopinionsaregivenisusuallyamatterofcustom.Forexample,opinionsarealmostalwaysprovidedbyborrower’scounselinconnectionwithaloanagreement,butarenotusuallyrequiredinconnectionwithanemploymentagreement.

§9:3Credit-relatedProvisions Specificrepresentations,covenantsandremedialprovisionshaveevolvedtoprotectapartytoacontractagainstthecreditriskofitscounterparty.Creditrisk,theriskthattheobligorwillbecomefinanciallyunableto perform its payment obligationswhen required under the contract, is present any time a party has anongoingcontractualobligationtomakepaymentstoanotherparty.

Anunderstandingofthefundamentalprinciplesofbankruptcylawisnecessarytounderstandcreditrisk.Inabankruptcy liquidation, thevalueofassetssubject to liensgoesfirst tosatisfy theclaimssecuredbythoseliens.Anyexcessvalueattributabletosuchassetsplusthevalueofallunencumberedassetsissharedratablybyallunsecuredcreditors.Inabankruptcyreorganization,wherethedebtorinpossessionkeepsitsassets,thevaluethateachcreditorisentitledtoreceiveunderthereorganizationplanisbasedinpartonthevalue that suchcreditorwouldhave received ina liquidation.So, it is easy to seewhyacreditorwithacontractualclaimagainstadebtorhasanongoinginterestinthecreditorfinancialhealthofthedebtor.Afinancialfailurebythedebtorcouldresultinitsbankruptcyandthecreditor’sinabilitytorecoveralloraportionofitsclaim,dependingontheexistenceandamountofothersecuredandunsecuredclaimsandthevalueofthedebtor’sassets.

Themagnitudeofcreditriskisafunctionoftheamountthatisatstakeatanyonetime.Takeasupplycontract that requires the purchaser to pay for each shipment within 15 days of delivery. The contractfurtherprovidesthatthesellerisnotobligatedtomakeanyshipmentsifpaymentforanypreviousshipment

isinarrears.Ifthepurchaserfailstopayforashipment,thesellercanlimititscreditrisktotheamountofthat payment by notmaking any additional deliveries until the delinquent account has been settled. Byallowingthesellertolimitthecreditrisk,thistypeofarrangementislikelytoresultinthesellerrequiringfewerprovisionsinthecontractrelatingtothepurchaser’sfinancialcondition.

Ontheoppositeendof thespectrumisa termloanagreementunderwhicha loan ismadeatclosing,whichtheborrowerpromisestorepayininstallments,withinterest,overastatedterm.Oncethetermloanismade,themoneyisgone—typically,havingbeenspentbytheborroweroncapitalassetsoracquisitions.Beforemakingtheloan,thelenderwillhavereachedaconclusionthattheborrower’sfinancialconditionoverthetermoftheloanshouldenableittomeetitsprincipalandinterestobligations.However,thelenderwilladdprovisionstothecontractthatprotectitagainsttheborrower’sfinancialdeterioration.Thesemayinclude provisions that (a) require the borrower to provide regular financial information, (b) restrict theborrower’sabilitytoactinamannerthatwouldmakeit lesscreditworthy,and(c)givethelendercertainlegalrightsintheeventthattheborrowergetsintofinancial(orother)trouble.

Awell-madecreditdecisionwill take intoaccount theseparate financialcharacteristicsofeachentitythatispartofthecredit.Twocriticalrules4applyinthiscontext: •Inabankruptcy,separatelegalentitiesaretreatedseparately.

•Acreditorwithaclaimagainstacompanydoesnotbyvirtuethereofobtainaclaimagainstanyofthecompany’ssubsidiaries,parentsorsistercompanies.Many businesses are comprised of more than one entity. A creditor making a credit decision as to a

multiple-entitybusinesswillwant a combinationof covenants relating to the entities, covenants limitingintercompany transactions, andguarantees—hereincalled the "creditpackage"—thatprotects thecreditorfromthelossofthevalueonwhichitscreditdecisionwasbased.

Let’s work with an example: suppose a lender is making a loan to Company A, which runs threebusinesslines.TheassetsandoperationsofonebusinesslineareownedbyCompanyA,andtheassetsandoperations of the other two business lines are owned by Company A’s subsidiaries, Company B andCompanyC.Thefollowingchartillustratesthedifferentlevelsofcreditprotectionthelendercancreatebytheuseof loandocumentation. In reading this chart, thebasic rulesofbankruptcydistributiondiscussedabovemustbekeptinmind.5

LeastProtection

BetterProtection

BetterProtection

BetterProtection

BestProtection

Thisdemonstratesthatacreditorisbestprotectedbyrequiringguaranteesfromeachentitythatmakes

up its credit.Thenext-bestprotection ishavingcovenants thatpreventvalue frombeing transferred toanon-guarantor.

The remainder of this section is a detailed discussion of the other most common credit-relatedrepresentations,covenantsandremedialprovisions.Theseprovisionsarefoundindebtagreementsbutmayalsobeincludedinanyotheragreementwherecreditconcernsneedtobeaddressed.

§9:3.1Representations Apartyentering intoacontractual relationship involvingcredit riskwillnormallyundertake financialduediligencebeforeentering into thecontract.Thiswould include reviewing thedebtor’sbusinessplan,financialstatementsandprojections,reviewingthedebtor’skeycontracts,analyzingthecollectionhistoryof its accounts receivable and so forth. This due diligence is usually buttressed by credit-relatedrepresentationswhich,takentogether,provideasnapshotofthedebtor’sfinancialcondition.Someofthesecredit-relatedrepresentationsarediscussedbelow.

[A]FinancialStatements TheauditedconsolidatedbalancesheetoftheDebtorforthefiscalyearendedDecember31,2007,theunauditedconsolidatedbalancesheetoftheDebtorforthefiscalperiodendedMarch31,2008,and the related consolidated statements of operations and cash flows of the Debtor for the fiscalperiods ended as of said dates (which annual financial statements have been examined by BigAccounting Firm LLP, certified public accountants), present fairly in all material respects thefinancialpositionoftheDebtoronaconsolidatedbasisatthedateofsuchfinancialstatementsandthe results for the periods covered thereby. All such financial statements have been prepared inaccordancewithGAAP,consistentlyappliedandsubject,inthecaseoftheMarch31,2008financialstatements,tonormalyear-endauditadjustments.

The purpose of this representation is to have the debtor stand behind the accuracy of its historical

financialstatements.Sincefinancialstatementsareprobablyreliedonbyacreditormorethananyotherduediligenceiteminmakingacreditdecision,thisrepresentationisextremelyimportant.Itwillalwayscoverthedebtor’smostrecentannualfinancialstatements,aswellasthemostrecentquarterly(and,ifavailable,monthly) financial statements. Because consistency of presentation is fundamental to the reliability offinancialstatements,therepresentationusuallyincludesastatementthatthefinancialstatementshavebeenprepared in accordancewithgenerally accepted accountingprinciples (GAAP), consistently applied.Thekey statement is that the financial statements "fairly present the financial condition and results ofoperations"ofthedebtor.Thisstatementisnottrueifthefinancialstatementsareincorrect.

Notethedistinctionbetweenauditedandunauditedfinancialstatements.Typically,acompany’sannualfinancialstatementsareauditedbycertifiedpublicaccountantswhoissueanauditor’sreportthatstatesthatthe financial statements fairly present the company’s financial position and results of operations inaccordance with GAAP. Interim financial statements—those prepared on a quarterly, and sometimesmonthly, basis—are usually not audited and are therefore, as the last sentence of the representationindicates,subjecttobeingretroactivelyadjustedasapartoftheyear-endauditprocess.

[B]Projections ThefinancialprojectionsattachedheretoasExhibitPhavebeenpreparedonabasisconsistentwiththeDebtor’sfinancialstatementsandarebasedongoodfaithestimatesandassumptionsmadebytheDebtor.On the date hereof theDebtor believes that the projections are reasonable and attainable,provided,however, thatprojectionsas tofutureeventsarenot tobeviewedasfactsandtheactualresultsduringtheperiodscoveredmaydifferfromtheprojectedresults.

This representation addresses projected financial information, as opposed to historical financialstatements.Projections are predictions as to a party’s financial condition and results of operations in thefuture, and therefore cannot be the subject of a representation that is expressed with the same level ofcertaintyasarepresentationregardinghistorical financial results.Therepresentationabove is typical: thedebtorstatesthatitbelievesintheprojections,andthattheassumptionsthatwentintothedevelopmentoftheprojectionswerereasonable.Thecreditorcouldallegeabreachofthisrepresentationbyassertingthatthe debtor didn’t actually believe, at the time the representation was made, that the projections wereattainable;however,themerefactthattheresultssetforthintheprojectionsarenotachievedwouldnotbyitselfconstituteabreach.

[C]MaterialAdverseChange Since December 31, 2007, there has been no material adverse change to the business, assets,liabilities,financialconditionorprospectsoftheDebtoranditssubsidiaries,takenasawhole.

Thisisanextremelyimportantrepresentationfromacreditstandpoint.It ispremisedonthecreditor’s

reliance on the debtor’s financial statements, and constitutes assurance by the debtor to the creditor thatnothingsignificanthashappenedtoitoritsfinancialpositionsincethedateofthefinancialstatements.Thedate in thisprovisionwill typicallybe thedateof a setof financial statements reviewedby the creditor.Theremaybeadiscussionastowhetherthedateshouldbethemostrecentauditedstatements,oravailablesubsequentunauditedstatements.Thecreditorwillusuallypreferthedateoftheauditedstatements,sincetheaccountants’auditprovidesitwithamorecertainbaseline.Thedebtormayadvocatetheuseofmorerecent audited statements,particularly if the trendof thebusinessbetween thedateof theunauditedandsubsequentunauditedfinancialstatementswasnegative.Amaterialadversechangetestisalwayseasiertomeetifthestartingpointislower.

[D]Litigation There areno actions, suits or proceedingspendingor, to theknowledgeof theDebtor threatened,against the Debtor or any of its subsidiaries that (a) relate to this Agreement or any of thetransactions contemplated hereby, or (b) are reasonably likely to be determined adversely to theDebtororsuchsubsidiary,and,ifsoadverselydetermined,couldreasonablybeexpectedtohaveamaterialadverseeffect.

Whyshouldtheexistenceoflitigationbepartofacreditdecision?Becauseajudgmentresultingfrom

litigationbecomesafinancialclaimthatmightinterferewiththedebtor’sabilitytosatisfyitsotherfinancialobligations.Inaddition,ajudgmentcanbeconvertedintoalienonthedebtor’sassets.Inanextremecase,alargejudgmentmighttriggerabankruptcyfilingbythedebtor.

Thelitigationrepresentationsetforthaboveis typical.Thefirstpartaddressesactions,suitsandotherproceedings that relate to the transaction pursuant to which the contract is being entered into. In otherwords,ifthereisanylitigationatallrelatedtothetransactionitmustbedisclosedhere.6

The second part of the representation relates to all other litigation (i.e., litigationnot relating to thetransaction).Theabovelanguagelimitstherepresentationtolitigationthatsatisfiestwocriteria.Thefirstisthat the litigation is reasonably likely tobeadverselydetermined.Thus, if thedebtorhasbeensuedonaclaimthatitbelievestobespurious,itmayconcludethatsuchclaimisnotreasonablylikelytobeadverselydetermined and therefore not covered by the representation. The second criterion is that the litigation isreasonably likely tohaveamaterialadverseeffect ifadverselydetermined.Evenif thedebtorbelieves itwilllosethecase,thelitigationwillnotbepickedupbytherepresentationiftheclaimisforanamountofdamagesthatisnotmaterial.Thisapproachallowsthedebtortomakesubjectivedeterminationsregardingthemeritsandmaterialityofthelitigation.Theotherapproachistorequiretherepresentationtobemade"flat"—thatis,drafttherepresentationtocoveralllitigation.Thebenefitofthisapproachtothecreditoris

that there is no subjective element and therefore no possibility of a surprise.The problem is that itwillresult in the debtor having to disclose all litigation, and the creditor will then have to perform its ownexaminationanddrawitsownconclusionsastothematerialityofeachdiscloseditemoflitigation.

Notealsothattherepresentationastothreatenedlitigationissubjecttoaknowledgequalification.Thisisoneofthefewinstanceswheresuchaqualificationisgenerallyaccepted,onthebasisthatitwouldbeunfair toholdapartyaccountableforabreachof thisrepresentationdue to thirdparty threats thataren’tknowntothedebtor.

[E]CompliancewithLaw The Debtor and each of its subsidiaries are in compliance with all applicable statutes, rules,regulations,ordersanddecrees,exceptwherethefailuretobeincompliancecouldnotreasonablybeexpectedtohaveaMaterialAdverseEffect.

Thisrepresentationisdesignedtoelicitdisclosureofanyviolationsoflaworjudicialordersordecrees.

Thematerialadverseeffectqualifierisusuallytheonlypartofthisrepresentationthatisnegotiated.Itmayberesistedbythecreditoronthebasisthatthereshouldn’tbeanyviolationsoflaw,materialorotherwise.The debtor’s counterargument is that the materiality standard does not deprive the recipient of theprotectionthatitwantsagainstviolationsoflawthatcouldresultinsomematerialreductiontothedebtor’screditworthiness.Without a materiality qualifier the representation could be untrue as a result of someinsignificantinfraction.(Seesection5:2.1.)

[F]PaymentofTaxes TheDebtoranditssubsidiarieshavepaidallmaterialtaxes,assessmentsandgovernmentalchargesorleviesimposeduponthemortheirincomeorprofits,oruponanypropertiesownedbythem,priorto the date onwhich penalties attach thereto, except for any such tax, assessment, charge or levybeingdiligentlycontestedingoodfaithandwithrespecttowhichreserveshavebeenestablishedinaccordancewithGAAP.

Thisreflectsthecreditor’sgeneralconcernabouttheexistenceofclaimsagainstthedebtor.Taxclaims

are a particular issue, because taxing authorities may obtain liens securing their claims that in certaincircumstancesmaytakepriorityoverthecreditor’s.

There are two customary qualifiers in the above language. First, the limitation of the covenant tomaterial taxes allows the debtor tomake the representation despite a delinquency in the payment of animmaterialamountoftaxes.Second,theprovisionallowsthedebtortomaketherepresentationevenif ithasnotpaidtaxes,solongasthedebtoriscontestingthevalidityofthetaxandhasenteredonitsbooksanyreserve required byGAAP.Without this carveout, the debtorwould be required to pay evenwrongfullyassertedtaxes.

[G]TrueandCompleteDisclosure Allfactualinformation(takenasawhole)deliveredinwritingbyoronbehalfoftheDebtortotheCreditor for purposes of or in connection with this Agreement or the transactions contemplatedherebyistrueandaccurateinallmaterialrespectsanddoesnotomitanymaterialfactnecessarytopreventsuchinformation(takenasawhole)frombeingmisleadinginanymaterialrespect.

Thisrepresentationisdesignedtocounteracttheprincipleofcaveatemptor, thatacontractingparty is

undernoobligation tovolunteer informationnototherwise required tobedisclosedby the agreement. Itreflects the reality that even an exhaustive set of representationsmay not be effective to uncover someadversefactthatmayberelevanttothecreditor’screditdecision.Itisadifficultrepresentationtoobjectto,

becausedoingsocreatestheimpressionthatthereissomethingtohide.Thisrepresentationisoftenreferredtoasa"10b-5representation"becauseitismodeledonthedisclosurestandardsetforthinRule10b-5undertheSecuritiesExchangeActof1934.

[H]OtherRepresentationsTherearenumerousothermorespecializedcredit-relatedrepresentationsthatregularlyappearincredit-

relateddocumentation.Theserepresentationscoversubjectssuchasenvironmental,ERISAandintellectualpropertymatters. In addition, individual transactions often give rise to representations that are speciallytailoredtoaddressspecificrisksandcircumstances.

§9:3.2AffirmativeCovenants Affirmativecovenantsincreditdocumentationaresometimesreferredtoasthehousekeepingcovenants:theyrequirethedebtortodothekindsofthingsthatgoodcompaniesordinarilydo,suchaspayitstaxes,insure its operations, and so on. Accordingly, there is usually a limited amount of negotiation of thesecovenants.

[A]ReportingCovenantsJust as the primary basis for a creditor’s initial credit decision is to review the debtor’s financial

statements, the primary means for continued oversight of the credit is the regular review of financialstatementsoverthelifeofthecontract.Thisislessofanissuewherethedebtorisapubliccompanywhosequarterlyandannualfinancialstatementswillbepubliclyavailable.7Aprivatecompany,ontheotherhand,has no obligation to deliver financial reports or other information to its creditors absent a contractualobligationtodoso.

►InterimFinancialStatements

TheDebtorshalldelivertotheCreditor,within(a)30daysaftertheendofeachfiscalmonthoftheDebtor (other than the last fiscalmonth in any fiscal quarter), the consolidated and consolidatingbalance sheets of the Debtor and its subsidiaries as at the end of such month and the relatedconsolidatedandconsolidatingstatementsof incomeandofcashflowsforsuchmonthandfor theelapsedportionof thefiscalyearendedwith thelastdayofsuchmonth, ineachcasesettingforthcomparative figures for thecorrespondingmonth in theprior fiscalyear,and (b)45daysafter thecloseof each fiscalquarterof theDebtor (other than the last fiscalquarterof the fiscalyear), theconsolidatedandconsolidatingbalancesheetsoftheDebtoranditssubsidiariesasattheendofsuchfiscalquarterandtherelatedconsolidatedandconsolidatingstatementsofincomeandofcashflowsforsuchfiscalquarterandfortheelapsedportionofthefiscalyearendedwiththelastdayofsuchfiscalquarter,ineachcasesettingforthcomparativefiguresforthecorrespondingquarterintheprioryear,whichshallbeinreasonabledetailandbeaccompaniedbyacertificationbythechieffinancialofficer of theDebtor that they fairly present in allmaterial respects the financial condition of theDebtoranditssubsidiariesasofthedatesindicatedandtheresultsoftheiroperationsandchangesintheircashflowsfortheperiodsindicated,subjecttonormalyear-endauditadjustments.

Thereareseveralthingstonotehere.Themonthlyandquarterlyfinancialstatementsmustbedelivered

30 and 45 days, respectively, from the last day of the reporting period. These time periods are fairlystandard, but may be subject to negotiation. (Under the securities laws, the time period for a publiccompanytoreportitsquarterlyfinancialstatementsis45days.)Monthlystatementsareonlyrequiredforthefirsttwomonthsinanyquarter,andquarterlystatementsareonlyrequiredforthefirstthreequartersofafiscalyear.Thisisintendedtoavoidduplicativereporting,butisoftennegotiated(forexample,byaparty

whowantstoreceivefinancialinformationassoonaspossible).Thedescriptionofthefinancialstatementstobedelivered(here,abalancesheet,incomestatementand

cash flow statement) should conform to the financial statements that the reporting company actuallyproduces. The above language refers to consolidated and consolidating statements—the former arecombined for the reportingentity and its subsidiaries,while the latter arebrokenout separately for eachentity in the group. There is a requirement for comparative statements,which show comparisons to thesamefinancialstatementsinthecorrespondingperiodoftheprecedingyear.Thedebtorisalsorequiredtodeliver year-to-date statements—statements for the period commencing at the beginning of the presentfiscalyearendandendingwiththeperiodbeingreportedon.Lastly, thereisarequirementthat thechieffinancial officer certify the financial statements as fairly presenting in allmaterial respects the financialconditionoftheentitiesbeingreportedon,subjecttoyear-endadjustmentsrequiredbytheauditors.

►AnnualFinancialStatements

The Debtor shall deliver to the Creditor, within 75 days after the end of each fiscal year of theDebtor,theconsolidatedandconsolidatingbalancesheetsoftheDebtoranditssubsidiariesasattheendofsuchfiscalyearandtherelatedconsolidatedandconsolidatingstatementsof incomeandofcashflowsforsuchfiscalyear,settingforthcomparativefiguresfortheprecedingfiscalyearand(inthecaseofsuchconsolidatedfinancialstatements)accompaniedbyareportbyindependentcertifiedpublicaccountantsofrecognizednationalstandingasshallbereasonablyacceptabletotheCreditor,which report shall contain no going-concern or similar qualification and shall state that suchstatements fairly present in all material respects the financial condition of the Debtor and itssubsidiariesasofthedatesindicatedandtheresultsoftheiroperationsandchangesintheirfinancialpositionfortheperiodsindicatedinconformitywithGAAPappliedonabasisconsistentwithprioryears.

Manyofthesameconceptsapplytothiscovenantregardingannualfinancialstatementsasappliedtothe

interim financial statements. The most important difference is that the annual consolidated financialstatements must be audited by independent accountants; typically the consolidating numbers are notaudited. The accountants’ report must not contain any going-concern qualification, a statement that theaccountantsareunabletoconcludethatthecompanycansurviveasagoingconcern.Thetimebywhichtheaudited annual financial statementsmust be delivered (here 75 days, the time period applicable tomostpubliccompaniesundersecuritieslaws)islongerthanfortheinterimstatements,duetothelengthoftimeittakestheaccountantstocompletetheiraudit.

►Projections

Notmorethan30daysafterthecommencementofeachfiscalyearoftheDebtor, theDebtorshalldeliverfinancialprojectionsoftheDebtoranditssubsidiaries(onaconsolidatedbasis)inreasonabledetailforeachofthefourfiscalquartersofsuchfiscalyearandonanannualbasisforthenextthreefiscalyearsthereafter,ascustomarilypreparedbymanagementforitsinternalusesettingforth,withappropriatediscussion,theprincipalassumptionsuponwhichsuchprojectionsarebased.

Acreditorthatiscarefullymonitoringitsdebtor’screditsituationwill, inmanycases,wanttoreceive

not only the debtor’s financial statements (which show its historical financial performance) but also itscurrentfinancialprojections.Alsoknownasaforecastorabudget,thesesetforththedebtor’sbestestimateas to its expected financialperformanceduring theperiod(s) coveredby theprojections.Projectionswilloftenbeonamonthlyorquarterlybasis for the firstyear,andannually thereafter.Thiscovenantusuallyrequirestheassumptionsonwhichtheprojectionsarebasedtobeincludedwiththeprojectionsandtobereasonable.

►ComplianceCertificate

Atthetimeofthedeliveryofitsquarterlyandannualfinancialstatements,theDebtorshalldeliveracertificateof itschief financialofficerstating thatnoDefaultorEventofDefaultexists,or, ifanysuchDefaultorEventofDefaultdoesexist,specifyingthenaturethereof,whichcertificateshallsetforth detailed computations required to establish whether the Debtor was in compliance with thefinancialcovenantsfortheperiodscoveredbysuchfinancialstatements.

Thepurposeofthiscovenantistorequirethechieffinancialofficerofthedebtortocertifythatthereis

no default,8 and to provide calculations showing compliance (or noncompliance) with the financialcovenants.Becausemost credit documents require thedebtor to providenotice every time that a defaultoccurs,thiscertificatemayappearredundant.Mostcreditors,however,believethataresponsiblefinancialofficerwill not sign a certificatewithout some investigation, and that the discipline of requiring such acertificateregularlyimprovesthechancesthatproblemswon’tbeoverlooked.

►NoticeofDefault

TheDebtor shall deliver, within two business days of the occurrence of anyDefault or Event ofDefault,noticethereofspecifyingthenatureanddurationthereofandwhatactiontheDebtorintendstotakewithrespectthereto.

Somewouldarguethatthisprovisionlacksteeth,inasmuchasthefailuretocomplywithitresultsina

defaultatatimethatanotherdefaultalreadyexists.Thecreditor’sremediesaretypicallythesamewhetherthere is one default or a number of defaults.Notwithstanding this argument, this is a standard reportingcovenant.

►NoticeofLitigation

Within three business days of the commencement of, or the occurrence of any significantdevelopment in, any litigation or governmental proceeding or investigation pending against theDebtororanyofitssubsidiariesthatcouldreasonablybeexpectedtohaveaMaterialAdverseEffect,theDebtorshalldelivernoticethereoftotheCreditor.

This covenant reflects the creditor’s continuing interest in litigation affecting the debtor, because any

judgmentwould represent a competingclaimandpossibly a competing lien.Thematerial adverse effectstandardwillbe the subjectofnegotiation: for a sizablecompany that is subject tohundredsof lawsuitsannually,thestandardisasensibleoneforbothdebtorandcreditor.Asburdensomeasitwouldbeforthedebtortoprovidesomanynotices,itwouldbeequallyormoreburdensomeforthecreditortoreviewandevaluatethemall.Forthisreason,sometimesnoticeisonlyrequiredofthoseproceedingswheredamagesinexcessofsomestateddollaramountareclaimed.

►OtherInformation

TheDebtorshallpromptlydeliversuchotherinformationanddocuments(financialorotherwise)asmaybereasonablyrequestedbytheCreditor.

This is a customary provision in most credit agreements; however, many debtors may find itobjectionablyopen-ended.Itillustratestheimportanceofinformationasoneofthelinchpinsofthecredit-monitoringprocess.

Inadditiontotheforegoingreportingcovenants,manyagreementscontainrequirementsastoreportingofothercategoriesofinformation,mostnotablytax,ERISAandenvironmentalmatters.

[B]BooksandRecords TheDebtorshall,andshallcauseeachofitssubsidiariesto,keepproperbooksandrecordsinwhichfull,trueandcorrectentriesinconformitywithGAAPandallrequirementsoflawshallbemade.

Without proper and accurate bookkeeping, there is no ability to monitor a company’s financial

performanceortounderstanditsfinancialconditionatanypointintime.ThiscovenantgivesthecreditoraremedyintheeventthatthedebtorfailstokeepitsbooksandaccountsproperlyinaccordancewithGAAP.Of course, the typical covenants and representations regarding annual and interim financial statementswouldalsobebreachedifthedebtor’saccountingpracticesfailedtomeetthisstandard.Withoutthebooksandrecordscovenant,however,thecreditorwouldhavetowaituntilthenextfinancialstatementdelivery,insteadofhavinganimmediateremedy.

[C]Inspections TheDebtor shall permit, and shall cause each of its subsidiaries to permit, upon reasonable priorwrittennotice,representativesoftheCreditortovisitandinspectanyofthepropertiesoftheDebtororitssubsidiaries,toexaminethebooksandrecordsoftheDebtoranditssubsidiaries,andtodiscusstheaffairs,financesandaccountsoftheDebtoranditssubsidiarieswiththeirrespectiveemployees,officersandindependentaccountants,allatsuchreasonabletimesandintervalsastheCreditormayreasonablyrequest.

Thiscovenantgoeshand-in-handwiththecovenantthatallowsthecreditortorequestanyinformation

notspecificallyrequiredtobedeliveredundertheothercovenants.Thisprovisiongoesonestepfurther,andpermits the creditor to directly go through the debtor’s books and records and discuss them with thedebtor’s officers and employees.Although seldomused, this right is an important one to creditorswhenthereisaconcernthatthereiseitherasystemicaccountingproblemorpossiblefraud.

[D]CompliancewithLaw TheDebtor shall, and shall cause each of its subsidiaries to, complywith all applicable statutes,regulations and orders of, and all applicable restrictions imposed by, all governmental bodies,domesticorforeign,inrespectoftheconductoftheirbusinessandtheownershipoftheirpropertyexcept for such noncompliance as would not reasonably be expected to have aMaterial AdverseEffect.

Thisissimilartotherepresentationregardingcompliancewithlaw,butinthiscontextitisanongoing

obligationratherthanamerestatementoffactthatismadeataparticularpointintime.Forthatreason,amateriality qualification is even more important here. Often there are also detailed covenants requiringcompliancewithspecificbodiesoflaw,suchasERISAandenvironmentallaw.

[E]MaintenanceofInsurance TheDebtorshall,andshallcauseeachof itssubsidiaries to,maintainatall times infull forceand

effectinsurancewithreputableinsurancecarriersinsuchamounts,coveringsuchrisksandliabilities,andwithsuchdeductiblesandself-insuranceasareconsistentwithnormal industrypractice.Suchinsurance shall name theCreditor as additional insuredwith respect to liability coverage and losspayeewith respect to casualty coverage.All policiesor certificateswith respect to such insuranceshallstatethatsuchinsurancepoliciesshallnotbecancelledormateriallychangedwithoutatleast30days’priorwrittennoticethereofbytherespectiveinsurertotheCreditor.

Theneedforthiscovenantfromacredit-protectionstandpointshouldbeobvious.Ifthedebtorincursa

significantuninsuredlossorliability,itscreditisimpairedtotheextentofsuchlossorliability,whichmustbepaidforoutofthedebtor’scashflow.Topreventthis,acreditorwillofteninsistonacovenantrequiringthe maintenance of insurance. The above provision is relatively loose, in that there are no specificrequirementsastotheidentityoftheinsurersortheinsurancecoveragelevels;itmerelyrequiresthedebtortomaintain insurance in accordancewith normal industry practice. The insurance covenant can also beextremelydetailedandspecifytypesandminimumamountsofcoverage,andminimumcreditratingsoftheinsurance carriers. The latter approach ismore typical in fixed asset financings, such as real estate andprojectfinancetransactions,wherethecreditdecisionistiedcloselytothevalueofthedebtor’sproperty.

Several other important points regarding insurance are contained in this provision. There is arequirement that the creditor be named as "additional insured" in respect of liability insurance and "losspayee"inrespectofcasualtyinsurance.Bybeingnamedasadditionalinsured,thelenderwillbecoveredbythedebtor’sliabilityinsurancetothesameextentthatthedebtoriscoveredunderthepolicy.Forexample,anadjoininglandownerclaimingdamagesduetoahazardouswastespillfromaplantfinancedbyacreditormaysueboththedebtorandthecreditor.Withanadditionalinsuredendorsement,thecreditorisinsuredtothe sameextent as thedebtor.Thecovenant also requires that the creditor isnamedas losspayeeundercasualty insurance policies.As a result, any paymentmade by the insurer on account of damage to thedebtor’spropertywouldbepaiddirectlytothecreditor.Thisprovisionisalwaysrequiredwhenthecreditorhas a security interest in tangible assets—it ensures that the creditor receives the cash proceeds of itscollateralintheeventitisdamagedordestroyed.

The covenant also requires each policy to provide that it cannot bemateriallymodified or cancelledwithout prior notice to the creditor. This goes one step further than having the debtor agree to thisrequirement: it creates an affirmative obligation on the part of the insurer. This gives a further level ofassurancetothecreditorthattheinsurancethatwasapartofitscreditdecisionwon’tdisappearorchangeinawaythatisadversetoit.

[F]PaymentofTaxesBynow,thereadermayhavedetectedapattern:mattersthatarethesubjectofrepresentationsarealso

oftenthesubjectofcovenants.Thereasonisthattherepresentationstatesoneormorefactsinrespectofacertainareaofthedebtor’sbusinessatclosing,butwithoutthecovenanttherewouldbenothingtopreventthedebtorfrommakingsignificantchangesinthatareaaftertheclosing.So,forexample,thedebtorthatiscurrentonall of its taxes at closingmight, in the absenceof a taxcovenantof the type set forthbelow,thereafterbuilduptaxarrearsthatcouldimpairitscreditworthiness.

TheDebtorshallpay,andshallcauseeachofitssubsidiariestopay,allmaterialtaxes,assessmentsand governmental charges or levies imposed upon them or their income or profits, or upon anypropertiesownedbythem,priortothedateonwhichpenaltiesattachthereto,provided,howeverthatneither the Debtor nor any of its subsidiaries shall be required to pay any such tax, assessment,chargeorlevybeingdiligentlycontestedingoodfaithandwithrespecttowhichreserveshavebeenestablishedinaccordancewithGAAP.

Note also the difference in the wording of this tax covenant and the tax representation at section

9:3.1[F].Thecovenantalsorequiresthedebtortocauseitssubsidiariestopaytheirtaxes.Whydoesn’tthe

covenantdirectlyrequireeachsubsidiarytopayitstaxes?Thisisbecauseeachsubsidiaryisnotapartytotheagreement;onlythedebtoris.Thedebtordoesnothavethelegalpowertobinditssubsidiaries.Ontheotherhand,itdoeshavethepowertoagreetocauseitssubsidiariestoactinaspecifiedway.Inthecaseofthe representation, in contrast, the debtor does have the power tomake factual statements regarding itssubsidiaries.

[G]CorporateExistence TheDebtor shalldo, andshall causeeachof its subsidiaries todo,orcause tobedone, all thingsnecessary to preserve and keep in full force and effect their existence and their material rights,franchises and qualifications to do business, except for rights, franchises and qualifications to dobusiness the loss ofwhich (individuallyor in the aggregate)wouldnot reasonablybe expected tohaveaMaterialAdverseEffect.

This is a relatively uncontroversial covenant that requires the debtor to maintain its corporate (or

partnershipor limitedliabilitycompany)existence,andtomaintainitsqualificationtodobusinesswheresuchauthorizationisrequired.Aswiththecorrespondingrepresentationdiscussedaboveatsection9:2.1,therequirementtomaintainqualificationtodobusinessisoftensubjecttoamaterialitystandard.

[H]PaymentofClaims TheDebtor shall, and shall cause each of its subsidiaries to, pay allmaterial claims against themwhendueandpayable,exceptwherethefailuretopaysuchclaims,individuallyorintheaggregate,wouldnotreasonablybeexpectedtohaveaMaterialAdverseEffect.

The failure by a debtor to pay its obligations as they become due is often the first sign of financial

difficulty.Ifadebtorishavingcashflowproblems,itsfirstreactionisoftento"stretchthetrade"—thatis,todeferthepaymentofitsaccountspayableandothershort-termobligations.Thisiswhythisprovisionisoftenincludedincreditdocumentation.Thedebtor,ontheotherhand,willarguethattheprovisionpreventsitfromdelayingpaymentseithertoaddressabonafidedisputeorsomelegitimateandunthreateningcashflow imbalance. The normalmiddle ground is to insert amaterial adverse effect qualification, as in theaboveexample,and/ortoexcludepaymentsthatarenotmadeasaresultofabonafidedispute.

§9:3.3NegativeCovenants Negativecovenantsare theprimarybattlegroundofcreditdocumentation.Theirpurpose is topreventthedebtorfromtakingactionsthatmaytendtoworsenitscredit;however,thenegativecovenantsproposedbythecreditorareoftenperceivedbythedebtorasoverbroadandimpairingtheflexibilityneededtotakeadvantageofopportunitiesandtoreacttochangingmarketconditions.Theprocessofnegotiatingnegativecovenantsinvolvesfindinganappropriatebalancebetweenthecreditor’sdesireforcontrolandthedebtor’sdesireforautonomyandflexibility.

[A]DebtThe incurrence of additional debt is one of the primary ways that a debtor can make itself less

creditworthy.Theadditionalprincipalandinterestpaymentobligationscreatefurtherclaimsonthedebtor’scash flow,making a liquidity problemmore likely to occur. Furthermore, the additional debt representsanother claim that will compete with the claim of the prior creditors in the event of a bankruptcyproceeding.Last, theexistenceofotherdebtmeansthat there isanothercreditorwithaccelerationrights,the exercise of which could precipitate a financial crisis. These factors result in the inclusion of debtcovenantsincreditdocumentationforallbutthemostcreditworthydebtors.

There are two basic types of debt covenants: maintenance covenants and incurrence covenants.Maintenancecovenantsarefoundmostofteninbankcreditagreementsandpermitspecifiedlevelsofdebttoremainoutstandingfromtimetotime.Incurrencecovenantsarefoundmostofteninprivateandpublicofferings of debt securities, and permit the incurrence of additional debt if a specified financial test issatisfied,aftergivingproformaeffecttoboththeincurrenceofthedebtandtheuseoftheproceedsthereof.Publicandprivatedebtindenturesalsousuallypermitthemaintenanceofdebtundercarveoutsandbaskets,in addition to debt that can be incurred under an incurrence covenant. The remainder of this discussiondescribestypicaldebtprovisionsinabankcreditagreement;however,manyoftheprovisionsareoftenalsofoundindebtcovenantsinotheragreements.

Thestartingpointofanydebtcovenant is thedefinitionof"debt"or"indebtedness."Hereisa typicaldefinition:

"Debt"shallmean(i)indebtednessforborrowedmoney,(ii)obligationsevidencedbybonds,notesorsimilar instruments, (iii) the deferred purchase price of assets or services but excluding tradepayablesincurredintheordinarycourseofbusiness,(iv)thefaceamountofalllettersofcreditandall drafts drawn thereunder, (v) all indebtedness of another Person secured by a lien on property,whetherornotsuchindebtednesshasbeenassumed,(vi)allcapitalizedleaseobligations,and(vii)allguaranteesoftheobligationsofanotherPerson.

Thepurposeofthisdefinitionistoisolatethoseliabilitiesthatanothercreditorwillwanttocontrol.The

foundation of the definition is actual borrowings (clause (i)) and obligations under instruments that arenormallyconsidereddebtobligations(clause(ii)).Thenextgeneralareaisobligationsthatareincurredtofinance the acquisition of property. Clause (iii) describes purchase money financing, in which theacquisitionofanassetisfinancedbytheseller’sagreementtobepaidthepurchasepriceovertime.Clause(vi)coverstheobligationsofthedebtorunder"capitalizedleases,"whichareleasestreatedasafinancingon thedebtor’sbalancesheet—that is, the leasedasset is recordedasbeingownedby thedebtorand theleasepaymentobligationsaretreatedasaliability.Notetheexclusionoftradepayablesinclause(iii):tradepayables are createdwhen inventory or services are purchased on credit terms in the ordinary course ofbusiness.Theyarecarriedonabalancesheetascurrentliabilitiesandtypicallynotconsidereddebt.Thus,financings of fixed assets through direct borrowing, purchasemoney financing or capitalized leases aretreatedasdebt,whereastheordinaryfinancingofinventoryorservicesisnot.

Obligations under letters of credit (clause (iv)) are also normally treated as debt.A drawing under aletter of credit creates a reimbursement obligation to the issuing bank that is considered the functionalequivalentofadirectborrowingfromthebank.Clauses(v)and(vii)coverarrangementswherethedebtorprovidescreditsupportforathirdparty’sobligations,eitherbypledgingitsassetsorprovidingaguarantee.

Nowthatwehaveexaminedthedefinition,let’slookatthebodyofatypicaldebtcovenant:

TheDebtorshallnot,norshallitpermititssubsidiariesto,create,incur,suffertoexistorpermitanyDebt,except:

Thesimplicity,andbreadth,ofthislanguagedemonstratesabasicparadigmofnegativecovenants:they

generallystartasaflatprohibitiononabroadly-definedrangeofactivities.Thekeytothenegotiationofthis and other covenants will be the provisions that follow the "except" at the end—the baskets andcarveouts that allow the debtor room for certain types and amounts of debt during the term of theagreement.Thefollowingaresomeoftheusualexceptionscontainedindebtcovenants,thoughthetypesandamountspermittedwilldependontheparticularcircumstancesofthetransactionandthecreditstatusofthedebtor.

►PurchaseMoney/CapitalizedLeaseObligations Financing of assets by means of capitalized lease or purchase money financing will frequently be

permitted, subject to separate or combinedbaskets permitting specified amounts of such financing to beoutstandingatanytime.Thenegotiationoftheseandothercovenantbasketswilloftenfocusonwhethertheneedfortherequestedamountsisreflectedinthedebtor’sprojections.

►ExistingDebt Debtthatexistsatthetimethecreditagreementisenteredintomustbepermittedorrepaid.Itisusuallydescribedonanattachedschedule.Thisexceptionisnotnecessaryifthecovenantrestrictsonlythecreationorincurrenceofnewdebt.

Let’sexaminetheinterplaybetweendebtthatispermittedbythisexceptionanddebtthatispermittedbyother exceptions.Assume, for instance, that a debtor has a $10million capitalized lease in place on theclosingdatethatisinadvertentlyomittedfromthescheduleofexistingdebt.Ifthereisalsoabasketforupto$50millionofcapitalizedleases,thereisnobreachbecause$10millionofthebasketcanbeutilized.Ifthedebthadbeen scheduled, thebasketwouldnothavebeenunnecessarilydiminished.This same issuearises inconnectionwithanycovenant,suchas the lienandinvestmentcovenants, thatpermit itemsthatexistatthetimeofclosing.

►IntercompanyDebt Companiesandtheirsubsidiariesoftenhaveaneedtomakeloanstoeachother.Oftenthisisaresultofaparent borrowing under a credit facility and in turn lending to its subsidiaries to provide them withnecessary working capital. Sometimes one entity will generate extra cash flow that is shared with itsaffiliatesintheformofintercompanyloans.Becausetheseloansconstitutedebt,theymustbespecificallycarvedoutofthecovenantinordertobepermitted.Putanotherway,transactionsamongthemembersofacorporategroupare,asageneral rule, treatednodifferentlyforcovenantpurposes than transactionswiththirdparties.Suchacarveoutmaybeopen-ended,ormaybesubjecttoabasket,mostlikelydependingonwhether the subsidiaries are part of the credit package by virtue of being covered by covenants and/orhavingguaranteedthedebt(seesection9:3).

►IntercompanyGuarantees Frequently,onememberofacorporategroupmayberequestedtoguaranteetheobligationsofanothermemberofthegroup—forexample,alessormayrequireaparentcompany’sguaranteeofitssubsidiary’sleaseobligations,particularlywheretheparentismorecreditworthythanthesubsidiary.Accordingly,debtcovenantswilloftenpermitthistypeofintercompanyguarantee.

►SubsidiaryDebt Sometimesitisanticipatedthatthedebtor’ssubsidiarieswillincurdebt.Thissituationarisesmostoftenin the case of foreign subsidiarieswhose financing needs are not provided for under the parent’s creditfacilities.BecausedebtofU.S.companiesisusuallynotguaranteedbyitsforeignsubsidiaries,9anydebtincurredbyaforeignsubsidiaryisstructurallyseniortoacreditoroftheU.S.debtor.Thismeansthattheforeigncreditorhasaclaimtotheforeignsubsidiary’sassets,incontrasttotheparentcompany’screditor,whichhasnosuchclaim.Asaresult,theparentcompany’screditorwillwanttorestricttheamountofdebtthatcanbeincurredbyitsforeignsubsidiaries.

►AcquiredDebt Debtors thatexpect tomakeacquisitionsmaywantabasketfordebtexistingatanacquiredcompanythat is not refinanced or paid off at the time of the acquisition. There are usually two reasons why anacquirormaywanttoleavesuchdebtoutstanding:(a)thedebtmaynotpermit,ormayimposeexpensivepenaltieson, prepayment, or (b) thedebtmayhave favorable economic terms that the acquirorwants tokeepinplace.

This carveout will require that the acquired debt was not created in anticipation of the acquisitiontransaction. This protects the creditor against the intentional creation of debt at the target before itsacquisition.

►GeneralDebtBasket Dependingontheneedsandcreditofthedebtor,theremaybeageneralbasketforpermittedadditionaldebt.Sometimesthisbasketwillbelimitedtosubordinateddebt.

►RefinancingDebt This exception permits the refinancing and extension ofmaturity of other permitted debt. The usuallanguage refers to the "refinancing, replacement or extension" of specified categories of debt. Thisprovisionisusuallynotapplicabletodebtpermittedunderabasket,becausethenatureofabasketpermitsthedebtincurredthereundertoberepaidandreborrowed,subjecttotheoveralldollarcap.Thecategoriesofdebt that areusually coveredby the refinancing exception aredebt existing at the time the agreement isenteredintoandotherspecificitemsofpermitteddebt.Often,thisexceptionspecifiesthattherefinancing,replacementorextensionmaynotresult in theincreasein theprincipalamountof thedebt.Additionally,there may be a requirement that the new debt may not have an earlier maturity or a shorter averageweightedlife10thantheoriginaldebt.Thispreventstherefinancingfromworseningthedebtor’scashflowbycreatingmoreonerousrepaymentrequirements.Sometimesthereisarequirementthatthetermsofthenewdebtcannotbelessfavorabletothedebtorthanthoseofthedebtbeingrefinanced.

[B]LiensThe interestofacreditor in restricting itsdebtor’sability tocreate lienson itsassets isdrivenby the

basicbankruptcyprinciplethatsecuredcreditorsarepaidpriortounsecuredcreditors,totheextentofthevalueof theencumberedassets.Thus,byprohibitingliensanunsecuredcreditoravoidscomingbehindanewsecuredcreditor,andasecuredcreditoravoidshavingtosharethevalueofitscollateral.

Atypicaldefinitionof"lien"is:

"Lien"shallmeananymortgage,pledge,securityinterest,encumbrance,lienorchargeofanykind,including any agreement to give anyof the foregoing, any conditional sale or other title retentionagreement,anyfinancingorsimilarstatementornoticefiledundertheUniformCommercialCodeorany similar recording or notice statute, and any lease having substantially the same effect as theforegoing.

This definition covers consensual liens such asmortgages (liens on real property), pledges (liens on

securities) and security interests (liens on all other personal property), as well as all other liens andencumbrances.Further,itincludesthefilingofallfinancingstatements(thefilingofwhichdoesnotcreate,butmerelyperfects,securityinterests),andleasesthathavetheeffectofcreatingalien.Aswiththedebtcovenant, theliencovenantusuallyprohibits thecreationorexistenceofall liensthatarenotspecificallypermitted.Followingisadiscussionoffrequentlyappearingcarveoutstotheliencovenant.

►TaxLiens Thereiscustomarilyalimitedcarveoutfortaxliens.Becausesometaxobligationsthatarenotyetdueandpayableresult in inchoate liens,acustomaryexception to the liencovenantcovers lienssecuring taxobligationsthatarenotyetdueandpayable.Anothertypicalexceptionpermitsliensinrespectoftaxesthatarebeingcontestedbythedebtor.Withoutthis,adebtorwouldberequiredtopaywhenduealltaxesthatwouldotherwisegiverisetoalien,evenifithadabonafidedisputeastotheimpositionofthetax.

►OrdinaryCourseLiens Thereareavarietyofliensthatariseintheordinarycourseofbusinessincommercialarrangements.Forexample,under the lawsof somestates (andunder some leases) a landlordhasa lienonpropertyat theleased premises that secures unpaid rent obligations. Similar liens include those in favor ofmechanics,materialmen,warehousemenandcarriers.Sometimesthecarveoutspecifiesthatobligationssecuredbythe

permittedlienscannotbeoverduebeyondsomestatedperiodoftime,unlesscontestedingoodfaith.

►WorkersCompensationSecurityArrangements Stateworkerscompensation,unemploymentinsuranceandsimilarprogramsoftenrequiretheemployertopostsecurityforitsobligations.Theremustbeacarveouttotheliencovenanttopermitsuchsecurity.

►Deposits Avarietyofcommercialarrangementsrequirecashdeposits.Themostcommonexampleofthisisthesecuritydeposit required inconnectionwitharealestate lease.Depositsof this typefallunder thebroaddefinitionof lienabove,because thedepositor ispledging itscash tosecure itspaymentobligations.Thetypicalliencovenantexceptionallowsdepositsinconnectionwithleases,tradecontracts,bids,performancebondsandinsuranceobligations.

►Easements,etc. Thereare anumberof restrictionson real estate that arguably fallwithin thedefinitionof "lien" thatshouldn’t trouble a creditor and are therefore excluded from the lien prohibition.The usual exception isalongtheselines:

Easements, rights-of-way, restrictions, reservations, permits, servitudes and other similarencumbrancesonrealpropertythatdonotmateriallyinterferewiththeordinaryconductofbusinessattheaffectedproperty.

Ofcourse,iftheaffectedrealpropertyisthesubjectofthetransaction(aswouldbethecase,forexample,inamortgageloan),theseissuesarenegotiatedmuchmoreclosely.

►LeasesandSubleases Ifthedebtoranticipatesleasing(aslessor)orsubleasing(assublessor)anyofitsproperty,theremustbeanexceptionfortheseactivities.Aleaseorsubleasecreatesanencumbrance(theinterestofthelesseeorsublessee)onthepropertyofthedebtor,soacarveoutisrequired.

►CapitalizedLeasesandPurchaseMoneyFinancing Totheextentthedebtcovenantpermitsthecreationofcapitalizedleasesortheincurrenceofpurchasemoneydebt, theremustbeanequivalentcarveout to the liencovenant topermit the liens securing theseobligations.Generally speaking, a capitalized lease is treated as a secured financing for accounting andcreditors’rightspurposes.Thus, theleasedassetappearsonthelessee’sbalancesheetasanownedasset,andwouldbe treatedaspartof the lessee’sestate inabankruptcyproceeding.Apurchasemoney lenderoftentakesasecurityinterestintheassetbeingfinanced.

Permittedpurchasemoneyandcapitalizedleaseliensmaybesubjecttolimitations.Theexceptionmayspecifythatthelienscan’tcoverpropertyotherthantheassetsthatarethesubjectofthefinancing(inotherwords, thedebtorcan’tgranta lien to thefinancerofan itemofequipmentonanyassetsother than thatitem of equipment). Also, the provision may specify that the lien must be created at the time that thepurchasemoneydebt is incurredor thecapitalized lease isentered into.This is toensure that the lien isgrantedtofacilitatethefinancing,notgrantedafterthefacttoassuageaninsecurecreditor.

►ExistingLiens Aswithexistingindebtedness,liensthatareinplaceatthetimethattheagreementbecomeseffectivearetypicallyscheduledandpermitted.Liensthatsecurerefinancings,extensionsandreplacementsofthedebtthatissecuredbytheselienswillalsobepermitted,subjecttoarestrictionthatsuchlienscannotcoveranyneworadditionalpropertyasaresultoftherefinancing,extensionorreplacement.

►LiensSecuringAcquiredDebt

Ifthedebtorispermittedbythedebtcovenanttoassumeoracquiredebtinconnectionwithacquisitions,thereshouldbeacorrespondingcarveout totheliencovenanttopermit lienssecuringsuchindebtedness.Therewillusuallybearequirementthattheliensmaynotextendtoanyassetsotherthanthoseoriginallycoveredbythelien—thisprotectsagainstablanketlienspreadingtocovertheassetsoftheotherpartytoamergertransaction,forexample.

►JudgmentLiens Inmanystates,ajudgmentthatisdocketedordeliveredtothesheriffforexecutionresultsinalieninfavorofthejudgmentcreditoronthejudgmentdebtor’spropertylocatedinthatstate.Withoutanexceptionforthistypeoflien,aborrowerwouldberequiredtopayimmediatelyanyjudgmententeredagainstit,orriskbeinginbreachofitsliencovenant.Forthisreason,mostliencovenantspermitjudgmentliens,solongas theenforcementof the judgment is stayedwithin30or60daysafter itsentry.Suchastaywilloccurwhenthejudgmentisappealed.Thus,underthisprovisiontheborrowerwillhave30to60daystoeitherpayorappealthejudgment.Iftheappealislost,thestayofjudgmentwillbeliftedandthejudgmentwillhavetobesatisfiedinordertoavoidabreachofthecovenant.

►PrecautionaryFinancingStatements Iftheprohibitiononliensincludesthefilingofanyfinancingstatements,thereshouldbeanexceptionfor the filing of precautionary financing statements filed pursuant to section 9-505 of the UniformCommercial Code. This section permits the lessor under an operating lease or a consignor under aconsignment to file a financing statement as a precaution in the event that the lease or consignment issubsequentlyrecharacterizedasasecuredtransaction.

[C]AssetSalesCreditagreementsrestrictthedebtor’sabilitytosellassetsinordertopreventsignificantchangestothe

business on which the creditor’s credit decision was made. Asset sales not contemplated by a debtor’sbusinessplancouldindicate,forexample,thatthedebtoriscannibalizingitspropertytomakeupforacashflowshortfall.Theassetcovenantsaletypicallystartswithabroadprohibition:

TheDebtorshallnot,andshallnotpermit itssubsidiaries to,sell, transfer,convey,assign, leaseorotherwisedisposeofanyoftheirassets,except:

Followingisadiscussionofthemosttypicalexceptionstotheassetsalecovenant.

►SaleofInventory This is an essential exception for any company that sellsmerchandise.Often it is limited to sales ofinventoryin theordinary courseof business,which allows for normal sales but prohibits bulk sales andotherextraordinarytransfers.

►SalesSubjecttoDebtRepayment Acreditor’sresistancetothesaleofproductiveassetsislessenedwhenthecashproceedsofthesaleareusedtorepaydebt.Accordingly,thereisoftenabasketforacertainamountofassetsales,ifthenetcashproceeds are used to permanently repay the debt. "Net cash proceeds" is usually defined as the totalproceedsofthesale,afterdeductingtheactualcostsofthesale(includingbrokers’,investmentbankers’andlawyers’fees,salescommissions,debtpaymentsrequiredtobepaidwithsuchsaleproceedsandtaxcosts).Thisbasketmaybelimitedtoamaximumamountoverthelifeoftheagreement,aperannumamount,oranaggregateamountthatdoesnotexceedsomestatedpercentageofthedebtor’stotalassets.Thisprovisionoften requires a specified percentage of the consideration for the sale to be in cash. The non-cashconsiderationwillusuallyconsistofanote(a"sellernote")orotherpaymentobligation.Thecreditorwill

want to maximize the portion of the sale consideration that is in cash and to minimize the non-cashconsideration,whichrepresentsanexchangeofoperatingassets foran investment (the investmentby thedebtorinthesellernote)ofuncertainquality.11

►SalesofAssetsthatAreReplaced Operatingcompaniesoftensellequipmentwithanexpectationof replacing it.Oneexampleof this iswhere existing equipment is traded in as new equipment is acquired.Accordingly, there is generally anexception for trade-ins and sales where the proceeds are used to acquire replacement equipment withinsomeperiodoftime.Sometimesthereinvestmentrequirementisnotlimitedtothereplacementofspecificassetsbutreferstofixedorotherassetsthatare"usefulinthebusinessofthedebtor."Thisisanespeciallybroadexception,particularlyifit’snotlimitedtofixedassets,inwhichcasethedebtorisable,forexample,tosellrealestateandusetheproceedstoacquireinventory.

►DispositionsofObsoleteEquipment Anotherstandardexceptionisonethatpermitsthedispositionofequipmentthatisobsolete,wornoutorotherwiseuneconomic.Thecreditorhasnolegitimatereasonnottopermitthedebtortodisposeofassetsthatarenolongerproductive.Sometimes,thisexceptionisopen-ended,othertimeslimitedtoanannualoroveralldollaramount.

►SaleofSpecifiedAssets Ifadebtorisexpectingtosellcertainpropertyatthetimethatitentersintoacreditagreement,itwillaskforacarveoutpermittingthosesales.Oftenthecarveoutwillspecifyhowtheproceedsof thesesalesmustbeapplied.Sometimesthecreditorwillwantthecarveouttospecifyaminimumsalesprice,butifthecreditagreementisgoingtobepubliclyavailable(asanexhibittoSECfilings,forexample),thedebtorwillresist this because of the negative impact disclosure would have on its ability to negotiate price withpotentialpurchasers.

►Leases,SubleasesandLicenses Wheretheassetsalecovenantisdraftedverybroadly,manytransactionsthatarenottypicallythoughtofas"sales"aresweptin.Amongthesearetransactionsinwhichthedebtorleasesorsubleasesoutpropertyaslessor or sublessor, or licenses intellectual property as licensor. In each of these cases, the debtor istransferringapartialinterestinitsrightstoproperty.Suchtransfers,tobepermitted,mustbecarvedoutofthecovenant.

►IntercompanySales Thereareseveralreasonswhyadebtormaywant tohavetheflexibilitytoconductsalesamongitselfanditssubsidiaries.Oneofthesubsidiariesmaybeamarketingarmthatsellsproducttocustomersthatitinturn purchases fromanother subsidiary.One subsidiarymaymanufacture and sell rawmaterials that areused by the debtor in itsmanufacturing process.Theremaybe a perceived need, for tax, operational orotherpurposes,tomovefixedassetsaroundamongdifferentmembersofacorporategroup.Thecreditor’swillingnesstoprovidethisflexibilitywilldependprimarilyonthecreditstatusoftheentitiesthatwouldbepermitted transferors and permitted transferees under such arrangements—in other words, are thesubsidiaries part of the credit package by virtue of being covered by the covenants and/ or havingguaranteedthedebt(seesection9:3).

►Sale-Leasebacks Inasale-leaseback,afixedassetissoldtoathirdparty,whosimultaneouslyentersintoaleasewiththeseller that gives the seller the right to the continued use of the asset in exchange for ongoing leasepayments.Thishastheeffectofgeneratingimmediatecashforthesellerinexchangefortheincurrenceofalong-termpaymentobligation.Assuch,itisusuallyconsideredbycreditorsastheeconomicandfunctionalequivalentofaborrowingsecuredbyassets.Becausesale-leasebacksareoftenusedasalast-ditchmeansof

generating cashby companies that are suffering cash flowproblems, they areoftenprohibitedor tightlyrestrictedincreditdocumentation.

Theremaybecircumstanceswherecompanies that leaseequipmentare forced, for timing reasons, topurchase theequipment inanticipationof the leasebeingentered into.Ausefulprovision toaddress thiscircumstanceisacarveoutforsale-leasebacksthatoccurwithinsomerelativelyshortperiodoftime(say,90days)oftheinitialacquisitionoftheproperty.Acreditorthatotherwisewouldbewillingtopermittheleaseofthisequipmentshouldbewillingtopermitsuchasale-leaseback.

[D]RestrictedPayments"Restrictedpayments"aretypicallydefinedasfollows:

Any (a) dividend payments on the equity interests of the Debtor or its subsidiaries, (b) otherdistributionsonaccountof theequity interestsof theDebtoror its subsidiaries,or (c)paymentonaccountof,or settingasideanypayment for,or establishmentof a sinking fund for, thepurchase,redemption,defeasance,retirementorotheracquisitionoftheequityinterestsoftheDebtoranditssubsidiaries.

Acreditoroftenlooksnegativelyonrestrictedpaymentsbyitsdebtor:ifthedebtorisgeneratingenough

freecashtobemakingdistributionstoitsequityholders,itshould,atleastinthecreditor’sview,insteadbeusing the cash to reduce its debt.Eachdollar paidout to equity is a dollar reduction to thedebtor’s networth and a dollar less that the creditor has recourse to. Accordingly, restricted payments are often thesubjectofverytightcovenants.

►Non-cashDividends Dividendspaidinadditionalequityareusuallyfreelypermitted,sincethistypeofdividendhasnoeffectonthedebtor’scashorotherassets.Ontheotherhand,dividendsofpropertyother thancashareusuallyrestrictedtothesameextentascashdividends.

►SubsidiaryDividends Dividendsthatarepaidtothedebtororawholly-ownedsubsidiaryofthedebtoraretypicallypermitted,becausethecashorotherpropertythatisdividendedcontinuestobepartoftheconsolidatedassetsofthedebtor.Ontheotherhand,adifferentissueisraisedwhereasubsidiaryisnotwholly-owned.Insuchacase,aproratedamountofanydividendorotherdistributionmustbepaidtothird-partyshareholders.Asaresult,dividendsofthistypearelookedonwithdisfavorbycreditors.

►EquityBuybacks Stock bonus and other stock incentive plans offered to a company’s management often require thecompanytorepurchasethestockuponthedeath,resignationor terminationof theemployee.Arestrictedpaymentscovenantwillblocksuchpayments,unlessacarveoutpermitsthem.Totheextentthesepaymentsaren’t fullypermittedby thecovenant, thedocumentproviding for suchpaymentsmustprovide for theirnonpayment or deferral—otherwise the debtormaybe forced to breach either its credit agreement or itsstockplan.

►TaxDistributions Many partnerships and limited liability companies are not taxed as entities; instead, their partners ormembersaretaxeddirectlyontheentityincomethatisattributabletotheirequityinterestsintheentity.Asaresult,theseentitiestypicallymakedistributionsinaminimumamountsufficienttocovertheirinvestors’incometaxliabilitiesarisingasaresultoftheirinvestments.Thesedistributionsshouldbecarvedoutofanyrestrictedpaymentscovenant.Thecreditor’snormalantipathytocashdividendsshouldbeovercomebythefact that if the debtorwere structured as a corporation, these amountswould be payable directly by the

debtorastaxes.

►IndentureRestrictedPaymentsCovenants The restricted payments covenant that appears in debt indentures differs from the typical creditagreementcovenant.Rather thanbeingstructuredasa flatprohibitionsubject tocarveouts, the indenturecovenant permits restricted payments in an amount (the "restricted payments basket") determined by aformula.Thisbasketisusuallyequalto50%ofthedebtor’sconsolidatednetincomefromthedateoftheindenture through the date of the restricted payment, plus 100% of the cash proceeds of new equityissuances,lesstheaggregateamountofallrestrictedpaymentspreviouslymadeunderthebasket.Thus,thedebtor’s ability to pay dividends and make other restricted payments increases with its profitability. Inaddition,thereareoftenspecificbasketssimilartothosefoundincreditagreements.

[E]InvestmentsUnlikedividends,whichfromacreditor’sstandpoint ismoneyout thedoor,aninvestmentpotentially

creates value that may strengthen the debtor financially and thereby inure to the creditor’s benefit.Accordingly,investmentsareusuallynotproscribedasnarrowlyasrestrictedpayments.Ontheotherhand,the creditorwillwant to restrict investments that either represent a deviation from the debtor’s businessplan, involve excessive risk or result in cash or assets being removed from its credit package.A typicaldefinitionofinvestmentsincludes:

Any advance, loan, extension of credit or capital contribution, any purchase of any stock, bonds,notes,debenturesorotherdebtorequitysecurities,andanypurchaseofassetsconstitutingabusinessunitofanyperson.

The first thing to note is that the definition covers both debt and equity investments, and is written

broadlysothatloansandotheradvancesareincludedinadditiontodebtsecuritiessuchasnotesandbonds.The definition also picks up asset purchases that constitute a "business unit," since acquisitions can beeffectedbypurchasingeitherthestockorassetsofthetarget.Sometimestheprovisionwillinsteadcoverpurchasesofallorsubstantiallyalloftheassetsofanyentity.

►InvestmentsinSubsidiaries It is very common for a consolidated group to need tomove cash among the constituent entities, inconnection with normal cash management functions as well as for strategic reasons. The creditor’swillingnesstopermittheseinvestmentswillbeprimarilydrivenbythepotentialeffectonitscreditpackage.Forexample,acreditormayberelativelyindifferenttoaninvestmentbyonesubsidiarythatisaguarantorof thedebt inanother subsidiaryguarantor.On theotherhand, thecreditorwillviewan investment in asubsidiarythatisnotaguarantorasanimpairmentofitscreditpackage,becauseitresultsincashmovingtoanentityagainstwhichithasnoclaim.12(Seesection9:3.)

►InvestmentsinJointVentures Aninvestmentbyadebtorinajointventureisusuallylookedatwithdisfavorbyacreditor.Typically,aninvestorinajointventuredoesn’thavethesamelevelofcontrolthatitwouldexerciseoverasubsidiary.Inaddition,amountsinvestedinjointventuresareoutsidethecreditpackagebecauseajointventurewillalmostneverguaranteethedebtofoneofitsinvestors.Asaresult,basketsforinvestmentsinjointventuresareusuallythesubjectofsignificantnegotiation.

►Acquisitions Tensionarisesinnegotiatingcarveoutsforacquisitionsbetweenthedebtor’sdesireforfreedomtomakeacquisitionsbasedonitsownbusinessjudgmentandthecreditor’sdesiretomakeitsowndeterminationon

themeritsofeachproposedacquisition.Themiddlegroundusuallyinvolvesabasketwithsomeadditionalbells and whistles. For example, a frequently occurring requirement is that the debtor demonstrate proforma compliance with its financial covenants (or other specified financial ratios), after taking theacquisitionintoaccount.

►LoansandAdvancestoOfficersandEmployees Companies often make loans and advances to their officers and employees for travel expenses,relocation,andforotherpurposes.Thesemustbecarvedoutoftheinvestmentcovenant,subjectusuallytoanoverallcap.

►BankruptcyInvestments Adebtormaybe issued securities in satisfactionof anoutstanding claimagainst a customeror otherpersoninabankruptcyproceeding.Acarveoutforthistypeofinvestmentisusuallynotsubjecttoadollarcap,becauseitisoutsideofthedebtor’scontrol.

►ExistingInvestments Any investments that exist on the closing date are usually scheduled and permitted under a separatecarveout.

►CashInvestments Asamatterofsoundcashmanagement,acompanythathascashwillwanttoinvestitratherthanhaveitsitidle.Therefore,acustomaryexceptiontotheinvestmentcovenantisonethatpermitstheinvestmentofcashinliquidsecurities.Thiscategoryofpermittedinvestmentsusuallyincludesthefollowingshort-terminvestments (referred to as "cash equivalents"): government securities, certificates of deposit andcommercialpaper,subjectinmanycasestominimumratingrequirements.

[F]TransactionswithAffiliatesAcreditorworriesabouttransactionsbetweenthedebtorandthedebtor’saffiliatesbecauseoftherisk

thatthetransactionwillresultinvalueescapingfromthedebtor.Forexample,thedebtorcouldsellassetstoits sole shareholder forabelow-marketprice.Thisconcerndoesnotcomeup in thecaseof transactionswithnon-affiliatesbecauseitisassumedthatinthiscircumstancethedebtorwillbehaveinaneconomicallysensibleway and obtain equivalent value.However, in the case of transactionswith affiliates this sameassumption isn’t made, due to the possibility that the debtor’s self-interest will be subordinated to itsaffiliates’ needs. "Affiliate" is usuallydefined as apersonor entity that directlyor indirectly controls, iscontrolledby,orisundercommoncontrolwiththedebtor,with"control"oftendefinedasthepowertovote5%or 10%of the affiliate’s equity interests.Under this definition, a company’s affiliates include (a) itsparent company, (b) investors owning the specified amount of voting equity, (c) its sister companies(companiesthatareownedbyitsparentcompany),(d)itssubsidiariesand(e)entitiesinwhichithastherequisitevotingequityinvestment(includingmostjointventures).

Thetypicaltransactionswithaffiliatescovenantisworded:

The Debtor shall not, and shall not permit its subsidiaries to, enter into any transaction with itsAffiliates,unlesssuch transaction isupon termsno less favorable to theDebtororsuchsubsidiarythanitwouldobtainonanarm’s-lengthbasiswithaPersonthatisnotanAffiliate.

Thecovenantdoesnotprohibitaffiliatetransactions;itmerelyrequiresthatsuchtransactionshaveterms

thatareequivalenttothosethatwouldbeobtainedfromanindependentparty.Thereisoftenacarveoutfortransactionsamongaffiliatesthatareeachpartofthecreditpackage.Sometimes,thereisarequirementthataffiliate transactions with a value above a stated dollar threshold must be specifically approved by thedebtor’s board of directors or an investment banking or valuation firm as being on arm’s-length terms.

Requirements of this type appear more frequently in agreements relating to high-yield and other debtsecurities.

[G]PaymentRestrictionsAffectingSubsidiariesConceptually,thisisoneofthehardestcovenantstograsp.Asimpleversionofthiscovenant(referredto

hereasthe"paymentrestrictionscovenant")readsasfollows:

The Debtor shall not, and shall not permit any of its subsidiaries to, enter into any agreementrestrictinganysubsidiary’srightto(a)paydividendsormakeotherrestrictedpaymentstotheDebtororanyother subsidiary, (b) sell, transferorotherwisedisposeofassets to theDebtoror anyothersubsidiary,(c)makeloansoradvancestotheDebtororanyothersubsidiary,or(d)repayanyloansoradvancesmadebytheDebtororanyothersubsidiary.

This covenant ensures that there is no impediment to the upstreaming ofmoney to a debtor from its

subsidiaries. This is important to a creditor, who wants to make sure there is a clear pathway for thesubsidiaries’cashandotherassetstobeavailabletothedebtor,ifthedebtor’sfinancialconditionrequiresit.Oneofthereasonsthatthiscovenantisconfusingisthat,unlikeothercovenantsthatrestrictactions, thiscovenant restricts the existence of other contractual provisions. It restricts the ability of a debtor’ssubsidiariestoenterintocertaintransactionsinawaythatsometimesgetsoverlooked.Inthecasewhereasubsidiaryisproposingtoincurdebt,forexample,mostlawyerswillrealizethatsuchincurrencemustbepermitted under the debtor’s debt covenant.But they sometimes forget that restrictions applicable to thesubsidiaryunderitsdebtagreementmustbeanalysedunderthiscovenantaswell.

Someofthetypicalexceptionstothiscovenantarethefollowing:

►ExistingRestrictions Existingpaymentrestrictionsmustbepermitted.Usually, theyarerequiredtobe listedonaschedule.Similar restrictions in agreements that refinance or replace the scheduled agreements are commonlypermitted as well, as long as the new provisions aren’t more restrictive than the ones being replaced.Sometimes, the lender will insist that existing restrictions be eliminated. For example, if there arerestrictionsofthistypeinexistingdebtofasubsidiaryofthedebtor,thelendermayrequirethatthedebtbepaidofforamendedattheclosing.

►Anti-assignmentProvisions Many contracts restrict the parties’ ability to assign their rights under the contract. For contracts andcontractrightsconstituting"accounts,""chattelpaper,""promissorynotes,""paymentintangibles,""letterofcredit rights," or "healthcare insurance receivables," as defined in the Uniform Commercial Code, suchprovisionsmaynotbeenforceable.(Seesection10:2.10.)Totheextenttheanti-assignmentprovisionisinanothertypeofcontractandisenforceable,suchaprovisioninacontractofasubsidiaryrunsafoulofthepaymentrestrictionscovenantbecauseitpreventsthesubsidiaryfromtransferringthecontract,oritsrightsto receive payments under the contract, to its parent company or other subsidiaries. An exception fortransferstoaffiliatesisoftennegotiatedandavoidsthisproblem.Butsincethisexceptionmaynotalwaysbeavailable,thereshouldbeacarveouttothepaymentrestrictionscovenantthatpermitstheserestrictions.

►SubsidiaryDebt Agreementsgoverningdebtarelikelytocontainalloftherestrictionsthatareproscribedbythepaymentrestrictionscovenant.Thus,ifitisanticipatedthattherewillbeaneedforasubsidiarytoincuritsowndebt,a carveout to the payment restrictions covenant will be useful. A creditor will likely only agree to thiscovenantiftheassetsandcashflowofthesubsidiaryarenotpartofitscreditdecision.

►SecuredFinancing

Agreementsgoverningsecuredfinancingsprohibitthesaleorotherdispositionofcollateral.Ifacreditagreementpermitsthedebtoranditssubsidiariestoincursecureddebt(forexample,purchasemoneydebtandcapitalized leases), itmustalsocontainacarveout to thepaymentrestrictionscovenant topermit therestrictionsonsalethatwillappearinsuchdebtagreements.

►AgreementstoSellAssets Agreements for the sale of assets, for obvious reasons, prohibit the seller from selling the assets tosomeoneelse.Accordingly,thepaymentrestrictionscovenantshouldpermitsuchprohibitionsinassetsaleagreements to which a subsidiary of the debtor is a party. (Of course the asset sale itself must also beallowedundertheassetsalecovenant.)

[H]AmendmentstoOtherDocumentsThiscovenantrestrictsthedebtor’sabilitytoamendspecifiedagreementsand,often,itscharter,by-laws

orother organizational documents.The agreements coveredby this restriction are those that the creditorfeelsareimportanttoitscreditdecision.Sometimes,thecovenantwillapplyto"allmaterialcontracts"butthisisadifficultlinetodraw.Sometimesthecovenantwillonlyrestrictamendmentsthat"couldreasonablybe expected to be adverse to the creditor’s interests." Under this standard, a modification to a debtor’scharterthatchangesnoticeprovisionsforitsannualmeeting,forexample,wouldbepermitted,whereasamodification providing for the issuance of preferred stockwithmandatory redemption provisionswouldnot,becausesucharedemptionwouldbeadrainonthecompany’scashflow.

[I]MergersThiscovenantwillreadsomethinglikethis:

TheDebtorshallnot,andshallnotpermititssubsidiariesto,liquidateordissolve,consolidatewith,ormergeintoorwithanyotherentity.

Thereasonfortherestrictiononliquidationanddissolutionisself-evidentinthecaseofthedebtor:the

creditorwantstoensurethatthedebtorcontinuestoexistasalegalentityaslongasitscreditobligationsremainoutstanding.Thecreditor’sinterestinpreventingthedissolutionorliquidationofsubsidiariesisnotas strong, particularly since a liquidation or dissolution of a subsidiary results in the subsidiary’s assetsbeingdistributedtoitsdirectparent,normallyagoodresultfor thecreditor.Accordingly, thereisoftenacarveoutforvoluntaryliquidationsanddissolutionsofsubsidiaries.

The restriction onmergers should dovetailwith the investment covenant. If the investment covenantpermitsacquisitionsintheformofstockandassetacquisitions,thereshouldbeanexceptiontothemergercovenantpermittinganysuchpermittedtransactiontobeeffectedbymergeraswell.

[J]CapitalExpendituresCapitalexpendituresaredefinedasexpendituresthatarerequiredtobeincludedasproperty,plantand

equipment on the debtor’s consolidated balance sheet. A debtor’s projectionswill forecast howmuch itexpectstospendoncapitalassetsduringtheperiodcoveredbytheprojections.If theactualexpendituressignificantly exceed the forecasted amounts, there may be undue strain on the debtor’s cash flow.Accordingly,manycreditagreementslimitthedebtor’sannualcapitalexpenditures.Theselimitsareusuallysetatthelevelofthedebtor’sprojectedcapitalexpenditureneeds,plusanegotiatedcushion.Often,thereisa carryover provision,which allows amounts that aren’t used under one year’s basket to be used in thesubsequentyear.

[K]FinancialCovenantsAkeycomponentofacreditdecisionisthedebtor’sprojections.Theamortizationoftheprincipalofa

loanisoftenstructuredtomatchthedebtor’sprojectedcashflow.Thetotalamountofdebtpermittedwillbe based on the sufficiency of the debtor’s cash flow to cover interest and principal payments. Inmanycases,theoverallcapitalization(i.e.,themixofdebtandequity)ofthedebtorwillceasetomakeeconomicsense if the debtor’s actual operating results fall significantly short of those that have been projected.Compliancebythedebtorwithalloftheaffirmativeandnegativecovenantsdiscussedabovemaypreventcertain credit-impairingbehavior, but they cannot protect the creditor from thedebtor’s operating resultstakinganosedive.

Financial covenants allow the creditor tomonitor the debtor’s financial performance and to exerciseremediesintheeventthatsuchperformancefallsbelowrequiredlevels.Eachfinancialcovenantmeasuresone ormore elements of the debtor’s actual financial condition or performance against projected levels(withnegotiatedcushions).Ifanyareaofthedebtor’sbusinesssubjecttoafinancialcovenantfallsshortofthe required level, the covenant is breached, an event of default occurs and the creditor is entitled toexerciseremedies.Therearedifferenttypesoffinancialcovenants,someofwhicharetailoredtoaspecificcompany or a specific industry. Discussed below are several of the most frequently recurring financialcovenants.

►MinimumEBITDA EBITDA is an acronym for "earnings before interest, taxes, depreciation and amortization." It iscomputedbytakingacompany’snetincomeforaparticularperiodandaddingbacktheamountofinterestexpense,taxexpense,depreciationandamortizationforsuchperiod,allofwhich,underGAAP,havebeendeducted inarrivingat thenet incomefigure.FinancialanalystsconsiderEBITDAtobeoneof themostimportantmeasuresofacompany’soperatingfinancialperformance.

AminimumEBITDA test requires thedebtor to reach certainEBITDA levels at the endof specifiedperiods.ThetestcanlookatEBITDAonaquarter-by-quarterbasis,butit ismuchmorecommonforthetesttobeona"trailingfourquarter"basis.Thismeansthatattheendofeachquarter,EBITDAforthefour-quarter period then ending will be measured. The difference between testing EBITDA (or any othermeasurementoffinancialperformance)foronequarterinsteadoffourquartersisthataone-quartertestismorevolatile—onebadquartercanresultinabreach,whereaswithafour-quartertestbadquarterscanbeoffsetwithgoodquarters.

►InterestCoverageRatio Thistestmeasurestheratioofthedebtor’sEBITDAtoitsinterestexpense,oversomespecifiedperiodoftime(again,usuallyfourquarters).Thisisanimportantratio,becauseitdemonstratesthesufficiencyofthedebtor’scashflowtocoveritsinterestpaymentobligations.

►FixedChargeCoverageRatio Similartotheinterestcoverageratio,thismeasuresthesufficiencyofEBITDAtocoverinterestaswellas other specified payments, usually including scheduled principal payments on debt, preferred stockdividendsandcapitalexpenditures.

►LeverageRatio Thereareactuallytwodifferentratiosthatarecalled"leverageratio."Thefirstistheratioof(a)debtto(b) debt plus networth.This testmeasures leverage by determiningwhat portion of the debtor’s capitalstructure consists of debt. It is a so-called "balance sheet test"because itmeasures itemson thebalancesheet,whichreflectsacompany’sfinancialconditionasofaparticulartime(asopposedtotheEBITDA-based testsdiscussedabove,whicharederived from thecompany’s incomestatements and test financialperformance).TheotherfinancialcovenantreferredtoasaleverageratioistheratioofEBITDAtodebt.Inthesamewaythataninterestcoverageratiolooksatthelevelofcashflowthatisavailableforthepaymentof interest, this leverage ratiomeasures the levelof cash flowavailable tocoverprincipal. It is ahybrid

covenant,measuringanincomestatementitem,EBITDA,againstdebt,abalancesheetitem.

►NetWorth Acompany’snetworthisequaltoitsassetsminusitsliabilities.Profitsincreasenetworth,lossesreduceit.Anetworthcovenantisdesignedtomeasurethechangestonetworthovertimeasaresultofprofitsandlosses.Itdoesthisbymeasuring,attheendofeachquarter,thedebtor’sactualnetworthagainstanamountequaltothedebtor’snetworthatclosing,plus50%(usually)ofnetincomeineachquarterthereafter,less100%ofnetlossesineachsuchquarter.Theeffectofthisapproachisthatthecushionbuiltintothetargetlevelincreasesby50centsforeachdollarofprofitsandshrinksby100centsforeachdollaroflosses.

§9:3.4EventsofDefault Thissectionofacreditagreementhastwodistinctparts:first,alistoftheeventsthatconstituteeventsofdefault,andsecond,adescriptionoftheremediesavailabletothecreditorifaneventofdefaultoccurs.Wewillnotexamineindetailalloftheeventsofdefaultthatappearincreditagreements,butinsteadfocusontheeventsofdefaultrelatingtothebuildingblockprovisionsdiscussedinthischapter:representationsandcovenants.

Creditagreementsprovidethatitisaneventofdefaultifoneofthedebtor’srepresentationswasnottruewhenmade.Theprinciplebehindthisisthatthecreditdecisionwasbasedinpartonthefactscoveredbytherepresentations,and,ifarepresentationturnsouttobefalse, thecreditorshouldbeabletoreverseitscredit decision. Because representations are onlymade at specific points in time, an event of default iscausedonly ifa representationwasfalseat the time that itwasmade.Changes in factsorcircumstancesoccurring after the date a representation is made cannot make the representation false retroactively.Frequently, an event of default does not occur unless a representation was untrue when made "in anymaterialrespect."Becausethepotentialresultsoftheoccurrenceofaneventofdefaultcanbesosignificant,thematerialityqualifierisanappropriateprotectionagainstahair-triggerdefault.

Thebreachofacovenantwillalsoconstituteaneventofdefault.Specifiedcovenantdefaultsmaybesubjecttonegotiatedgraceperiods,inwhichcasethebreachwillnotconstituteaneventofdefaultunlessitremainsuncuredforaspecifiednumberofdays.13Thepurposeof thegraceperiod(alsoreferredtoasacureperiod)istogivethedebtortheopportunitytoreturntocompliancebyfixingtheproblemthatgaverisetothebreach.Somegraceperiodsaredraftedtocommenceonlyafterthedebtorhasknowledgeofthebreach.

Abreachbythedebtorofitsrepresentationsorcovenantsresultsinaneventofdefaultbecauseitsignalsan event or condition that could result in the creditor’s wanting to reverse ormodify its original creditdecision.Withouttheremediesthataremadeavailabletothecreditorupontheoccurrenceofaneventofdefault,judicialremedieswouldbethecreditor’ssolerecourseintheeventofabreach.

Theprimaryremedyforaneventofdefaultisaccelerationofthedebt,sothatprincipal,accruedinterestandallotheroutstandingobligationsofthedebtorunderthecreditagreementimmediatelybecomedueandpayable.Inmostcases,thedebtorwillbeunabletopaytheacceleratedobligations(ifithadthatmuchcashon hand, it probably wouldn’t have any loans outstanding). As a result, acceleration will precipitate afinancialcrisis,oftenbankruptcy.Theotherprincipal remedy, found in revolvingcreditagreements, is toterminateorsuspendundrawncommitments.Thismeansthatthedebtor’sabilitytoborrowadditionalloansiseliminatedorsuspended.Thismayalsoputthedebtorinaprecariousposition,particularlyifitsliquidityis insufficient without the availability of revolving loans. Because these remedies create such drasticconsequences,moreoftenthannotthecreditorwillnotactuallyexerciseitsremedies.Instead,itwillusethethreatofexercisingitsremediestoobtainconcessionsfrom,andobtainanincreasedlevelofcontrolover,thedebtor.

§9:4Acquisition-relatedProvisions Theremainderofthischapterisdevotedtobuildingblockprovisionsincludedinagreementsgoverningtheacquisitionbyoneentityofanother.14Becauseacquisitionscanbestructuredaseitherstockpurchases,

assetpurchasesormergers,thebuildingblockprovisionsapplicabletoeachwillbeexamined.Aswasthecase with the credit-related provisions discussed in section 9:3 above, the goal is not to provide anexhaustiveovervieworanalysisofallthepossibleprovisionsandtheirvariantsthatmayarise.Instead,thediscussion should provide the reader with a broad understanding of how some of the building blockprovisionsareusedtoachievetherespectivegoalsofbuyersandsellersintheacquisitionprocess.15

Firstanoteaboutthefundamentaldifferencebetweenstockacquisitionsandmergers,ontheonehand,andassetacquisitions,ontheother.Instockacquisitions, thetargetbecomesasubsidiaryofthebuyer.16Alloftheassetsandliabilitiesofthetargetcontinuetobeitsassetsandliabilities(andwillbeincludedonthebuyer’sconsolidatedbalancesheet).Thesameresultmayoccurinamerger:instructuresotherthanamergerdirectlywithorintothebuyer,thetargetbecomesthebuyer’ssubsidiary.Inamergerbetweenthetargetandthebuyer,allofthetarget’sassetsandliabilitiesbecometheassetsandliabilitiesofthebuyer,byoperationoflaw.

Inanassetacquisition,ontheotherhand,onlytheassetsspecifiedintheacquisitionagreementaresoldto the buyer, and only those liabilities similarly specified become liabilities of the buyer. 17 So, forexample,ifthebuyerpurchasestheassetsofadivisionoftheseller,noneoftheliabilitiesassociatedwithsuchbusinesswilltravelwiththeassets,excepttotheextentspecifiedintheacquisitionagreement.18

§9:4.1Representations

[A]ThePurposeofRepresentationsTherepresentationsmadebyasellerinanacquisitionagreementconsistofaseriesofstatementsabout

thetarget19intendedtocreateanaccuratepictureofthetargetonwhichthebuyercanrelyinmakingitsinvestment decision. The representations serve three basic functions. First, negotiation of therepresentationsuncoversissuesthatmaygiverisetoadditionalpricenegotiationsorrequestsbythebuyerfor additional protections (such as promises by the seller to remedy a problem that is disclosed by therepresentations). Second, if a representation is untrue, it may give the buyer the right to terminate thetransaction.Third, if thebuyerdiscoversafterclosing thatarepresentationof thesellerwasuntruewhenmade,itmayhaveanindemnificationclaimoraclaimforbreachofcontractagainsttheseller.20

The scopeof the representations in an acquisition agreement is typicallymuchbroader than in creditdocumentation, because a buyer’s need tounderstand all aspects of thebusiness being acquired ismuchmoreextensivethanacreditor’sneedtoknowfactsthatmayaffectitscreditdecision.Theprimarybusinessterminanyacquisitionisprice,whichmaybeaffectedsignificantlybyanyissuesorproblemsrelatingtothe target. The buyer will also have operational and management considerations that require a closeunderstandingofthebusinessthatitintendstoacquire.

[B]RepresentationsandtheDisclosureProcessAbuyer’s first step indetermining thenecessary facts tomake its investmentdecisionand inform its

pricinganalysis is thecompletionofitsownduediligence.Manyrepresentationsmadeintheacquisitionagreement force the seller to stand behind the information provided to the buyer in the due diligenceprocess.Theyalsotendtosmokeoutfactsthatmaynothavesurfacedduringduediligence.

The way that the negotiation of representations results in disclosure is as follows. The acquisitionagreement,whichisnormallydraftedbycounsel to thebuyer,willcontain,forexample,arepresentationthat the target isnot the subjectof any litigationwhichcould reasonablybeexpected tohaveamaterialadverseeffectonthetarget.(Sometimesthematerialadverseeffectqualifierwillnotbeincludedinthefirstdraftbutwillbeaddedasaresultofnegotiation.)Ifthetargetdoeshavesuchpotentiallymateriallitigation,itcannotmakethisrepresentationtruthfullyunlessthelitigationiscarvedoutoftherepresentation.Thisistypicallydoneinthedisclosureschedulesthatareattachedtotheacquisitionagreement.Bydisclosingfactsthatare inconsistentwith therepresentations in thedisclosureschedules, thesellereliminates thebuyer’s

abilitytowalkawayfromthetransactionortobringclaimsforbreachorindemnificationonthebasisofthefact that isdisclosed.Theriskof thedisclosedinformationis thusshiftedfromtheseller to thebuyerbyvirtue of disclosure. The buyer, on the other hand, receives information that allows it to make a fully-informedinvestmentdecisionandtopricethedealaccordingly.

[C]TimingofRepresentationsRepresentations are oftenmade at the time that the acquisition agreement is signed, and again at the

closing.Incaseswherethereisalonggapbetweenthesetwopointsintime,thefactsrepresentedtobytheseller may change. Accordingly, there should be a mechanism allowing the seller to update itsrepresentationssoastobetrueatclosing.Thebuyer,despiteitsinterestinknowingalltherelevantfacts,will notwant to be forced to close after the seller has disclosed unfavorable facts between signing andclosing.Thisisusuallyaddressedbyallowingthesellertoterminatepriortoclosingifadditionalfactsaredisclosedbytheseller;oftenthisrightisconditionedontheadditionaldisclosurebeingmaterialorresultinginamaterialadverseeffectonthetarget.

[D]RepresentationQualifiersThescopeofarepresentationwilldictatetheamountanddetailofdisclosurethatmustbemadebythe

seller in order to make the representation true. Consider the following two variations of the samerepresentationmadeinanagreementtoacquirealargechemicalcompany:

ExceptasdisclosedintheDisclosureSchedule,theTargetanditssubsidiariesareincompliancewithallenvironmentallaws,rules,regulations,ordersanddecrees.

ExceptasdisclosedintheDisclosureSchedule,theTargetanditssubsidiariesareincompliancewithall environmental laws, rules, regulations, orders and decrees, noncompliance with which couldreasonablybeexpectedtohaveamaterialadverseeffectontheTargetanditssubsidiaries,takenasawhole.

This hypothetical target and its subsidiaries regularly run afoul of environmental requirements.Sometimes the noncompliance is immaterial—the target cures the problem by performing routine andinexpensive remediation. Sometimes the issue is material, involving potentially significant fines andremediation costs.Under the first variation of the environmental compliance representation, the seller isrequiredtodiscloseallviolations,materialorotherwise.Althoughpreparingsuchalongschedulemaybemorework,thesellerwillbeoffthehookforallmattersthataredisclosed.Thebuyer,ontheotherhand,willhavegottenmoreinformationthanmaybeuseful toit. Inorder tounderstandthepotentialexposureresultingfromtheseenvironmentalissues,itmustunderstandandanalyzeeveryitemdisclosedonthislongschedule.

Ontheotherhand,ifthesecondrepresentationisusedaburdenisplacedonthesellertodifferentiatebetweenmaterialandimmaterialeventsofnoncompliance.Theresultofthisistwofold.First,failurebythesellertoincludeanymaterialviolationswillresultintherepresentationbeingbreached.Second,thebuyer’sreviewandanalysiswillbebetterfocused,andtheriskofthetarget’snoncompliancewithenvironmentalrequirementswillbeshiftedtotheselleronlywithrespecttothosemattersthataredisclosed.

Inadditiontomaterialityqualifiers,theothermaindeviceusedbysellerstosoftentheirrepresentationsisthequalificationthatarepresentationismade"tothebestoftheseller’sknowledge."Anexampleofthisisthefollowing:

TothebestknowledgeoftheSeller,theTargethasgood,validandmarketabletitletothepropertyitpurportstoown,freeandclearofallencumbrances.

Aftertheclosingthebuyerlearnsofanexistingeasementinfavorofastateagencyrunningthroughthe

centerofthetarget’smainoperatingfacility,andthestate’splanstoexerciseitsrightsundertheeasementinconnectionwitharoad-buildingproject.Thebuyerwillhaverecourseagainsttheselleronlytotheextentthatitcanshowthatthesellerknewabouttheeasement.

Theuseofaknowledgestandardmayhaveanegativeimpactonthevalueoftheseller’srepresentations,andthereforeisusuallyvigorouslyresistedbybuyers.Theissueforthebuyerastomostrepresentationsisnotwhetheradversefactsareknownbytheseller,butratherwhichpartyshouldbeartherisktheyrepresent.The use of a knowledge standard effectively shifts the risk of unknown problems from the seller to thebuyer.

Following is adiscussionof someof the representationsmostoftenmadeby the seller in acquisitionagreements.21

[E]CorporateExistence,PowerandAuthorityInastockacquisitionoramerger,thebuyerwillwanttoknowthattheacquiredcompanieshaveallthe

necessaryattributesofcorporateexistence.Thelanguageofthisrepresentationisasfollows:

Each of theTarget and its subsidiaries (i) is a corporation duly organized, validly existing and ingoodstandingunderthelawsofitsstateofincorporation;(ii)hasfullcorporatepowerandauthorityto carry on its business as it is nowbeing conducted and to own theproperties and assets it nowowns;and(iii)isdulyqualifiedorlicensedtodobusinessasaforeigncorporationingoodstandingineveryjurisdictioninwhichsuchqualificationisrequired.

Theonlypartofthisthatislikelytobenegotiatedisclause(iii).Theimpactoffailingtobequalifiedin

a particular state may be small; accordingly, this representation is often subject to a materialityqualification.Additionally,iftheentitybeingacquiredissomeformofentityotherthanacorporation,therepresentationmustbemodifiedaccordingly.

Notethattherepresentationcoversnotonlythetargetbutalsothetarget’ssubsidiaries,astheacquisitionofatargetwithsubsidiariesresultsintheacquisitionofthesubsidiariesaswell.Consideranacquisitionofaholdingcompany,theonlyassetsofwhicharetheequityinterestsinanumberofoperatingsubsidiaries.Anacquisitionagreementthatprovidesforrepresentationsonlyastotheentitythatisbeingdirectlyacquired(theparentholdingcompany)willfailtoprovidethebuyerwithcomfortastotherealgutsofthebusiness.Therefore,thebuyerwillalwayswantrepresentationsthatcoverboththetargetandthetarget’ssubsidiaries.

[F]Consents;NoViolationsIfanacquisitionresultsinthetarget’sviolationofalegalorcontractualrequirement,thebuyermaybe

purchasingaheadache.Forexample,ifthetargethasanimportantleasewithachangeofcontrolprovisionthatisn’tdiscoveredbythebuyeruntilaftertheclosing,thebuyermayfinditselfwithalandlordthathastherighttoterminateorrenegotiatethelease.Or,thetargetcouldbeinviolationofalawororderbecauseof the transactionandasa resultbe facingcriminal sanctionsorpenalties.Obviously,nobuyerwants towalkunknowinglyintoasituationlikethis,andthereforethefollowingrepresentationisstandard.

Theconsummationofthetransactionscontemplatedherebywillnot(i)conflictwithorresultinthebreach of any provision of the certificate of incorporation, by-laws or similar organizationaldocuments of the Target or any of its subsidiaries, (ii) require any filing with, or permit,authorization,consentorapprovalof,anyGovernmentalEntityorotherPerson(includingconsentsfrompartiestoagreementstowhichtheTargetoranyofitssubsidiariesisaparty),(iii)requireanyconsent,approvalornoticeunder,orresultinaviolationorbreachof,orconstitute(withorwithout

noticeorthepassageoftimeorboth)adefault(orgiverisetoanyrightoftermination,amendment,cancellationoracceleration)under,anyagreementtowhichtheTargetoranyofitssubsidiariesisaparty,or (iv)violateanyorder,writ, injunction,decree,statute, ruleor regulationapplicable to theTarget,anyofitssubsidiariesoranyoftheirpropertiesorassets.

Thebuyerwillprobably require,asacondition toclosing, that thesellerobtainanyconsents thatare

necessarytomakethisrepresentationtrue.Sometimesamaterialityqualifier isnegotiatedwithrespect toconflictswith agreements. For example, a target that is a retailerwith 500 leased locationsmay have ahandfulofleasesthatcontainchange-of-controlprovisionsthataren’twaived.Amaterialityqualifierwouldpreventthissituationfromblowingupthedeal.

[G]FinancialStatements;NoUndisclosedLiabilitiesThis is an extremely important representation: the financial statements of the target are probably the

single most crucial document to a buyer in making its investment decision. The representation will besimilar in form and substance to that discussed above in connectionwith credit agreements (see section9:3.1[A]).Thisrepresentationmayneedtobesignificantlymodifiedinthecontextofanassetsaleorthesale of a subsidiary. If the acquisition involves all of the assets of a business that has its own financialstatements,thereisnoissue:thesellerwillmakethenormalrepresentationswithregardtothesefinancialstatements.If,however,theassetsbeingsoldaretheassetsofadivisionorasubsidiaryofalargerbusiness,itislikelythatseparatefinancialstatementswithrespecttothebusinessrepresentedbytheseassetswillnotexist. In this case, the representationwill have tobe tailored to cover the financial information thatwasactuallydeliveredtothebuyerinitsduediligence.So,forexample,ifsuchfinancialinformationwasnotauditedbyaccountants,norepresentationcanberequestedastotheexistenceofanaudit.

[H]MaterialAdverseChangeThebuyerprotectsitselfagainsttargetproblemsorfinancialdeteriorationafterthedateofthefinancial

statementsbygettinga representation that therehasbeennomaterial adversechangeafter the statementdate.Thus,ifthetarget’ssaleshadfallensignificantlysincetheperiodcoveredbythefinancialstatementsdeliveredtothebuyer,thesellerfailstodisclosethisasamaterialadversechangeatitsownrisk.

[I]BooksandRecordsInmanycases,theeffectivenessofthebuyer’sduediligencewilldependonthesoundnessofthetarget’s

booksandrecords(includingaccountingrecords,minutebooksandstocktransferrecords).Therefore,thesellerwillbeexpectedtomakethefollowingrepresentation:

The books of account, minute books, stock record books and other records of the Target and itssubsidiariesarecompleteandcorrectinallmaterialrespectsandhavebeenmaintainedinaccordancewithsoundbusinesspractices,includingthemaintenanceofanadequatesystemofinternalcontrols.The minute books of the Target contain accurate and complete records of all meetings of, andcorporateactiontakenby,theshareholdersoftheTargetanditsboardofdirectorsandallcommitteesthereof.

[J]TitletoAssets

TheTargetandeachofitssubsidiarieshasgood,validandmarketabletitletoallthepropertiesand

assetsthattheypurporttoown(tangibleandintangible)freeandclearofallEncumbrances.

Thisrepresentationwillbewordeddifferentlydependingonwhetherthetransactionisanassetpurchaseorastockpurchase.Inanassetdeal,thesellerwillmakethisrepresentationastotheassetsthatarebeingsoldtothebuyer.Inastockdealoramerger,therepresentationwillbemadewithrespecttotheassetsthatareownedbythetargetandeachofitssubsidiaries.

Abuyeristryingtomitigatetwoimportantrisksbyaskingforthisrepresentation:firstthebuyer’splanstooperatetheacquiredassetsmaybeimpairedbyaclaimorencumbrance.Forexample,trademarksmightbesubjecttoalong-termlicenseagreementthatwouldpreventtheirusebythebuyer,oranencumbrancemayrepresentaneconomiccostthatshouldbefactoredintothepurchaseprice.Thesecondriskaddressedbythisrepresentationisafinancialone.If,forinstance,asaresultofdisclosureunderthisrepresentationthebuyerlearnsthataplantofthetargetissubjecttoa$1millionmechanics’lien,thebuyerwillprobablyrequireeitheracorrespondingreductiontothepurchasepriceorsatisfactionof thelienbythesellerasaconditiontoclosing.

[K]CapitalizationThisrepresentationwillberequiredinstockacquisitionandmergertransactions.Sinceineachofthese

transactionsthebuyer isacquiringthetargetbyacquiringthetarget’ssharesdirectly(or indirectly, in thecaseofcertainmergers),itisimportantforthebuyertofullyunderstandthecharacteristicsoftheseshares.

The authorized capital stock of theTarget consists of ______Shares of common stock (ofwhich______sharesareissuedandoutstanding)and_____sharesofpreferredstock,parvalue$___pershare(ofwhich____sharesare issuedandoutstanding).All theoutstandingsharesof theTarget’scapital stock have been duly authorized and validly issued and are fully paid and non-assessable.Exceptassetforthabove,(i)therearenosharesofcapitalstockoftheTargetauthorized,issuedoroutstanding; (ii) there are no existing options, warrants, calls, preemptive rights, subscriptions orother rights, agreements, arrangements or commitments of any character, relating to the issued orunissued capital stock of theTarget, obligating theTarget to issue, transfer or sell or cause to beissued, transferred or sold any shares of capital stock, or other equity interest in, the Target orsecuritiesconvertibleintoorexchangeableforsuchsharesorequityinterests,orobligatingtheTargettogrant,extendorenterintoanysuchoption,warrant,call,preemptiveright,subscriptionorotherright, agreement, arrangement or commitment; and (iii) there are no outstanding contractualobligationsoftheTargettorepurchase,redeemorotherwiseacquireanycapitalstockoftheTarget.

The buyer’s overriding concern is to ensure that it is acquiring 100% of the voting and economic

interests in the target. This goal could be defeated if there are shares owned by someone other than theseller, if thereareoptions, conversion rightsorpreemptive rightspursuant towhich thirdpartiesmaybeabletoobtainsharesoriftherearevotingagreementsrelatingtosuchshares.Theexistenceofpresentorfuture minority shareholders may affect buyer’s view as to the appropriate value of the transaction orwhether thepotentialnuisanceofdealingwithother shareholdersmakes thedealundesirable.Thebuyerwillalsowanttoknowthedetailsofanypreferredorothernon-votingstock,becausesuchsecuritiesraiseapotentialeconomic(asopposedtocontrol) issue.If thebuyerexpects tohavethetargetpaydividendsormake distributions to it, the existence of other classes of capital stock that would be required to sharethereinwill be significant.Outstanding preferred stockmay have dividend requirements that have to besatisfiedbeforecommondividendsmaybepaid.Theprovisionsofthepreferredstockmaygivetheholdersthereofvetopoweroverspecifiedtransactionsorcontainothercontract-likeprovisionsthatmaybeadversetothebuyer’sinterests.

[L]Litigation,FullDisclosure,Etc.Acquisition agreements contain a number of representations that are similar to, and serve the same

purposeas,certainoftherepresentationsdiscussedaboveinthecontextofcreditagreements.Theseincluderepresentations regarding litigation (section 9:3.1[D]), compliance with law (section 9:3.1[E]), and fulldisclosure(section9:3.1[G]).

[M]OtherRepresentationsThe typical acquisition agreementwill also contain a number of additional representations regarding

specific aspects of the target’s business. They will often be tailored to the specific transaction. Theserepresentationsmaycover,amongothermatters,thefollowing: •Environmentalmatters—hasthetargetcompliedwithallapplicablerulesandregulations?Arethere

anypendingorthreatenedclaimsrelatingtoenvironmentalmatters?Haveallrelevantenvironmentalactivitiesbeendisclosed? •Accountsreceivable—howtimelyaretheybeingpaid?Aretheredisputeswithcustomers? •Inventory—haveallnecessarywritedownsandreservesbeentakenonthebooks? • Real property—have all appropriate title documents been delivered to the buyer?Are there anycondemnationorsimilarproceedingspendingorthreatened?Areanypropertiesunderlease? •Leases—havetheyallbeendisclosed?Arethereanydefaultsunderanyleases? •Contractsandcommitments—haveallmaterial itemsbeendisclosed?Arethereanydefaults?Doemployment agreements provide for severance payments? Do any agreements provide for thepaymentofliquidateddamagesintheeventofbreachortermination? •Insurance—isthepropertyofthetargetproperlyinsured?Arethereanyunsettledinsuranceclaimsoutstanding? •Employeebenefitplans—havetheyallbeendisclosed?Willanyplansbeterminatedasaresultoftheacquisition,and,ifso,atwhatcost? •Taxmatters—hasthetargetfiledalltaxreturnsandpaidalltaxes?Arethereanydisputeswithanytaxingauthority? •Intellectualproperty—areallitemsdisclosed?Arethereanydisputeswithrespecttoownershiporuse?Arethereanythird-partyinfringementclaims?Haveallactionsbeentakentomaintainvalidityandeffectiveness? •Labormatters—arethereanystrikesorlaborproblems?Hasthetargetcompliedwithallapplicablelaborlaws?

§9:4.2Covenants Unlikecovenantsimposedonadebtorbyacreditor(seesections9:3.2and9:3.3),whichtendtoregulatea broad rangeof business activities, covenants under an acquisition agreement impose requirements thatgenerally relate only to the transaction itself. They can be distinguished by the period of time that theycover:someapplyduringtheperiodbetweensigningandclosingandothersapplyafterclosing.Thepre-closingcovenants,asageneralrule,requirethesellertotakeactionsthatwilleitherfacilitatetheclosingorwill prevent the target’s business from being changed or impaired in anymeaningful way. The buyer’srecourseforabreachoftheseller’scovenantsare(a)terminationbythebuyeroftheacquisitionagreement(ifthebreachoccursandisdiscoveredbeforeclosing),(b)actionbythebuyeragainstsellerforbreachofcontract,or(c)indemnification,totheextentprovidedundertheagreement.

[A]InterimOperationsoftheTargetA recurring theme in acquisition documentation is the buyer’s interest in protecting itself against

changesthatwouldresult inthetarget’sbeingadifferentcompanyinsomesensefromtheonethebuyerinitiallydecided toacquire.Thisobjective isaddressedby includingcovenants that restrict thesellerandtargetfromengagingincertainactivitiesbetweensigningandclosingthatthebuyerconsidersdetrimentalto itspotential investment in the target.Thesecovenantsgenerallyprohibit the targetand its subsidiariesfromengaginginactivitiesoutsidetheordinarycourseofbusinessduringtheperiodfromthesigningoftheacquisitionagreement through the closingdate.Often, thisgeneral restrictionwill be supplementedbyanumberofspecificrestrictionsonthetargetanditssubsidiariesdoinganyofthefollowing: •changingaccountingpractices

•amendingitsorganizationaldocuments •creatingsubsidiaries •amendingorterminatingmaterialcontractsorinsurancepolicies •incurringorprepayingdebt •changingcompensationlevelsormodifyingbenefitplans •enteringintonewleasesorlicensingagreements •enteringintomaterialcontracts •payingdividends •enteringintotransactionswithaffiliates •makinginvestments •issuingorsellingcapitalstock •makingcapitalexpenditures •disposingofassets •settlingclaimsorlitigation Thetensioninnegotiatingthiscovenantisbetweenthebuyer’sinterestintightlyrestrictingthetarget’s

behavior in order to preserve its value, and the seller’s (and the target’s) interest in having an adequateamountofoperatingflexibility.This tension increases indirectcorrelation to theexpected lengthof timebetweensigningandclosing.

There are a numberofmethods to soften these covenants to satisfy the need for flexibility.First, thepartiescanexclude transactions in theordinarycourseofbusiness thatareconsistentwithpastpractices.Thisapproachworksaslongasthetargethasademonstrabletrackrecordastotheactivityatissuethatthebuyer understands and is comfortablewith.A second approach is to permit the restricted action up to anegotiated level. This is appropriate as to actions that can be quantified—for example, a restriction onentering into new supply contracts can apply only to contracts that involve payments in excess of somespecifieddollaramount.

[B]ActionsRelatingtotheClosingThe buyer’s obligation to purchasewill be subject to a number of conditions precedent thatmust be

satisfiedbytheseller.Ifthesellerfailstosatisfyanyofthese,thebuyerwillbeabletowalkawayfromthetransaction.Why,then,doesthebuyerneedacovenantrequiringthesellertocausesuchconditionstobe

satisfied?Because,withoutthiscovenant,thesellerwouldbeabletogetoutofthetransactionwithoutcostmerelybyfailingtosatisfytheseconditions(unless thebuyerwaswillingtowaivethem).Thiscovenantallows the buyer to assert a breach of contract claim against a seller that has failed to diligently pursueclosing.22

PriortotheClosing,theSellershalluseits[reasonable][best]effortstotakeallactions,andtodoallthingsnecessary,toconsummatetheClosingaspromptlyaspracticable.

Inmanycases,thisgenerallanguagewillbesupplementedbyspecificrequirementsastoparticularclosingconditions.Forexample,ifagovernmentalpermitisrequired,thebuyermayproposeaprovisionnotonlyrequiring the seller to use its best efforts to obtain the permit, but also requiring the seller to file itsapplicationforthepermitbyaspecificdate.

[C]NotificationofCertainMattersThebuyerwillwanttobemadeawareofanynewfactsordevelopmentsarisingpriortoclosingthatare

pertinenttoitsinvestmentdecision.Thisisaddressedbythefollowingcovenant:

TheSellershallpromptlysupplementoramendtheDisclosureSchedulewithrespecttoanymatterarisingafterthedateofthisAgreementthat,ifexistingoroccurringonthedateofthisAgreement,wouldhavebeenrequiredtobeincludedontheDisclosureSchedule.Nosupplementoramendmentof the Disclosure Schedule pursuant to this section shall be deemed to cure any breach ofrepresentationhereunder.

Whennewfactsariseorarediscoveredafterthesigningdatethatwouldhaveoriginallybeendisclosed

under theseller’srepresentations, theseller isobligated todisclose themunder thiscovenant. If thefactsexistedonthesigningdateandtheiromissionresultedintherepresentation’sbeingincorrect,thebuyerwillusuallyhavetherighttoterminatetheagreement.Inotherwords,thebuyercan’tbeforcedtocloseintheface of facts that could have affected its original investment decision. The seller may argue that thiscovenantisnotreallynecessary:thenewfactswillpreventthesellerfromsatisfyingtheclosingconditionthat it bring down all of its representations. Thiswill allow the buyer to terminate the transaction. Thebuyer,however,doesn’twanttobekeptinthedarkastoadversefactsordevelopmentswhilethesellerisfurtivelytryingtomakethemgoaway.Particularlywhenthereisalonggapbetweensigningandclosing,thebuyerwillwanttheabilitytoevaluatethesituationwhenitarises,notatamuchlaterdate.

[D]Post-closingCovenantsTheperfectacquisitiontransactionendsinaneatclosingandahappybuyerandsellerwhoshakehands,

go their separateways and never speak to each other again. Unfortunately, this ideal is seldom, if everachieved.Often,therearepost-closingpurchasepriceadjustments.Theremaybelooseendsthatmustbetiedup, such as closing conditions thatweren’t satisfied at closing andwere converted intopost-closingcovenants.Theremaybe a transitional period duringwhich the seller is required to continue to provideservices to the target. In addition, there are certain commonpost-closingcovenants.Following is abriefdiscussionofsomeofthese.

►Confidentiality Asaresultof theirduediligence thebuyerand thesellermayhaveobtainedconfidential informationrelatingtotheother.Underaconfidentialityprovisioneachpartyagreestomaintaintheconfidentialityofnon-public information. There are a number of customary exceptions to the confidentiality obligation,including:

•Confidentialityneednotbemaintainedforinformationthatismadepublicthroughnofaultofthecovenantingparty. •Confidentialinformationmaybesharedwithcounsel,accountantsandotheradvisorsinconnectionwiththetransaction. •Informationmaybedisclosedifrequiredbyprocessoflaw(subjecttotheotherpartybeinggivennoticeandanopportunitytoobtainaprotectiveorderblockingpublicdisclosureoftheinformation).

►CovenantNottoCompete Abuyerwilloftenwanttoensurethatthesellerdoesnotstartupanewbusinesstocompetewiththebusinessthatitjustsoldtothebuyer.Thisisaccomplishedbytheinclusionofacovenantnottocompeteintheacquisitionagreement.Broadcovenantsnottocompetearecarefullyscrutinizedbythecourts,soitisimportant to narrowly describe the scope of the restricted business and the duration and geographicalcoverageofthecovenant.

►Anti-poachingCovenant Boththesellerandthebuyermayhaveaninterestinprotectingagainsttheotherpartyhiringawayitsemployees.Thiscovenantprotectsagainstthatbehavior.

§9:4.3 Conditions Precedent: Chickens, Eggs and Big Fat Moments inTime Mostacquisitionagreementsaresignedwellinadvanceoftheactualclosing.Asaresult,theconditionsprecedent to closing are the subject of careful scrutiny and negotiation. If the buyer isn’t careful innegotiating the conditions, itmaybe forced topurchasea company that is less attractive than theone itthoughtitwasgettingorbesubjecttoanactionfordamagesbytheseller.Bythesametoken,thesellerwilldo itsbest toavoidconditions thataresoopen-ended that thebuyerwillbeable towalkon thebasisofsome technicality. Both parties will want to protect themselves against unforeseen risks that may betriggered by the consummation of the acquisition—for example, claims by third parties for tortiousinterference.

Theobligationofeachof thebuyerand the seller toclose is subject toadifferent (although in somerespectsoverlapping)setofconditions.Ifeachoftheconditionstotheseller’sperformanceisn’tsatisfied,thesellerisnotrequiredtoclose(unlessitchoosestowaivetheunsatisfiedconditions).Thesameistrueforthebuyeriftheconditionstoitsperformancearenotsatisfied.Fromtheperspectiveoftheparties’lawyers,theconditionsofbothpartiesfallintotwocategories:thosethatthelawyerscanhelptosatisfyandthosecompletelyoutsideofthelawyers’control.Onceanacquisitionagreementissigned,thelawyerswillbegintowork towards the closing of the acquisition. Each lawyerwill take primary responsibility for certainitemsthatmustbedeliveredtogettheopposingpartytoperform.Forexample,theconditionstotheseller’sperformance will include delivery to the seller of the buyer’s certified charter and by-laws, boardresolutionsandoneormoreofficer’scertificates:buyer’scounselwillberesponsibleforproducingthese.At the same time, the seller’s counselwill have responsibility for similar documentswith respect to itsclientthatmustbedeliveredtothebuyer.Eachlawyerwillreviewtheitemspreparedanddeliveredbytheother.Notwithstandingtheoccasionalskirmish,thepreparationfortheclosingisessentiallyacollaborativeeffort.

Whathappensifaclosingconditionisn’tsatisfied?Thereareseveralpotentialresults: •Theclosingdoesnotoccur.

•Theclosingisdelayeduntiltheconditionhasbeensatisfied. • The failure of the condition to be satisfied iswaived in exchange for a concession (such as anadjustmenttothepurchaseprice).

•Theconditionisconvertedintoacovenanttobeperformedafterclosing. •Theconditioniswaivedandtheclosingoccurs. Questionsof timingareoften the subjectof intense focus. Imagine twoboys involved in the swapof

baseballcardswhereneitherwillgiveuppossessionfirst; theexchangecanbeconsummatedonlywithasimultaneoussnatchandrelease.Commercialandcorporatetransactionsare,inessence,nodifferent.Thesellerwillnotriskdeliveringtitletotheassetswithoutreceivingpayment.Thebuyerdoesnotwanttopaybeforedelivery.Inasimpleacquisitionthisisgenerallyaddressedwithoutmuchfussthroughthemechanicsofclosing.Eachclosingdocumentisexecutedandplacedontheclosingtable.Includedamongthesewillbethekeydocumentsfortransferringtitle:stockcertificatesandstockpowers,inthecaseofastockdeal;billsofsaleandothertransferdocumentsinthecaseofanassetdeal;andasignedmergeragreement,inthecaseofamerger.Whenthepartiesandtheircounselareinagreementthatallconditionshavebeensatisfied(orwaived) other than the payment of the purchase price, the buyer instructs its bank (usually over thephone)towiretransferthepurchasepricetotheseller’sbankaccount.Atthatpoint,thepartieswillagreethatthetransactionisclosed.Thisisamodestfiction:atthatpoint,thesellerwillnothaveyetreceivedthemoney,becausewiretransfersarenotinstantaneous.

As transactions become more complicated, with a greater number of parties, more steps and morepaymentstobemade,themutualsuspensionofdisbeliefinherentinthescenariodescribedabovebecomeshardertosustain.Frequently,oneofthepartieswillinsistthatitsperformancemustbethelaststepintheclosing process, leading to a metaphysical discussion that practitioners refer to as the chicken-and-eggdebate.Eventually, thepartieswill inevitablygetcomfortablewith the(alsometaphysical)notion thatallthestepsareoccurringsimultaneouslyina"bigfatmomentintime."

Theremainderofthissectionexaminessomespecificacquisitionagreementconditions.

[A]PaymentandTransferTheprimary condition to a buyer’s performance is the seller’s transfer to it of the acquired assets or

stock.Theprimaryconditiontoaseller’sobligationtoeffectsuchtransfersisthebuyer’spaymentofthepurchasepriceanddeliveryofanynon-cashconsideration.

[B]LegalImpedimentsNeitherpartywillwanttocloseifdoingsoviolatesalaworacourtorder.Bothparties’performancewill

thereforebeconditionedontherebeingnostatute,rule,regulationorder,decreeorinjunctionthatprohibitstheconsummationof theclosing.Thebuyerwillalsoseekaseparateconditionthat therearenopendinggovernmentalproceedings that could impair theacquiredbusinessor thebuyer’sownership thereof—forexample, antitrust proceedings that may result in the buyer being forced to divest part of the acquiredbusiness. In addition, neither partywill bewilling to close if any requiredgovernmental approval is notdelivered.

[C]LitigationEachpartywillwanttohaveitsperformanceoftheacquisitionagreementconditionedtosomeextenton

theabsenceoflitigationrelatingtothetransactionitself.Noonewantstocloseatransactionunderacloudoflitigation.Theissuesarisinginthenegotiationof thisconditionareusuallythematerialitylevelof thelitigation and how and by whom such materiality is quantified.Without a materiality qualification, theexistenceofanylitigationastothetransaction,nomatterhowspurious,willgiveeachofthepartiesafreewalk.Thisisofparticularconcernifoneofthetransactionpartiesisapubliccompany,giventhepossibilityofstrikesuits.

Thebuyerwillalsowantaconditionrelatingtolitigationaffectingthetarget.Thebuyerwillwanttheright to assess litigation against the target seeking money damages or injunctive relief that could bedisruptive or harmful to the target’s business. The mechanism to provide for this is a condition to the

buyer’sperformance that there isno litigationagainst the target.Often thisconditionwillbesubject toamaterialityqualification.

[D]RepresentationsThebuyerwillnotberequiredtocloseunlesstheseller’srepresentationsaretrueontheclosingdate.23

Withoutthiscondition,thebuyercouldbeforcedtoacquireatargetthatissubstantiallydifferentfromtheonedescribedintheseller’soriginalrepresentations.True,thebuyermayhaveanindemnificationclaimora claim for breach of contract, but most buyers would not willingly purchase damaged goods and anindemnificationclaim.

Anoften-negotiated issue iswhether thecondition requires the representationsmerely tobe"trueandcorrect"or "true and correct in allmaterial respects."The sellerwillmake all of theusual arguments infavorofthematerialitystandard.Thebuyerwillarguethatcertainoftherepresentationsalreadyaresubjectto a materiality standard. According to the buyer, the addition of a general materiality standard to theconditionwill have two improper results: the representations thatwere originallymade flatwill becomesubject tomateriality, and the representations thatwere originallymadewith amateriality standardwillbecomesubjecttotwomaterialitystandards(withwhatevermysteriouseffectthatmayhave).

[E]PerformanceofCovenantsAnotherconditiontothebuyer’sperformancewillbecompliancebythesellerwithallofitscovenants.

Asdiscussed above, the covenants applicable to the seller prior to closinggenerally prevent actions thatcouldresultinsignificantchangestothetarget.Ifthesellerhasbreachedoneofthesecovenantsthebuyerwillbeabletowalkawayfromthedeal,but inmostcircumstancesthiswillnotbetheresult.Unlesstheharmtothetargetisextremelysignificant,thefailureoftheconditiontobesatisfiedwillinsteadgiverisetoanegotiation,mostoftenrelatingtoapurchasepriceadjustment.

[F]Officer’sCertificateThesellerwillusuallyberequiredtodeliveracertificatesignedbyoneofitsofficersstatingthat(i)its

representationsintheacquisitionagreementaretrueandcorrectatclosing,and(ii)ithasperformedallofits covenants in the acquisition agreement.While this seems duplicative of the conditions discussed insections9:4.3[D]and[E]above,thereisatechnicalbutimportantdifference.Ifnocertificateisdelivered,there isnoactualbringdownof the representations andno statement that all of the covenantshavebeensatisfiedatclosingtoprovidethebasisforanindemnificationclaimbythebuyer.Ontheotherhand,iftherepresentationandcovenantconditionsareomittedandonlytheconditionrequiringtheofficer’scertificateisincluded,thebuyerwillbeforcedtocloseiftheofficerdeliverstherequiredcertificate,evenifthebuyerisawareofrepresentationorcovenantbreaches.Afurtherbenefitofgettinganofficer’scertificate,inthisaswellasothercircumstances,isthatanindividualofficerwillbelikelytoinvestigatethecorrectnessofthestatementsinacertificatethatheisrequiredtosign.

[G]FinancingThe inclusionofa financingconditionpermitsabuyer to terminate the transaction if it isnotable to

obtainfinancingfor thepurchaseprice.Thesellerwhoaccepts thiscondition to thebuyer’sperformanceassumes a potentially large risk of non-closure.Often, one of the seller’s primary criteria in choosing abuyeriswhetherthebuyerhasthefinancialabilitytoclose.Asellermayevenbewillingtoacceptalowerpurchasepriceinexchangeforgreatercertaintyofclosing.Conversely,abuyerlackingthefinancialabilityto consummate the acquisition that enters into an acquisition agreement without a financing out, alsoassumesasignificantrisk.Iftheclosingfailsduetothebuyer’sinabilitytopay,thebuyerwillbesubjecttoaclaimbythesellerfordamages.24

In somecases, the sellermaybewilling toaccept a financingcondition if at the time theacquisition

agreement is signed there is some indication that thebuyerhasa reasonableexpectationof liningup thefinancing.Thisusually involves thedeliveryby thebuyerofa financingcommitment froma thirdparty,indicatingthethirdparty’sagreementtoprovidealloraportionofthenecessaryfinancing.Theselleranditscounselwillexamineanysuchcommitmentcarefully:themoreconditionstherearetothecommitment,thelesscomfortwillbeobtainedbytheseller.

[H]LegalOpinionsA legal opinion is a letter by a lawyer setting forth legal conclusions regarding his client and the

transactiondocuments towhich the client is aparty.Theprimary subjectsof legal opinionsdelivered inconnectionwith transactions are similar to those that are covered by the "enforceability representations"(seesection9:2).Legalopinionsarerequestedtoassuretheopinionrecipientthatthenecessarylegalduediligencerelatingtotheserepresentationshasbeenundertaken.Itisgenerallyamistaketoviewtheopinionassomethingakintoaninsurancepolicy,suchthat,ifthestatementsmadebythelawyerinanopinionturnouttobefalse,aclaimmaybeassertedagainstthelawyer.Instead,suchclaimsaresubjecttoaprofessionalnegligencestandard—thestatementsmadebylawyersinlegalopinionsdonotgiverisetostrictliabilityifdeterminedtobewrong.

Whetherornotopinionsaredeliveredasaconditiontoclosingaparticulartransactionisafunctionofcustom and negotiating leverage. In acquisition transactions, the trend has been away from the use ofopinions. Of course, opinions may be requested to provide comfort as to a particular legal issue in atransaction.

§9:4.4Remedies Theremediesthatareavailabletoapartyunderanacquisitionagreementareusuallythefollowing: • Termination of the agreement in the event of the other party’s breach of representations or

covenants. •Indemnificationfromtheotherpartyforitsbreachofrepresentationsorcovenants. • An action for damages resulting from the other party’s breach of representations or covenants(unlesstheagreementprovidesthatindemnificationisthesoleremedy). • An action for damages resulting from the other party’s failure to close notwithstanding thesatisfactionofalloftheconditionsprecedenttoitsperformance. •Paymentofabreak-upfee.Onlythefirsttwoofthese,whichareexplicitlyprovidedforintheagreement,willbediscussedhere.

[A]TerminationThe remedy of termination is relatively straightforward: if one party breaches its representations or

warranties,theotherpartymayterminatetheagreement.Thisremedyisavailableonlybeforetheclosingoftheacquisition,sinceitsprimaryeffectistopreventtheclosingfromoccurring.Thismayraiseaquestionastotheneedforthisremedy,giventhatthebreachwillalsocausethefailureofaclosingcondition.Butmostagreementsprovideforanoutsidedatefortheclosingtooccur,andwithoutaterminationprovisionapartywouldhave towait for thatdatebefore it could assert theother’sbreachas abasis for ending theagreement.Theterminationprovisionallowsthepartytowalkawayimmediatelyuponthediscoveryofabreachbytheotherparty.

[B]IndemnificationIndemnification isusually the sole remedy forbreachesof anacquisitionagreement thatoccuror are

discoveredafterclosing.25Althoughtheindemnificationprovisionsaregenerallymutual,thevastmajorityof indemnity claims are by the buyer against the seller and relate to the breach by the seller ofrepresentationsorcovenantsrelatingtothetarget.Inotherwords,thetypicalindemnificationclaimisbasedon a buyer that has received, in its view, damaged goods. Other indemnification claims may seekcompensation for out-of-pocket expenses incurred as a result of the other’s breach. Indemnificationmayalsobeprovidedforspecificclaimswithoutregardtotheexistenceofabreach.Forexample,asellermayagreetoindemnifyabuyeragainstallliabilityandattorneys’feesinconnectionwithaspecifiedlitigationtowhichthetargetisapartyatthetimeoftheclosing.

Hereisthebasicindemnificationprovisionbyasellerinfavorofabuyer:

The Seller shall indemnify and hold harmless the Buyer from and against all losses, damages,penalties, disbursements, costs and expenses (including without limitation attorneys’ fees andexpenses)incurredbytheBuyerasaresultofanybreachbytheSellerofanyofitsrepresentationsorcovenantsunderthisAgreement.

What is thedifferencebetweenabuyerassertingaclaimfor indemnificationunder thisprovisionand

asserting a claim for damages in an action for fraud or breach of contract? First, a party’s right toindemnificationmaybesubject tonegotiatedlimitations.Second, thetypeofdamagesprovidedforinanindemnification provision may be different from those available in a legal proceeding—for example,attorney’sfeesmightnotbeawardedtotheplaintiffinacontractaction.Havingsaidthis,theinclusionofindemnificationprovisionsdoesnotavoidtheneedfortheindemniteetoprovethebreachanditsdamages.Putadifferentway,indemnificationisnotselfexecuting:inotherwords,iftheindemnitorrefusestopay,theindemniteemustjudiciallyenforcethepromise.

Thereareanumberof techniques to limitexposureunderan indemnificationprovision.The first isabasket,which issimilar toan insurancedeductible.The indemniteemaynot receive indemnitypaymentsexcepttotheextentitsindemnityclaimsexceedastateddollaramount.Inaddition,sometimesanyclaimbeneathaspecifieddollaramountwillneithergiverisetoanindemnityclaimorcountagainstthebasket.Anothernegotiatedapproachinthiscontextmaybethatindemnityclaimsarenotpaiduntiltheyaggregateastateddollaramount,atwhichpointtheyareallpaid.Sometimesabuyerwillagreetocapthemaximumaggregate amount of indemnity payments that it is entitled to receive. These provisions often containdetailedprocedureswith respect toclaims for indemnification for legalclaims.Thebasic rule is that theindemnitor, being responsible for paying a judgment or settlement in respect of a claim against theindemnitee,isentitledtocontrolthedefenseofsuchclaim,includingtheselectionofcounsel.

____________________1Anentity’sbeingproperlyorganizeddependsonwhetheralllegalrequirementswereproperlyfollowedinconnectionwithitscreation.Beingvalidlyexistinggoestothepresentvalidexistenceoftheentity.Thistechnicaldistinctionisoftenthesubjectofdebateinthecontextoflegalopinions,butnotcontractrepresentations.2 It ispossible forperformance tobe restrictedeven if executionanddeliveryarenot.Forexample,acompanyenters intoanagreement requiring it todoA,BandC.Thecompany is subject toregulationprohibitingitfromdoingC.Theregulationisnotviolatedbythecompanyexecutinganddeliveringthecontract,norisitviolatedwhenthecompanyperformsitsAandBobligations.BecauseofthepotentialconflictcreatedbyitsobligationtoperformC,however,thecompanywouldnotbeabletomaketherepresentation.3Seesection6:3.4[C],note3.4Theserulesmaynotapplyifthereisapiercingofthecorporateveil,eitherthroughtheapplicationofthebankruptcyprincipleofsubstantiveconsolidationorotherwise.5Eachofthefollowingscenarioscanbeimprovedtoagreatextent,fromthelender’sperspective,bycausingtheobligorstograntalienonsomeoralloftheirassetstosecuretheirobligations.6Thispartof therepresentationisnotstrictlyacredit-relatedprovision.Evenwheretherearenoongoingpaymentobligations,acontractpartywillwant tobeawareofall litigationrelatingto thecontractitselfortherelatedtransactions.7However,ifthecovenantisomittedforthisreasonandthedebtorfailstocomplywithitssecuritieslawdisclosureobligations,thelenderwillnothaveanyremedy.8Thedistinctionbetween"Default"and"EventofDefault"isdiscussedinsection9:3.4,note13.9GuaranteesofthistypecreatetaxabledeemeddividendsunderSection956oftheInternalRevenueCodeandforthisreasonareusuallyavoided.10"Averageweightedlife"teststheaverageduedateofscheduledprincipalpaymentsonaloanweightedbytheamountoftimesuchprincipalpaymentsareoutstanding.Anamortizationschedulethatrequiresmoreprincipalpaymentstobemadeinlateryearswillhaveagreateraverageweightedlifethanonethatisfront-endloaded.11Thedebtormaynottakebackasellernoteaspartialconsiderationforanassetsaleifitissubjecttoacovenantrestrictinginvestmentsthatdoesn’thaveanapplicableexception.12Anintercompanyinvestmentconsistingofaloanoradvancewillalsoneedtobepermittedasdebtunderthedebtcovenant.13Manyagreementscharacterizebreaches thathavenotyetbecome"eventsofdefault,"because requirednoticeshavenotbeengivenor requiredcureperiodshavenotyet run,as"defaults."Theexistenceofadefaultmaytriggerlesserremedies,suchasthecreditor’srefusaltomakeadditionaladvances.14Therearespecialprovisionsthatrelatetotheacquisitionofpubliccompaniesthatarenotaddressedhere.15Althoughboththebuyerandthesellermakerepresentationsandcovenants,thischapterwillfocusexclusivelyontherepresentationsandcovenantsmadebythesellerandthebuyer’sremediesforbreachthereof.16Throughoutthissection,threepartieswillbereferredto:thebuyer,thesellerandthetarget.Dependingonthecontext,the"target"istheentitytobeacquiredbystockacquisitionormerger,orthebusinessunittheassetsofwhicharetobeacquiredinanassetacquisition.17However,anassumptionofliabilitiesbyabuyerdoesnoteliminatetheseller’sobligationsinconnectiontherewith:forthesellertogetoffthehook,anovationisrequired,inwhichthecreditoragreestolooksolelytothebuyerforpaymentorperformance.18However, ifa transfer is found tobe fraudulent,or ifacourt imposessuccessor liabilityundercertain theoriessuchas theproduct-lineexception,anassetpurchasermightbeheld liable for theobligationsoftheseller,evenifnotassumedinthecontract.19Inadditiontorepresentationsaboutthetargetanditsbusiness,thesellerwillberequiredtomakeenforceabilityrepresentationsastoitselfandtheacquisitionagreement.Seesection9:2.

20 See KLING AND NUGENT, NEGOTIATED ACQUISITIONS OF COMPANIES, SUBSIDIARIES ANDDIVISIONS,11-2–11-8(2000)[hereafter,"KlingandNugent"].21Foramoreexhaustivediscussionofacquisitionagreementrepresentations,seeKlingandNugent§11.04.Enforceabilityrepresentations(seesection9:2)willalwaysbemadebyboththebuyerandtheseller;theyarenotdiscussedhere.22Thisissuerunsbothways:thesellerwillalsowanttobeabletodragareluctantbuyertothealtar.Accordingly,thiscovenantisoftenwrittentoapplytobothparties.23Theremainderofthediscussionofconditionsprecedentwill,forsimplicity’ssake,addressonlyconditionstothebuyer’sperformance.24Thepartieswillsometimesagreetoa"break-upfee"tobepaidintheeventoneofthepartiesterminatesthetransaction.25Asadditionalfeaturesareintroducedtoasimpleacquisition,additionalremediesmaybeaddedaswell.Ifapartofthepurchasepriceistobepaidbythebuyerovertime,breachbythebuyermayresultinthesellerhavingtherighttoacceleratesuchobligations,forexample.

Chapter10

MiscellaneousProvisions;MiscellaneousThoughts

§10:1Introduction Attheendofalllongcontractsisthe"Miscellaneous"section,whereeverythingthatdoesn’tfitneatlyelsewhereiscollected.Lastminuteagreementsareoftentuckedinthereaswell.Aswithcontracts,sowiththisbook.Thislastchaptercoversthecustomaryprovisionsincludedincontract"miscellaneous"sections.Italsoisthecollectionareaforstraypointsthatdidn’tfindausefulplaceelsewhereinthebook.

§10:2The"Miscellaneous"Sections Thispartofacontractoftencontainsprovisions thatareneitheroperativeprovisions, representations,covenants, conditions, definitions nor remedial provisions. There are two basic categories of provisionsincluded in this section: provisions that relate to the enforcement, amendment and interpretation of thecontract(mostoftheseareoftenconsideredboilerplate),andprovisionsthatarespecifictothetransactionbutthatdon’tfallneatlyintoanyoftheothersections.Forthisreason,alawyerreadingacontractskipsthemiscellaneousprovisionsatherandherclient’srisk;sometimesimportantitemsareburiedthere.

§10:2.1ChoiceofLaw This provision states that the contract is to be interpreted and enforced under the law of a particularjurisdiction.Acommonformulationofthisisthefollowing:

ThisAgreement and the rights and obligations of the parties hereunder shall be governedby, andconstruedandinterpretedinaccordancewith,thelawsoftheStateof_______.

This is the most important of the miscellaneous provisions and should never be omitted from any

contract,nomatterhowshortorinformal.Itspecifiesthatallsubstantivelegalissuesarisinginconnectionwiththeenforcementorinterpretationofthecontractaretoberesolvedbylookingtothelawofthechosenjurisdiction.Withoutthisprovision,anydisputeregardingacontractwillmostlikelyalsoinvolveadisputeoverthelawgoverningthecontract.Anyonefamiliarwithconflictoflawsprinciplesknowsthecomplexityoftheissuesthatcanbeinvolvedinajudicialdeterminationofthisissue.

Let’slookattwoexamplesillustratingthepotentialimportanceofthisprovision: •AMassachusettsfinancecompanyandanindividualresidentofOhioenterintoaloanagreement

governedbyNewYorklaw.Thebanklendstheindividual$200,000undertheloanagreement,ataninterest rate of 18%.Theborrower files for bankruptcy and asserts usury as a defense against thebank’s claim. The bankruptcy judge applies New York usury law, which prohibits loans to

individualsoflessthan$250,000bearinginterestatgreaterthan16%perannum.Thelender’sentireclaimagainsttheborrowerisvoided.IfthelawofOhiohadbeenselectedasthegoverninglawoftheloanagreement,theusurydefensewouldnothavebeenavailabletotheborrower. • The seller under a long-term supply contract asserted a claim against the buyer for breach; thedispute lingered for awhile and the partieswent their separateways. Four years later, sellerwasacquired and the acquiror determined that the seller’s claim was meritorious. Unfortunately, thestatuteoflimitationshadrununderArkansaslaw,whichwasthegoverninglawofthecontract.IfthepartieshadselectedthelawofVirginia,thestatewherethebuyerwaslocated,theclaimwouldstillbeenforceablebecausethestatuteoflimitationsthereforcontractclaimsissixyears. Whatlawshouldbeselectedtogovernacontract?Insomecasestheanswerisself-evident.Acontract

relatingtotheconveyanceorleaseofrealestateisalmostalwaysgovernedbythelawofthestatewherethepropertyislocated.AcontractbetweentwoindividualswhoareresidentsofNewJerseyshouldprobablybegoverned by the laws of New Jersey. A shareholders agreement among shareholders of a Delawarecorporationwill often be governed by the lawofDelaware. Inmany cases, the correct choice of law ismuchlessobvious.Moststateswillenforcetheparties’choiceofitslawasthegoverninglawofacontractonlyiftherearesufficientcontactswiththatstate.Thecontactrequirementmaybesatisfied,forexample,ifoneormoreparties is incorporatedor resident in that state, thecontract involvesproperty located in thestate, or payments are to bemade from or into the state. The failure to ensure that there are sufficientcontactstosupportthecontractualchoiceoflawcanhaveunpleasantconsequences.Thepartythatwouldbenefitfromtheapplicationofanotherstate’slawmayarguethatthechoiceoflawwasinvalidandthatthelawofadifferentstateshouldbeappliedbasedoncommon-lawchoiceoflawprinciples.

ThelawthatismostoftenchoseninlargecorporateandfinancingtransactionsisNewYorklaw.Thereare three reasons for this.First,NewYorkhasawell-developedbodyofcase law regardingcommercialissuesandajudiciaryexperiencedinthesematters.Second,manyoftheprominentplayersinthisarena—investment banks, banks, corporations and law firms—are based in New York. Last, New York has astatute1 that permits contracting parties to select NewYork law as the governing law regardless of theexistenceorsufficiencyofanycontactswithNewYork.2ItiseasytochooseNewYorklawknowingthataNewYork courtwill enforce this choice of law. (On the other hand, a court outside ofNewYorkmayentertainargumentsthat,underitsownslaws,thechoiceofNewYorklawwasimproper.)

Sometimesagoverninglawprovisionwillrefertoastate’slaws"withoutregardtoanychoiceoflawrulesthereunder."Thepurposeofthisistoavoidhavingtheapplicationofthatstate’schoiceoflawrulesresultinadifferentstate’slawsbeingchosentogovernthecontract.Forexample,ifStateA’slawrequirestheapplicationofthelawsofthestatewiththemostsignificantcontacts,itispossiblethatacourtlookingatacontractgovernedbyStateA’slawmaydecidethatStateB’slawshouldbeappliedbecausetherearegreatercontactswithStateB.Ifthelanguagereferredtoaboveisincludedinthegoverninglawclause,thispossibilityisavoided.3

§10:2.2ConsenttoJurisdiction Thisprovision isdesigned toensure thatadispute regarding thecontractwillbeheard inaparticularcourtorthecourtsofaparticularstate.Thisisachievedbyhavingthepartiesagreethattheyaresubjecttothepersonaljurisdictionofsuchcourts.Sometimesthisprovisionisdraftedtoprovidethatthejurisdictiontowhichthepartiesconsentistheexclusivejurisdictiontolitigateissuesarisingunderthecontract.Theriskof this approach is that it forecloses each of the parties fromobtaining possible strategic advantages bybringingsuitelsewhere.4Forthisreasonitisusuallymorecustomarytostatethattheconsenttojurisdictionisnonexclusive.

Frequentlythereisalsoanagreementbythepartiesthatserviceofprocessinanylitigationmaybemadebymail sent in accordance with the notice provision of the contract. This improves the likelihood thatpartieswillnotbeabletoassertanyproceduraldefectsinthemannerbywhichserviceiseffected.Theseprovisionsalsofrequentlycontainawaiveroftheparties’righttoassertthataproceedinginthespecified

jurisdictionisinanimproperorinconvenientforum.

§10:2.3WaiverofJuryTrial Commercial contracts routinely provide for awaiver by theparties of their right to a trial by jury inconnectionwithanylitigationassociatedwiththecontract.Mostsophisticatedpartieswouldprefertoavoidtheextrauncertaintythatisoftenassociatedwithhavingajurybethetrieroffact.Ontheotherhand,anindividualenteringintoacontractwithabankorotherlargeinstitutionmayprefertoknowthatadisputewillbeheardbyajuryofhispeers.Thisisexactlywhythebankorinstitutionwantsawaiverofjurytrial,and,unfortunatelyfortheindividual,itisusuallytheinstitutionthatdraftsthecontract.

Waiversof jury trial areusuallywritten tobebindingonbothparties.This is done to counteract theconcernthatthewaiverofjurytrialmaynotbeupheldbyacourtthatdeterminesthewaiverwasobtainedasa result ofgreatlyunequalbargainingpower. Jury trialwaivers are alsooftenwritten inblockcapitallettersor inbold inorder to satisfy the requirement imposedby some jurisdictions that suchwaiversbeconspicuous.

§10:2.4Counterparts Acounterparts provision states that the contractmay be executed separately by the parties—in otherwords,thesignaturesofthepartiesdonotneedtobeonthesamepieceofpaper.Thisisanextremelyusefulprovision in thecurrentageofvirtualclosingswheresignatoriesmaybespreadaround theglobe.Thesesituations involve thepartiessigningsignaturepagesseparatelyand returning thembyfaxormail to thelawyers,whothenattachthemtothecontractwhentheclosingoccurs.Theseareseparate"counterparts."Iffaxedsignaturesareanticipated,itisalsouseful(thoughperhapsnotalegalnecessity)toaddastatementthatsignaturesdeliveredbyfaxareeffective.

§10:2.5Headings Thissectionprovidesthatheadingsareincludedforreferencepurposesonlyandarenottobegivenanysubstantiveeffect.Thisistopreventthepartiesfrommakingargumentsbasedonheadingsthatareincorrectorbadlywritten.Forexample,supposethatacontractcontainsaprovisionunderwhichPartyAwaivesallrights of setoff. The provision does not include a similar waiver by Party B. The provision’s heading,however,is"WaiveroftheParties’RightsofSetoff."Withouttheprovisionspecifyingthatheadingsaretobesubstantivelyignored,PartyAcouldargue,basedonthisheading,thatPartyBhaswaiveditsrightofsetoff.

§10:2.6Severability Thissectionstatesthatifaprovisionintheagreementisfoundtobelegallyprohibitedorunenforceable,theoffendingprovisionis"severed"fromtherestoftheagreementwhichotherwisecontinuestooperateasoriginallywritten.Otherwise, there is a risk thatacourtmay throwout thebabywith thebathwaterandrefusetoenforcetheentirecontract.

§10:2.7IntegrationClause Thisclauseprovidesthattheagreementistheentireandexclusiveagreementbetweenthepartieswithrespecttoitssubjectmatter.Thisclausepreventsthepartiesfromarguingthattherearesideagreementsorunderstandings that are not set forth within the four corners of the agreement. This may be extremelyimportant in the event of a dispute. Under the parol evidence rule, parties to a contract containing thisprovisionmay not introduce evidence to demonstrate that the parties intended something different fromwhatthecontractprovides.5

§10:2.8NoImpliedWaivers A partymay contend that a waiver granted by another party should be broadly interpreted to covereventsandcircumstancesotherthanthosetowhichitwasoriginallyaddressed.Asimilarargumentcanbemade that a party’s actions or inactions create an impliedwaiver. For example, a lessee that obtains thelessor’swaiverofarequirementthatthelesseefileitsOctobermaintenancereport,mayarguethatitmayalsoskipthedeliveryoftheNovemberreport.Or,anemployeewhohasrepeatedlyfailedtodeliverhistaxreturns to the employer as required by his employment agreement, may take the position that by notcomplainingaboutthenon-delivery, theemployerhaswaivedtherequirement.Topreventargumentslikethese,itiscustomarytoincludeaprovisionsuchasthefollowing:

Nofailure toexerciseandnodelay inexercisinganyrightor remedyhereundershalloperateasawaiver thereof. No waiver or consent hereunder shall be applicable to any events, acts orcircumstancesexceptthosespecificallycoveredthereby.

Thisprovisionmakesitclearthatanywaiversmustbegiveninwritingandwillbeconstruednarrowly.

§10:2.9Amendments This section describes the requirements for entering into amendments, consents and waivers. Thissectionshouldalwaysrequireamendments,consentsandwaiverstobeinwriting.6Differentcontractshavedifferentrequirementsastowhichofthepartiesmustexecuteanddeliveranamendment,consentorwaiver.Sometimes it is the "party or parties to be charged" thatmust sign,which requires the signature of thepartiesthatarenegativelyaffectedbytheamendment,waiverorconsent.Thedifficultywiththisapproachis that it may not always be clear which parties are negatively affected. Accordingly, it is generallypreferabletorequireallofthepartiestosigneachamendment,waiverandconsent(seechapter7).

§10:2.10Assignment Inmanycasestheprovisiongoverningwhetherandunderwhatconditionsthepartiesmayassigntheirrights under the agreement is found in the miscellaneous section. The primary exception to this isagreementswhere assignability is one of the key substantive issues, such as partnership agreements andshareholderagreements.Therearethreekindsofassignmentthatmaybecoveredbytheseprovisions.

[A]NovationA complete assignment involves the replacement of one of the contract parties by another person or

entity that assumes all of the assigning party’s rights and obligations under the contract.7 This form ofassignment(technicallyreferredtoasa"novation")isfound,forexample,inrealestateleases,wherethelesseecanbereplacedundertheleasebyassignment.Anotherexampleisinasyndicatedcreditagreement,underwhichlendersusuallyhavetherighttoassigntheirrightstoberepaidinrespectofoutstandingloansandtodelegatetheirobligationstomakeadditionalloans.Inthistypeofassignment,theassigneebecomesa party to the agreement and the assignor usually ceases to be a party (although certain rights andobligations—for example indemnities—may continue if specified). If the assignor assigns and delegatesonlyapartofitsinterestunderthecontract,itwillcontinuetobeapartywithrespecttoitsretainedinterest.

The right to create a novation is often subject to conditionsor the consent of theother parties to thecontract.Inthecaseofalease,forexample,thelessorisnotgoingtoagreeinadvancethatthelesseecanassigntheleasetoanyone:thelessorwillwanttoensure,forexample,thatthecreditoftheassigneeisnotanyworsethanthatof theassignorandthat theassigneeisnotgoingtousethepremisesforundesirablepurposes.Therefore,theassignmentsectionoftheleasemaysetforthcriteriathatmustbesatisfiedbeforeanovationmaybeeffected.

[B]AbsoluteAssignmentofRightsAnabsoluteassignment(e.g.,asale)byapartyofitsrightsunderacontractresultsintheassigneebeing

entitledtoreceivethebenefitsofthecontractthatwouldotherwisehavebeenpaidtoorperformedforthebenefitoftheassignor.Theassignorcontinuestoberesponsibleforitsperformanceunderthecontract.

Article 9 of the Uniform Commercial Code renders many contracts’ anti-assignment provisionsunenforceable.Apartymayassignitsrightsunderthesecontractsnotwithstandinganyprohibitiononsuchassignmentoranyprovisionthatanassignmentresultsinatermination,defenseordefault.8

[C]CollateralAssignmentofRightsAnother typeofassignment isacollateralassignment.Apartygrantingasecurity interest in itsrights

under a contract has entered into a collateral assignment of the contract, in other words, has given itssecuredpartytherighttoforecloseonitsinterestinthecontractifitdefaultsonthesecuredobligations.9Here’s an example: CompanyA grants to its banks a security interest in its rights under an acquisitionagreementpursuant towhichCompanyA isacquiringallof theassetsofCompanyBfromCompanyC.Twoyearsaftertheacquisition,CompanyAisinfinancialdistress,inpartduetoenvironmentalproblemsassociatedwithCompanyB’sassets.CompanyAhaspotentiallyvaluableclaimsagainstCompanyCundertheindemnificationprovisionsoftheacquisitionagreement.AfterCompanyAdefaultsonitsbankdebt,thebankshavetherighttoforecloseontheirsecurityinterestintheacquisitionagreement,sellingCompanyA’srightsthereunder(includingtheindemnificationclaims)toathirdpartyforvalue.

§10:2.11CostsandExpenses Many contracts specify how the parties’ costs and expenses relating to the transaction are allocated.Evenifeachpartyistoberesponsibleforitsowncostsandexpenses,itisnotabadideatostatethatfactinorder toavoidanypossibledisputes.Whereonepartyagrees to reimburseanother forallorapartof itstransaction expenses, several issues tend to be negotiated. First iswhether only reasonable costswill becovered. The party with the reimbursement obligation wants to impose some limit on the other party’sability to runupunlimited expenseson its ticket.Sometimes a capon these costswill benegotiated. Inothercases,onlycertaincategoriesofexpenseswillbereimbursable.

§10:2.12Indemnification Indemnification is an agreement to pay or reimburse another party’s expenses, losses, damages andcosts. Many transactions involve some form of indemnification. In most acquisition agreements, theindemnificationprovisionisoneoftheprimarybattlegrounds.(See9:4.4[B].)Increditagreements,ontheother hand, indemnification provisions in favor of the lender are customary but seldom negotiatedextensively.

Thetypicallanguageofanindemnificationprovisionisthefollowing:

Party A indemnifies Party B for and against all liabilities, losses, damages, penalties, actions,judgments,costs,expensesordisbursementsofanykindornaturethatmaybeimposedon,incurredby,orassertedagainstPartyB,inanywayrelatingtoorarisingoutofPartyB’sexecution,deliveryorperformanceofthisagreementortheconsummationofthetransactionscontemplatedhereby.

Let’s examine the description of the indemnified amounts: all "liabilities, losses, damages, penalties,actions,judgments,costs,expensesordisbursements."Thislitanyisaclassicexampleofthepropensityoflegal writers to use every available synonym. This type of list is traditional, however, so it would beinadvisabletoshortenit.Exactlywhatdoesallofthismean?Let’sassumethequotedlanguageappearsinan agreement pursuant to which Party A operates a deep-sea drilling rig owned by Party B. The

indemnificationprovisionisassetforthabove.TherearealistofthingsthatwouldpotentiallygiverisetoaclaimforindemnificationbyPartyBagainstPartyAbythisindemnificationprovision: • Fines or penalties assessed against Party B as a result of Party A’s performance under the

agreement. • Judgments against Party B arising in connection with Party A’s performance—for example, ajudgmentgrantingdamagestoalandownerwhosepropertyisharmedbyaspillemanatingfromtherig. •The legal fees andexpenses incurredbyPartyB indefending itself against anyclaimarising inconnectionwiththeagreementoritsperformancethereunder. WhatiftheoilspilldescribedinthesecondpointabovewasPartyB’sfault?ShouldPartyBbeentitled

toindemnificationforthisfromPartyA?Mostindemnificationprovisionsaddressthistypeofconcernbyexcluding costs that result from the indemnitee’s bad behavior, such as its gross negligence or willfulmisconduct.Seesection5:6.5foramorethoroughdescriptionofthisexclusion.

§10:2.13FurtherAssurances The parties agree to do such further acts and things and to execute and deliver such additional

agreements and instruments asmaybe reasonably necessary to give effect to the purposes of thisAgreementandtheparties’agreementshereunder.

Thefurtherassurancesclauseaddressesoneofthetransactionallawyer’sprimalfears:thatheforgotto

tie down some loose end. By adding this provision, the lawyer gains some measure of comfort thatunforeseenmatterswillbeappropriatelyaddressed.Itisnotapanacea,however.Whileitislikelytoworkin relation to minor or ministerial acts that are squarely within the parties’ expectations and do notsignificantlyimpacteitherparties’position,itmaybeineffectivetoaddressanunresolvedissuewhichwillresultinameaningfuleconomicorothercosttooneoftheparties.Take,forexample,arealestateleasethatrequiredasecuritydeposittobepaidbythetenantinescrowtothelandlord’sattorney.Iftwoweeksaftertheclosingthelandlordasksthetenanttosignashortescrowagreementtoevidencethisarrangement,thetenantwouldnormallyconsent. If,on theotherhand, theescrowagreementprovided that intereston theescrowed funds is paid over to the landlord, the tenant will object. If the landlord points to the furtherassurances clause and reminds the tenant that during the negotiations therewas some discussion of thelandlordgetting this interest, apliable tenantmaygoalong.The tenant could,on theotherhand, just aseasilytakethepositionthatthediscussionsregardinginterestnevermadeitintotheleasebecausetherewasnever an agreement on that point, and that therefore the language in the further assurances clause aboutagreements "reasonably necessary to give effect to the purposes of this Agreement and the parties’agreementshereunder"isinapplicable.

§10:3Miscellany Don’t confuse "principal" and "principle." "Principal" is (a) the amount of a debt obligation, (b) thepersoninstructinganagent,or(c)asynonymfor"primary.""Principle"isatheoryoridea.

_________________________ Theword"hereby"isoftenusedunnecessarily.Inthephrase"Sellerherebyagrees,"theword"hereby"canbeeliminatedwithnolossofmeaning.Ontheotherhand,using"hereby"asanalternativeto"bythisagreement"isacceptable:

_________________________ It iscommontosee inconsistentprovisions indifferentagreements thatareenteredintoasapartofa

single transaction.A frequentlyoccurringexample is in thecaseofa secured financing.Theparties firstnegotiate the credit agreement. Then the security documents arrive, and they contain boilerplate that isinconsistentwithfullynegotiatedprovisionsinthecreditagreement,suchasinsuranceandtaxcovenants.There are three ways to address this (in declining order of desirability): (a) Delete the inconsistentboilerplate.(b)Modifytheboilerplatetoexactlymatchthenegotiatedprovision.(c)Includeaprovisionthatintheeventofinconsistentprovisions,thecreditagreementcontrols.

_________________________ Under a negative consent clause, a party that fails to object to a specified action by a stated time isdeemed tohaveconsented.Thepartyadvocating thisapproach (a)seekscertainty thatadecisionwillbemadebyaspecifieddate,and(b)fearsthattheforgetfulnessandinertiaofhiscounterpartymayresultintheconsentnotbeinggiven.The responseof thecounterparty,moreoften thannot, is: "Youwantcertainty?Fine,butwe’llspecifythatnoresponsebythecut-offtimemeansthatconsentisdenied."

_________________________ Lawyerstendtobeespeciallyclumsyintheuseofprepositions.Thisisparticularlytruewhenthereisaseriesofprepositionalphrases.Forexample:

TheCompanywillusereasonableeffortstoensurethatthereisnotheftordamagetotheinventory.To check the grammar of this sentence, the draftsperson should imagine that there are two separatesentences,oneaddressing"theft"andtheother"damage."Bydoingthis,itiseasytoseetheerror:

TheCompanywillusereasonableeffortstoensurethatthereisnothefttotheinventory.Ofcourse,theproperprepositionalphraseis"theftof"not"theftto."Thesentenceshouldberewritten:

The Company will use reasonable efforts to ensure that there is no theft of or damage to theinventory.

_________________________

Beware of covenants that restrict a party’s activities and also restrict the party from entering into anagreementtoengageintherestrictedactivity.Consider,forexample,acontractfor thesaleofabuildingthat prohibits the seller from (a) selling any building fixtures and (b) agreeing to sell any such fixtures.Becausethepartofthecovenantdescribedinclause(b)isrelativelyunusual,thesellermayforgetthatitisthere and enter into another contract to sell a refrigeration unit located in the building. Subsequentlyrealizinghismistake, thesellerconcludeshehasn’tbreachedthefirstcontractbecausethesaleunder thesecond contract is explicitly conditioned on receipt of consent of the building buyer to the sale of therefrigerationunit.Theselleriswrong:hehasbreachedthecovenantinthefirstagreement.

_________________________ Thephrase"anyandall"isinelegant,asinthefollowingsentence:

TheCompanywaivesanyandallrightstoobjecttothetransferoftheShares.Would thewaiver be less effective if it applied to "all rights" instead of "any and all rights"?Could an

argument bemade that thewaiver of all rightswasnot effective as to anyparticular right?No, onbothcounts.

_________________________ Ifa time limitation inaproposedcontract seems too tight, itprobably is too tight.Try toprovide formoretimewithoneofthefollowingapproaches: • Convince the other side that the inevitable extension requests will be annoying and time-

consuming. •Buildinanautomaticextensioniftherequiredactionisn’tcompletedontime,aslongasreasonableeffortsweremadetomeetthefirstdeadline. •Providethatconsenttoanextensionrequestwillnotbeunreasonablywithheld. •Whereanextensionrequestmustbeconsentedtobymorethanoneparty,designateonesuchpartytoprovideaconsentthatwillbindalloftheparties. _________________________

Occasionally lawyers forget that there are limitations on the ability of contracts to create private lawbetween the parties. Many legal requirements—such as the margin regulations and securities lawregistrationrequirements,tonamebuttwoexamples—can’tbewaivedorignoredbecausethepartiesagreeto do so. It is also often a mistake to assume that parties can contract their way around property lawrequirements.AnagreementbetweenPartyAandPartyBstating thatPartyA is theownerofBlackacredoesnotmakethatstatementtrue.Acourt,forexample,coulddeterminethatthetransactionbetweenPartyAandPartyBisactuallyasecuredfinancingandthereforePartyBdoesn’townBlackacrebutmerelyhasamortgageonit.10

_________________________ Avoiddefiningthesamethingintwodifferentwaysinthesamecontract(asin"Xerxes,YeomanandZeus,Inc.shallbereferredtohereinas‘XYZ’orthe‘Company’").Thismerelycreatesconfusion.

_________________________ Theconceptofamajorityispreciselydescribedas"morethan50%."Using"51%ormore"mayseemcloseenough,untilyouarefacedwithasituationwheretheactualtallyis50.1%.

_________________________ Becarefulwhenmakingglobalchanges.Thinkaboutunanticipatedconsequences.Forexample,aglobalchangeoftheword"securities"to"certificates"couldresultinareferencetothe"SecuritiesActof1933"beingchangedtothe"CertificatesActof1933."

_________________________ Whatistheeffectofincludingoneprovisioninacontractthatrequiresthatsomethingbe"satisfactory"tooneofthepartiesandanotherprovisionthatrequiresthatsomethingelsebesatisfactorytothatparty"initssolediscretion"?Thistypeofinconsistencypermitsanargumenttobemadethatthefirstdeterminationissubjecttosomestandardotherthan"solediscretion,"suchas"reasonablediscretion."Thisillustratesthepotentialeffectofcarelessinconsistency.

_________________________ Sometimes a party with negotiating leverage may impose on the other party an onerous provision,without any particular reason for doing so. This approach can often backfire. For example, a group of

lendersmayinsistonaleveloffinancialreportingthatisunusuallydetailed—forexample,arequirementthattheborrowerprovidedailyreportsofsalesandcollections.Aprovisionlikethiscancomebacktohauntthe lenders if theyhaveno real expectationof reviewing this information.Firstof all, itwill require theborrowertodevotehumanresourcesthatwouldbebetterspentonmoreproductivetasks.Moreimportantly,theagentbankwillbechargedwithknowledgeofalltheinformationdeliveredtoitunderthisrequirementeven if itdoesn’tactually review thematerial.That factcouldcreateunanticipatedexposure to theotherbanksinthesyndicate.

Ortaketheexampleofamergeragreementthatprohibitsthetargetfromenteringintocontractsvaluedat $10,000 ormore prior to themerger.The other party has not done itself any favors by imposing thisrestrictionifthedollarthresholdisunreasonablylowinlightofthetarget’sbusiness.Theresultwillbeaconstant streamof requests from the target forwaivers,whichwill becomean administrativeburden forbothparties.Becarefulnot toputsomething in thecontract justbecauseyoucan: thereshouldbea realneed.

_________________________ Words like hereof, thereunder, hereinafter, whereby and the like are widely criticized as one of thefeaturesofbadlegalwriting,or"legalese."11Admittedly,overuseofthesewordsistobeavoided.Ontheotherhand,theseterms,whenusedproperly,canbeusefulandprecisesignpostsforthereader.Theyalmostalways result in fewer words being used. The phrase "as contemplated hereby," rewritten to avoid theprepositionalindicator,wouldbe"ascontemplatedbythisagreement."

_________________________ Herearesometechnicalconsistencypointstobeonthelookoutfor: • If a term is defined with the word "the" (for example: the "Investor"), each reference in the

agreement to thatdefined termshouldalsobeprecededby "the."Theconverse is also true: if thepartyisdefinedas"Investor,"referencesshouldbeto"Investor,"not"theInvestor." • Be consistent in referring to schedules and exhibits. Don’t refer in one spot to "Exhibit 1," inanotherspotto"Exhibit2attachedhereto"andinanotherto"Exhibit3hereof." •Evenifanagreement’snoticeprovisionrequiresallnoticestobeinwriting,confusionmayresultifsomereferencestonoticesspecifythattheyaretobeinwriting,andothersdon’t. •Internalcross-referencescaneitherusetheword"hereof"(asin,"totheextentpermittedbySection5Ahereof"),ornot.Beconsistent. •Theformatofdefinitionsshouldbethesame.Ifthefirstdefinitionreads"Affiliatemeans...,"donotdraftthenextdefinitionas"ApplicableMarginshallmean...." • Some agreements underscore internal cross-references to other sections of the agreement, or toschedulesandexhibits.Ifyoudothis,doitconsistently. •Make sure thatmarginsand spacingareusedconsistently throughout thedocument.Cuttingandpasting from other documents can result in the inadvertent use of different fonts, type sizes andformats. •Inreferringtodollaramounts,usewordsornumbersconsistently(i.e.,$3millionor$3,000,000). •Eitherfollowallwrittenreferencestonumberswithaparentheticalreferencetothenumeral(e.g.,"fifteen(15)days")everytime,ordon’tdoitatall. • Be attentive to the use of the terms "the date hereof," "the date of the execution and deliveryhereof," "the closing date" and "the date of effectiveness hereof." The failure to be precise andconsistentwiththesereferencesmaycreatesubstantiveaswellasstyleproblems.

•Beconsistentintheuseofserialreferences.Inthephrase"Buyershallnot(a)payanydividends,(b)redeemanysharesor(c) investmentsinjointventuresshallbelimitedto$500,000,"clause(c)should be harmonized as follows: "make investments in joint ventures in an amount exceeding$500,000." _________________________

Generalcarveoutsorbasketscanbeusedtopermitactivitiesforwhichspecificcarveoutsorbasketsarealsoavailable.Forexample,takeanassetsalecovenantthathasa$10millionbasketforsalesofobsoleteequipmentanda$20millionbasketforanyassetsales.Theclientsusedupthe$10millionbasketlastyear;theynowcome toyouaskingwhether theycansellanadditional$2millionofobsoleteequipment.Theanswerisyes,totheextentthereisroominthe$20milliongeneralbasket.

_________________________ Somefavoritetypos(allofwhichillustratethatspell-checkonlygoessofar): •TheBuyerwaivesitsclamsagainsttheSeller.

•ThisagreementhasbeendulyauthorizedbytheBoardofDeviators. •XYZCORPORATION

By:____________Name:SamuelDoeTitle:VicePresidentandTreasure •AllotherinstrumentssecuringtheindebtednesshereunderareherebymadepartofthisNoteandtheprovisionsofsuchinstrumentsaredeemedinappropriateherein. _________________________

Paycarefulattentiontowhethermodifiersapplytotheitemstheyaremeanttomodify,andbesurethattheydon’tapplytoitemstheyarenotmeanttomodify.Notetheambiguityinthisprovision:

TheSubsidiaryshallnotenterintonewrealpropertyleasesoracquireanyrealestateifitsLeverageRatioexceeds3.00/1.00.

ItisnotclearwhethertheLeverageRatiorequirementappliestoeachoftherestrictions.Ifitisintendedtoapply only to real estate acquisitions, the sentence can be clarified by flipping the restrictions andnumberingthem:

TheSubsidiaryshallnot (a)acquireany realestate if itsLeverageRatioexceeds3.00/1.00,or (b)enterintonewrealpropertyleases.

Alternatively,ifthetestistoapplytobothrestrictions,theuseof"ineithercase"clarifiesthings:

TheSubsidiaryshallnotenterintoanynewrealpropertyleasesoracquireanyrealestateif,ineithercase,itsLeverageRatioexceeds3.00/1.00.

_________________________ "Withoutduplication"isahandyphrasewhenthereisaconcernaboutdouble-countingoroverlaps.For

example, let’ssaythepartieswant toquantifyallofanentity’s liabilities,asdisclosedonitsmostrecentbalancesheet,plusallofitsobligationswithrespecttocertainleasesthatarelistedonaschedule.Itisnotclearwhetheranyorallofthescheduledleaseobligationsareincludedasliabilitiesonthebalancesheet.Thefollowinglanguagedoesthetrick:

Thesum(withoutduplication)of(a)allliabilitiesoftheCompanysetforthonitsDecember31,2001balancesheet,plus(b)allobligationsoftheCompanyundertheleasessetforthonScheduleM.

____________________1N.Y.GEN.OBLIG.LAW§5-1402.Thetransactionmustbeforatleast$250,000;certainexclusionsapply.2TheStateofDelawarehasasimilarstatute.3IncontractsgovernedbyNewYorklaworthelawofastatewithastatutesimilartotheNewYorkstatutediscussedintheprecedingparagraphthislanguageisrefinedasfollows:"withoutregardtoanychoiceoflawrulesthereunderexceptGOLSection5-1402".4Inaddition,aprovisionforexclusivejurisdictionmaybeunenforceable.5Intheabsenceofthisprovision,thejudgewillmakeafactualdeterminationwhetherthecontractwasintendedtoexpressthecompletedealbetweentheparties,inwhichcasetheparolevidencerulealsoapplies.6However,thisrequirementmaybeunenforceableundersomestates’laws.7Manyprovisionsrelatingtoassignmentsdon’tclearlydistinguishbetweenassignmentofrightsanddelegationofduties.8UCC§9-406(d).Absoluteassignmentsofso-called"paymentintangibles"(rightstoreceivemonetarypayments),promissorynotesandcertainotherrightsarealsopermittednotwithstandingsuchprohibitions or provisions, but the assignee’s rights are limited.UCC§ 9-408.Anti-assignment provisions as to certain types of "general intangibles" not involving the payment ofmoney are stillenforceable.UCC§9-109.9RevisedArticle 9 also affects the enforceability of anti-assignment clauses as they relate to collateral assignments.Anti-assignment clauses are ineffective as to accounts, chattel paper, paymentintangiblesandpromissorynotes(UCC§9-406),andareineffectiveastocertaintypesofgeneralintangiblesnotformoneyduebutinthiscasearesubjecttolimitationofthesecuredparty’srights(UCC§9-408).10AriddleattributedtoAbrahamLincoln:Ifyoucalladog’stailaleg,howmanylegsdoesthedoghave?Four:callingthetailalegdoesn’tmakeitaleg.11The authorwas once reviewing a contractwith another lawyer fromhis firm and a client.The client scoffed at a provision that included the phrase "subject to thisAgreement and thePledgeAgreement and the restrictions hereunder and thereunder." "Why do you lawyers always have towrite like that?" the client asked. "You should be glad," said the other lawyer: "Weusuallywrite‘hereunder,thereunderandeverywhereunder.’"

Glossary1

ACCELERATIONCLAUSE:Aprovisioninanexecutorycontractpursuanttowhichallobligationsareaccelerated and due irrespective of the stated time for performance (e.g., outstanding debt obligationsbecomingimmediatelydueandpayableifaneventofdefaultoccurs).

ACCOUNT:See"AccountReceivable."

ACCOUNTPARTY:See"LetterofCredit."

ACCOUNTRECEIVABLE:Theright toreceivepaymentforpropertysold, leased, licensedorservicesprovided.Alsoreferredtoasan"account"ora"receivable."

ACCRETION:Thegrowthof apaymentobligationover timeat an agreed-upon rate.For example, theprincipalamountofazerocouponnoteaccretesfromtheoriginaldiscountedpriceforwhichitisissuedtoitsfaceamountatmaturity.Compare"CashPay,""Compounding"and"PaymentinKind."

ACQUISITION:Atransactioninwhichalloracontrollingportionoftheequity,orsubstantiallyalloftheassets,ofabusinessareacquired.

ACQUISITIONAGREEMENT:Anagreementpursuanttowhichanacquisitioniseffected,eitherintheformofastockpurchaseagreementoranassetpurchaseagreement.

ADDITIONAL INSUREDENDORSEMENT: A provision in a liability insurance policy giving thirdparties(mosttypicallylendersto,orinvestorsin,thenamedinsured)protectionunderthepolicy.Compare"LossPayeeEndorsement."

AFFIRMATIVECOVENANT:See"Covenant."

AGENT:Theentity(oftenafinancialinstitution)thatactsasagentonbehalfofagroupofprincipals(most

oftenasyndicateoflendersunderacreditagreement).

AGREEMENTINPRINCIPLE:See"LetterofIntent."

AMENDMENT:Anagreement that changes theprovisionsofanexistingcontract, addsnewprovisionsand/ordeletesexistingprovisions.

AMENDMENT AND RESTATEMENT: A form of amendment in which the entire agreement beingamendedissetforthinfull,withallagreedchangesincluded.

AMORTIZATION: (a)Thescheduledrepaymentof theprincipalamountofa loan. (b)UnderGAAP,aperiodic reduction of earnings representing the diminution in value of intangible assets. Compare"Depreciation."

ANTI-ASSIGNMENT CLAUSE: A provision that prohibits, restricts or requires consent to theassignmentofaparty’srightsortothedelegationofaparty’sobligationsunderanagreement.

ANTI-DILUTION PROVISION: A provision that protects a party entitled to the issuance of equityinterests(e.g., under awarrantor anoption) against events thatwouldcause suchequity tobecome lessvaluable incomparison tootherequity interests (forexample, the issuanceof stockatbelow fairmarketvalue).

ANTI-LAYERINGPROVISION:Aprovisioninasubordinateddebtagreementprohibitingthecreationofadditionaldebtthatisseniortothatsubordinateddebtbutjuniortoseniordebt.

ARM’SLENGTH:Usedtodescribeatransactionthatisatleastasfavorableasonethatwouldhavebeenenteredintowithapersonthatisnotanaffiliate.

ASSET-BASEDLOAN: A revolving loan that is limited in amount by a formula measured by statedpercentages of certain of the borrower’s assets, usually accounts receivable and/or inventory. See"BorrowingBase."

ASSETPURCHASEAGREEMENT:Anagreementtoacquireassets,typicallyallorsubstantiallyalloftheassets,oralloftheassetscomprisingaseparatebusinessunit,ofanotherentity.

ASSETSALECOVENANT:Acovenantrestrictingaparty’sabilitytosell,transferorotherwisedisposeofitsassets.

ASSIGNEE:See"Assignment."

ASSIGNMENT:Thetransferbyoneparty(an"assignor")toanotherparty(an"assignee")ofrightsunderacontractbetweentheassignorandathirdparty.Compare"Novation"and"ParticipationAgreement."

ASSIGNMENTANDACCEPTANCE:Anagreementpursuant towhicha lender inasyndicatedcreditagreementassignsalloraportionofitsloansand/orcommitmentstoanotherperson.

ASSIGNOR:See"Assignment."

ATTORNEY-IN-FACT:Apersonwhoisauthorizedbyapowerofattorneytoactonbehalfofthesigner.

AUDIT:Initsmostgeneralsense,acarefulreviewofapartofabusiness.Anauditoffinancialstatementsby certified public accountants results in the accountants rendering an opinion that the audited financialstatements fairly present the party’s financial position as at the date of the financial statements and theresultsofitsoperationsandchangesinitsfinancialpositionfortheperiodofsuchfinancialstatements,inaccordancewithgenerallyacceptedaccountingprinciples.

AUTOMATICSTAY:TheBankruptcyCodeprohibitionagainsttheexerciseofcontractualandotherlegal

rightsandremediesagainstabankruptcydebtor.

BANKRUPTCY-REMOTE ENTITY: An entity that is subject to restrictions under contracts or itsorganizational documents that make it unlikely that the entity will become the subject of bankruptcyproceedings.

BASISPOINT:Oneone-hundredthofonepercent(.01%).

BASKET: (a) An exception to a restrictive covenant, which permits a certain amount of the restrictedactivity.Anexampleofabasketunderacovenantrestrictingtheincurrenceofdebtwouldbeanexceptionpermitting up to $10 million of outstanding purchase money debt. (b) A provision in an acquisitionagreementexcludingindemnityclaimsbelowaspecifieddollaramount.

BENEFICIALOWNERSHIP:Descriptiveofanindirectinterestinproperty.Forexample,anagentmaybethe"recordowner"ofpropertyonbehalfofitsprincipal,whoisthe"beneficialowner."Theconceptofbeneficialownershipisalsoapplicabletotherelationshipofaparentcompanyandasecond-tiersubsidiary:the parent is considered the beneficial owner of the shares of the second-tier subsidiary. Also called"equitableownership."

BENEFICIARY:See"LetterofCredit."

BILLOFSALE:Adocumentthattransferstitletopersonalproperty.

BLACKLINING:Themarkingof adocument to illustrate changesmade fromapreviousversion.Alsoreferredtoas"redlining."

BLANKETLIEN:Alienonallofaperson’sexistingandfutureproperty.

BOILERPLATE:Contractprovisionsthatarestandardandinmostcasesnotheavilynegotiated.

BOND:Along-termdebtsecurity.

BORROWER:See"CreditAgreement"and"DebtSecurity."

BORROWINGBASE:Theamountofaborrower’saccountsreceivableandinventoryorotherassetsthatareeligibletobeborrowedagainstinanasset-basedloanfacility.See"Asset-BasedLoan."

BREACH:Failurebyapartytoperformacontractualobligation,orthemakingofafalserepresentation.

BREAKAGEPROVISION:A provision requiring a borrower to compensate a lender for its economiclosses resulting fromanearly repaymentofa loanora failure toborrowa loan thathasbeen requested.Compare"Make-WholeProvision"and"PrepaymentPenalty."

BREAK-UPFEE:A feepayable toaparty toanacquisitionagreement if theotherparty terminates theagreementorrefusestoclose.

BRINGDOWN:(a)Therepetitionofarepresentationsubsequenttothedateitwasoriginallymade.(b)Asupplemental search of public records (for example, offices where financing statements are filed andsecretary of state corporate records) to determine whether any changes have occurred since a previoussearch.

BUSINESS INTERRUPTION INSURANCE: Insurance protecting against lost income or profitsresultingfromaninterruptionofbusiness.

CALL:Arighttopurchaseaspecifiedassetinthefutureatasetprice.Compare"Put."

CALLPREMIUM:Anadditionalamountrequiredtobepaidbyanissuertoredeemdebtsecuritiesprior

totheirmaturity.

CALLPROTECTION:Aprovisionwhichprohibitsorrestrictstheearlyredemptionofadebtsecurity.

CAPITALIZEDLEASE:Aleaseastowhichtheleasedassetappearsasanasset,andtheleaseobligationsappear as a liability, on the balance sheet of the lessee. It usually constitutes a "security agreement" asdefined in Article 1 of the Uniform Commercial Code. Also known as a "financing lease." Compare"OperatingLease."

CARVEOUT: A general exception to a restrictive covenant. An example of a carveout to a covenantrestrictinglienswouldbeanexceptionpermittingmechanics’liens.Compare"Basket."

CASHCOLLATERAL:Cashorcashequivalentsthataredepositedtosecureanobligation.

CASH PAY: A term describing securities on which dividends or interest are paid in cash. Compare"Accretion,""Compounding"and"PaymentinKind."

CASUALTYLOSS:Alosstotangiblepropertyasaresultofphysicaldamage,suchasfireorstorm.

CHANGEOFCONTROLPROVISION:Aprovisionpursuanttowhichachangeinthevotingcontrolofa party (usually by reference to a change in the ownership of a stated percentage of voting shares or asignificant change in the composition of the board of directors or other governing body) gives rise to aremedysuchasterminationofthecontractoraccelerationofindebtedness.

CLAWBACK:Aprovisionrequiringapaymentpreviouslymadetobereturned.

CLOSING:Thesatisfactionoftheconditionsprecedenttoeither(a)theeffectivenessofanagreementor(b)someactiontobetakenunderanagreementoragreements(e.g.,thefundingofaloanorthetransferoftitletorealestate).

CLOSINGCHECKLIST:Alistofclosingdocumentsusedtokeeptrackofthestatusandsatisfactionofconditionsprecedent.

COLLATERALAGENT:Asecuredpartythatactsasagent,andholdscollateral,foragroupofcreditors.

COLLATERALASSIGNMENT:Atypeofsecurityagreement inwhichthecollateralconsistsofrightsunderoneormorecontracts.

COMFORTLETTER: (a)A letter fromaparent company toa creditorof its subsidiary, informing thecreditorthattheparentisawareofthesubsidiary’sobligationstothecreditorandthatitsnormalpolicyistoensurethatitssubsidiariespaytheirobligationsastheybecomedue.Acomfortletterisnotenforceableasaguarantee.(b)Aletterfromcertifiedpublicaccountantsstatingthattheyhavereviewedspecifiedfinancialstatementsorreports,withoutengaginginauditprocedures.

COMMERCIALLETTEROFCREDIT:See"LetterofCredit."

COMMITMENT:(a)Anobligationarisingunderacommitmentletter.(b)Alender’sobligationtomakeloansunderacreditagreement.

COMMITMENTLETTER:Anagreementtoenterintoatransaction,basedonasummaryofterms,andsubjecttocompletionofdocumentationandsatisfactionofotherconditions.Mostoftenprovidedbylenderscommittingtoadebtfinancingtransaction.Compare"ProposalLetter"and"LetterofIntent."

COMPOUNDING:Amethod of interest accrual on a debt obligation, inwhich the accrued amount ofinterest is periodically added to the principal amount of the obligation instead of being paid in cash.Compare"Accretion,""CashPay"and"PaymentinKind."

CONDITION:See"ConditionPrecedent."

CONDITIONPRECEDENT:Arequirementthatsomeactionbetakenbeforeacontractualobligationisperformedorisenforceable.Alsoreferredtoasa"condition."

CONFORMEDCOPY: A copy of a contract (a) which has been updated to reflect changes made insubsequent amendment(s), or (b) inwhich the actual signatures havebeen replacedby thenamesof thesignatoriestypedinthesignaturespaces(andusuallyprecededby"s").

CONSENT:Anagreementbyapartytopermitacontractuallyprohibitedaction.

CONSENTANDAGREEMENT:AnagreementunderwhichPartyAacknowledgesthatPartyB’srightsunder its contractwithPartyAhavebeenassigned toPartyC, andunderwhichPartyAmayagree thatPartyChascertainnotice,cureandenforcementrightswithrespecttotheassignedcontract.

CONSENTSOLICITATION:Arequestforconsentfromtheholdersofdebtsecuritiestotheamendmentofthedebtsecurities.

CONSOLIDATED:Amethodoffinancialreportinginwhichthefinancialconditionandoperatingresultsofaparentcompanyanditssubsidiariesarecombined.

CONSOLIDATING:Amethodoffinancialreportinginwhichthefinancialconditionandoperatingresultsofaparentandeachofitssubsidiariesareseparatelyreported.

CONSTRUCTIONLOANAGREEMENT:Anagreementtomakeloansusedtofinancetheconstructionof a building or other project. It provides for multiple drawdowns, each of which is subject to thesatisfactionofconditionsrelatingtotheconstructionprocess("milestones").

CONTRIBUTIONAGREEMENT: An agreement under whichmultiple guarantors of the same claimagreetocontributetheirproratashareofanypaymentsmadeundertheothers’guarantees.

CONTROLAGREEMENT:Anagreementpursuanttowhichanentitymaintainingadepositaccountorsecurities account agrees that it will honor certain instructions of a third party purchaser that is not theowner of the securities account or deposit account. As defined in the Uniform Commercial Code, a"purchaser"includesasecuredparty.

COUNTERPARTY:Anotherpartytoacontract.

COUPON:Theinterestrateonadebtsecurity.Compare"ZeroCoupon."

COVENANT:Aprovisionthatobligatesapartytoeithertake(an"affirmativecovenant")orrefrainfromtaking (a "negativecovenant")anaction,orwhich requires themaintenanceof somedefinedmeasureoffinancialperformance(a"financialcovenant").

COVENANTNOTTOCOMPETE:Anagreementnottoengagein,oracquireanentitythatengagesin,activitiesthatcompetewiththebusinessoftherecipientofthecovenant.

CREDITAGREEMENT:Anagreementunderwhichoneormoreparties (the"lenders")providecreditfacilities (revolving loans, term loans, swingline loansand letterofcredit facilities) toanotherparty (the"borrower").Compare"DebtSecurity."

CREDITENHANCEMENT:See"CreditSupport."

CREDITFACILITY:See"CreditAgreement."

CREDITRATING:Theratinggiven toaspecificdebt issuebya ratingagency(e.g.,Moody’s InvestorServiceInc.orStandard&Poor’sInc.).Theseratingsarebasedonthecreditworthinessoftheissuerofthe

debt.

CREDITRISK:Theriskthatanobligorwillbefinanciallyunabletopayitsobligationsastheybecomedue.

CREDITSUPPORT:Anyarrangementunderwhichacreditorreceivesanothersourceofrepaymentforaclaim, such as a guarantee, pledge of assets by a third party or a letter of credit.Also known as "creditenhancement."

CREDITOR:Apartythatisowedmoneybyanotherparty(the"debtor").

CROSS-ACCELERATION:Aprovisioninanagreement(usuallyadebtagreement)providingthatitisadefaultbyapartyifitsotherdebthasbeenaccelerated.

CROSS-DEFAULT:Aprovision inanagreement(usuallyadebtagreement)providingforadefault ifapartyisindefaultunderanotheragreement.

CROSSREFERENCE: A reference in one provision of an agreement to another provision. Example:"Proceedsofsalespermittedunderthissection2(a)shallbeappliedinthemannersetforthinsection3(b)."

CUREPERIOD:See"GracePeriod."

CURRENCYRISK:Riskarisingfromthepotentialchangeinratesofexchangebetweentwocurrencies.Abusinessthathasincomeindollarsandliabilitiespayableinpesoshascurrencyrisk,totheextentthevalueofthedollardropsinrelationtothevalueofthepeso.

CURRENCYSWAP:Ahedgeagreementpursuanttowhichtwopartiesagreetomakespecifiedpaymentstoeachotherwhichtakeintoaccountcurrencyexchangeratefluctuations.

CUSHION: Extra room in a provision requiring a measurement. For example, a covenant limiting acompany’sannualcapitalexpenditures to$12million,when thecompanyprojects$10millionofcapitalexpenditures,includesa$2millioncushion.Compare"Haircut."

DEBENTURE:Adebtsecurity.

DEBTINCURRENCETEST:Aprovision inadebtagreementpermitting the issuer to incuradditionaldebttotheextentitsatisfiesafinancialtest.

DEBT:See"Indebtedness."

DEBTCOVENANT:Acovenantrestrictingaparty’sabilitytoincurormaintainindebtedness.

DEBTSECURITY:Asecurityrepresentingdebtoftheissuer.Adebtsecurityisfunctionallysimilartoabankloan,butthenomenclatureisdifferent:Alendermakesloanstoaborrowerunderacreditagreement.Anissuersellsdebtsecuritiestoaninvestorornotepurchaserpursuanttoanindentureoranotepurchaseagreement.Compare"CreditAgreement."

DEBTSERVICE:Scheduledpaymentsofprincipalandinterestonindebtedness.

DEBTOR:(a)Apartythatowesmoneytoanotherparty(the"creditor").(b)Apersonorentitythatisthesubject of a bankruptcy proceeding. (c)A person that has granted a security interest under theUniformCommercialCode.

DEED:Anagreementpursuanttowhichaninterestinrealpropertyisconveyed.

DELIVERY:Deliveryofanexecutedcontractbyonepartytotheotherpartiesinamannerdemonstratingsuchparty’sintenttobebound.

DEMANDREGISTRATIONRIGHT:TherightofaholderofsecuritiestocausetheissuertoregisterthesecuritiesundertheSecuritiesActof1933.

DEPRECIATION:UnderGAAP,thechargetoearningsovertimerepresentingthediminutioninvalueoffixedassets.Compare"Amortization."

DERIVATIVE:Anagreementcreatinganobligationtopaythatisdeterminedbyreferencetooneormoreexternalbenchmarks,suchaspublished interestorcurrencyexchangeratesor the tradingpriceofoneormoreequityissues.See"HedgeAgreement."

DIRECTORDEROFMATURITY:See"InverseOrderofMaturity."

DISCOUNT:Areductiontothestatedamountofapaymentoranobligation.Adebtsecurityissoldatadiscountwhen thepurchasepricepaid for thedebt security is less than its faceamount.Compare"Par,""Premium"and"ZeroCoupon."

DOCUMENTARYLETTEROFCREDIT:See"LetterofCredit."

DOLLARFORDOLLAR:Aphraseusedtoindicatethatanadjustmenttooneamountwillbethesameasanadjustmenttoanother.Example:"Theescrowamountwillbereduceddollarfordollarbytheamountofeachpurchasepriceadjustment."

DRAGALONGRIGHT:Arightgrantedtoonesecurityholder("HolderA")byanother("HolderB")toincludeHolderA’ssecuritiesinasalebyHolderBofitssecurities.

DRAWDOWN:Afundingofaloanorequityinvestment(alsocalleda"takedown").

DROP-DEADDATE:Adatespecifiedinanagreementonwhichonepartyhastherighttoterminatetheagreementiftheotherpartyhasnotsatisfiedorwaivedcertainconditionsbysuchdate.

DUEDILIGENCE: An examination of a business or a portion thereof in connection with a proposedtransaction.

DUE DILIGENCE OUT: A condition giving a party the right to terminate an agreement if it is notsatisfiedwiththeresultsofitsduediligence.

EARN-OUT: Consideration for an acquisition that is paid to the seller after the closing only if certainfinancialperformancegoalsaresatisfiedbythetarget.

EBITDA:Earningsbeforethedeductionofinterest,taxexpense,depreciationandamortization.EBITDAisconsideredakeyindicatorofacompany’sprofitabilityandisusedinmanyfinancialcovenants.

ENFORCEABILITY:Acontract is enforceable if a courtwould enforce it eitherbygrantingmonetarydamagesorequitablerelief.

ENGAGEMENT LETTER: An agreement under which a professional or professional firm (e.g., anaccountingfirm,aninvestmentbankorafinancialadvisoryfirm)isretained.

ENTITY: An organization that is recognized as a legal person, including a corporation, a generalpartnership,alimitedpartnership,alimitedliabilitycompany,alimitedliabilitypartnershipandatrust.

EQUALANDRATABLECLAUSE:Aprovisionfoundinadebtfinancingagreementrequiringthatthedebt obligations under that agreement be secured to the same extent that other future obligations maybecomesecured.

EQUITABLEOWNERSHIP:See"BeneficialOwnership."

EQUITY:An investment inanentity, suchascommonstock, that (a) representsanundivided fractionalownershipinterestintheentity,and(b)entitlestheinvestortocertaineconomicrightsvis-à-vistheentity,includingtherighttoashareoftheentity’sprofitsandenterprisevalueafterthesatisfactionofcreditors’claims.

ERISA:TheEmployeeRetirementIncomeSecurityActof1974.Thisfederallegislationgovernspension,retirementandotheremployeebenefitplans,andisoftenthesubjectofrepresentationsandcovenants.

ESCROW:Anarrangementinwhichtwoormorepartiesdeliverdocuments,moneyorpropertytoathirdparty (the "escrow agent"), which agrees to deliver such documents, money or property in a specifiedmanneruponthesatisfactionofcertainconditions.

ESCROWAGENT:See"Escrow."

EURODOLLARINTERESTRATE:See"LIBOR."

EVENT OF DEFAULT: An event, act or condition that allows a party to exercise remedies under acontract,suchasaccelerationofdebtunderacreditagreement.

EXCULPATIONCLAUSE:See"HoldHarmlessProvision."

EXECUTION:Thesigningofacontract.

EXECUTIONCOPY:Thefinaldraftofanagreement,withoutdraftlines,andoftenmarked"ExecutionCopy"onthefrontpagetoidentifyitassuch.

EXECUTORYCONTRACT:Acontractinwhichsubstantialperformancebyoneormorepartiesisstillrequired.

EXHIBIT: An attachment to a contract which is usually a form of another agreement or document.Compare"Schedule."

FACEAMOUNT:Thestatedprincipalamountofadebtsecurity.

FACTORING:Atransactioninwhichaparty(the"debtor")sellsitsaccountsreceivabletoasecondparty(a"factor").Typically, thefactorhastherighttosellanaccountreceivablebacktothedebtorifpaymentthereunderisnotreceivedforreasonsotherthanthefinancialinabilitytopayonthepartoftheobligorontheaccountreceivable(e.g.,adisputeoverthequalityofthegoodssold).

FAIRNESSOPINION:Anopinionofanindependentfinancialexpertastothefairnessofatransaction.Afairnessopinionisoftenrequiredasaconditionprecedenttomergerandacquisitiontransactions.

FEEMORTGAGE:Amortgageonownedproperty.

FIDUCIARYOUT:See"NoShopClause."

FINANCIALCOVENANTS:Covenantsthattestlevelsoffinancialconditionandperformance.CommonexamplesaretheratioofdebttoEBITDA,theratioofinterestexpensetoEBITDA,andtheratioofdebttoequity.

FINANCIALSTATEMENTS:Tables showing apersonor entity’s financial condition as at a particulartime and the results of its operations for a specified period. The different types of financial statementsincludeabalancesheet,anincomestatement(alsocalledastatementofprofitsandlosses),astatementofchangesinequityandastatementofcashflows.

FINANCINGLEASE:See"CapitalizedLease."

FINANCING OUT: A condition in an acquisition agreement allowing the acquiror to terminate theagreementifitisunabletoobtainfinancingforthetransaction.

FINANCING STATEMENT: A form describing the personal property in which a security interest isgranted,whichisfiledwithstateand/orcountyofficialspursuanttoArticle9oftheUniformCommercialCodeinordertoperfectthesecurityinterest.

FIXEDRATE:See"InterestRate."

FLEXPROVISION:Aprovisioninacommitmentletterordebtfinancingagreementpermittingtheinitiallenderstochangethestructure,pricingorothertermsifnecessarytoachieveasuccessfulsyndication.Alsoreferredtoasa"marketflexprovision."

FLOATINGRATE:See"InterestRate."

FORCEMAJEURECLAUSE:Aprovisionthatexcusesafailuretoperformresultingfrom"ActsofGod"andothercircumstancesoutsidethenonperformingparty’scontrol.

FORBEARANCE:See"StandstillAgreement."

FORECLOSURE:Asalebya securedpartyofcollateral, theproceedsofwhichareused to satisfy thesecuredobligations.See"SecurityInterest."

FRAUDULENT CONVEYANCE: A transfer made without fair consideration when the transferor isinsolventorisrenderedinsolventthereby.Suchatransfermaybesetasidepursuanttofederalandstatelaw(e.g.,Section548oftheBankruptcyCode).

FROZENGAAP:AprovisionspecifyingthatchangestoGAAPafterthedateoftheagreementareignoredforpurposesoffinancialcalculations.

FUNDEDDEBT:Atermusuallydefinedasindebtednesswithamaturityofoneyearormore.

FUNDSFLOWMEMORANDUM:Amemorandumsettingforththedetailsofeachpaymenttobemadeataclosing.

FURTHERASSURANCESCLAUSE:Aprovision requiring theparties to take such further actions asmaybenecessarytoachievetheresultscontemplatedbythecontract.

GAAP:See"GenerallyAcceptedAccountingPrinciples."

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: The rules of accounting employed bycertifiedpublicaccountants.Alsoreferredtoas"GAAP."

GOLDENPARACHUTE:See"SeveranceAgreement."

GOVERNINGLAWPROVISION:Acontractprovisionspecifyingwhichjurisdiction’slawgovernstheinterpretationandenforcementofthecontract.

GRACEPERIOD: A period of time during which a party can cure a breach before it gives rise to aremedy.Alsoreferredtoasa"cureperiod."

GRANTCLAUSE: (a)Generally,aprovisionpursuant towhichan interest inproperty isconveyed. (b)The provision in a security agreement pursuant to which an owner of property (the "debtor") grants asecurityinterestinthepropertytoacreditor(the"securedparty").

GROSS:See"Net."

GROSS-UPPROVISION: A provision requiring the amount of a payment to be increased in order toprotect therecipientagainstspecifiedreductions tosuchpayment.Forexample,a taxgross-uprequiresapayortoincreaseapaymentsuchthatthenetamountreceivedbythepayee,afteranyrequiredtaxpaymentor withholding by it, will be the amount that the payee would have received had no tax payment orwithholdingbeenrequired.

GUARANTEE (ALSO SPELLED GUARANTY): (a) An agreement under which a party (the"guarantor")agrees tobe liable for thepaymentorperformanceof theobligationsofanotherperson. (b)Theactofprovidingsuchaguarantee.

GUARANTEEOFCOLLECTIBILITY: A guarantee that can be enforced only after the creditor hasexhausteditsremediesagainsttheprimaryobligor.

GUARANTEEOFPAYMENT:Aguarantee thatmaybeenforcedagainst theguarantorwhetherornotremedieshavebeenenforcedagainsttheprimaryobligor.

GUARANTOR:See"Guarantee."

HAIRCUT:A reduction to an amount. For example, a sellerwho agrees to a reduction in the purchasepriceissaidtobe"takingahaircut."Compare"Cushion."

HAIRTRIGGERPROVISION:Acovenantthatislikelytobebreachedoraremedialprovisionthatislikelytobetriggered.

HEDGEAGREEMENT:Aderivativeagreementthatprotectsagainstfinancialrisks.Themostcommonexampleofhedgeagreementsareinterestrateswapsandcurrencyswaps.

HELLORHIGHWATER:A termdescribinganobligation that isunconditional.A"hellorhighwaterlease"isaleaseinwhichthelesseeisrequiredtomakeitsrentpaymentsregardlessofanycircumstances,includingthecompletelossoftheleasedproperty.

HOLDHARMLESSPROVISION:Aprovisionunderwhichonepartyagreesnottoassertaclaimagainstanotherparty.Alsocalledan"exculpationclause."

HOLDINGCOMPANY:Anentitythatownsonlyequityinterestsinotherentities.Compare "OperatingCompany."

HYPOTHECATIONAGREEMENT: A type of security agreement under which a security interest isgranted by a "debtor" who is not an "obligor" (as such terms are used in Article 9 of the UniformCommercialCode)assecurityfortheobligationsofathirdparty,nottheobligationsofthepartygrantingthesecurityinterest.

IMMEDIATELYAVAILABLEFUNDS:Describingamannerofpaymentthatgivesthepayeeimmediateaccesstothefunds.Paymentbycheckisnotapaymentinimmediatelyavailablefunds,becausethecheckissubjecttocollection.Paymentbywiretransferisapaymentinimmediatelyavailablefunds.

INADVANCE:See"InArrears."

INARREARS:Paymentaccruingoveraperiodoftimethatispaidattheendofsuchperiod.Forexample,interestthataccruesduringamonthandthatispaidattheendofthemonthispaidinarrears.Payment"inadvance"istheopposite.

INCORPORATIONBYREFERENCE:WhereaprovisioninContractAdeemsaprovisioninContractBtobepartofContractA.

INDEBTEDNESS:Atermappearingmostoftenindebtcovenantsandfinancialcovenantsthatdescribes

certain long-term liabilities. This term is usually defined to include borrowings, purchase money debt,capitalizedleases,reimbursementobligationsinrespectoflettersofcredit,andsometimesguaranteesandhedgeagreements.Alsoreferredtoas"debt."

INDEMNITY/INDEMNIFICATION: A promise by one party (the "indemnitor") to reimburse anotherparty(the"indemnitee")forcertaincosts,damagesorlosses,ortopaythemdirectly.

INDENTURE:Anagreementgoverningtheissuanceofdebtsecurities.Thepartiestoanindenturearetheissuerof thedebtsecuritiesanda representative for theholdersof thesecurities (an"indenture trustee").IndenturesaremostoftenusedinthecontextofpublicdebtofferingsandsalesofdebtsecuritiesunderRule144A.

INDENTURETRUSTEE:See"Indenture."

INTEGRATION CLAUSE: A contract provision stating that the agreement represents the entireagreementbetween theparties. Itspurpose is tosupersedepriorandcontemporaneousagreementsand toexcludeparolevidence.Alsoknownasa"mergerclause."

INTELLECTUALPROPERTY:Copyrights,patents,trademarksandtradesecrets.

INTERCREDITORAGREEMENT:See"SubordinationAgreement."

INTERESTRATE:Therateofinterestrequiredtobepaidontheoutstandingprincipalamountofadebtobligation. Interest rates are either "fixed rates,"which are setwhen the debt is first incurred and don’tchangeoverthetermofthedebt,or"floatingrates"whicharebasedonbenchmarksthatchangefromtimetotime,suchasLIBORor theprimerate.Floatinginterestratesusually includeanadditionalpercentage(calledthe"spread"or"margin")thatisaddedtotheapplicablebenchmarkrate.

INTERESTRATERISK:Theriskthatinterestratesmayfluctuateovertime.Forexample,loansthataresubjecttoafloatinginterestratecreateinterestrateriskfortheborrower,becauseitsinterestpaymentsmayincreaseifinterestratesgoup.

INTERESTRATESWAP:Ahedgeagreementpursuanttowhichtwopartiesagreetomakepaymentstoeachother,basedonthecalculationofdifferentinterestratesappliedtoanotionalamount.

INVERSEORDEROFMATURITY: A phrase used in loan prepayment provisions indicating that aprepaymentreducesthefinalamortizationpayments.Thisisfavorabletothelenderbecauseitshortensthematurity of the debt and unfavorable to the borrower because there is no short term reduction of itsamortizationpayments."Directorderofmaturity"meanstheopposite.

INVESTMENT COVENANT: A covenant restricting a party’s ability to invest in, or make loans oradvancesto,anotherperson.

IPSOFACTOCLAUSE:Aremedialprovisionprovidingthatacontractisautomaticallyterminateduponaparty’sfilingofabankruptcypetition.TheseclausesaregenerallyunenforceableunderSection365(e)oftheBankruptcyCode.

ISDA:(a)TheInternationalSwapDealersAssociation.(b)Thestandardprintedformofswapagreement,promulgatedbytheInternationalSwapDealersAssociation.

ISSUER:Apartythatissuesdebtorequitysecurities.See"DebtSecurity."

ISSUINGBANK:See"LetterofCredit."

JOINTANDSEVERALLIABILITY:Acontractualarrangementwherebytwoormorepartiesareeachresponsibleforthefullamountofthesameobligation.

JUDGMENT CREDITOR: A party entitled to payment of money from another party pursuant to ajudgment.

JUNIOR:See"Priority."

LEASE:Anagreementpursuant towhichanownerof realorpersonalproperty (the"lessor")grants therightofuseand/orpossessionofsuchpropertytoanotherparty(the"lessee"),inexchangeforthepaymentofrent.See"CapitalizedLease"and"OperatingLease."

LEASEHOLDMORTGAGE:Amortgageonalessee’sinterestunderalease.

LEGALDESCRIPTION:Adetaileddescriptionoftheboundariesofaparcelofrealestatethatconformswithlocallawrequirementsrelatingtotherecordingofrealestateinterests.

LEGALOPINION:See"Opinion."

LENDER:Apartythatmakesaloan.See"CreditAgreement"and"DebtSecurity."

LESSEE:See"Lease."

LESSOR:See"Lease."

LETTERAGREEMENT:Anagreementintheformofaletterfromonepartytoanother.

LETTER OF CREDIT: A three-party arrangement involving a bank (the "issuing bank"), the bank’scustomer(the"accountparty")andacreditoroftheaccountparty(the"beneficiary").Attheaccountparty’srequest, the issuing bank issues a letter of credit to the beneficiary, pursuant towhich the issuing bankagrees to pay the account party’s obligation to the beneficiary when due, upon presentation by thebeneficiaryofspecifieddocumentstotheissuingbank.Uponsuchpayment,theaccountpartyisobligatedtoreimbursetheissuingbank,typicallyundera"reimbursementagreement."A"standbyletterofcredit"isaletterofcreditthatcanbedrawnbythebeneficiaryiftheaccountpartyfailstomakeaspecifiedpaymenttothebeneficiary.A"trade letterofcredit" (alsoknownasa"commercial letterofcredit"or"documentaryletter of credit") can be drawn by the beneficiary in payment for goods sold by the beneficiary to theaccountparty.

LETTEROFINTENT:Awrittenexpressionofinterestorintentiontoenterintoatransaction.Aletterofintenttypicallydoesnotcreateabindingobligationtoconsummatethetransaction,butthelettermayhaveenforceableprovisions relating toconfidentiality,disclosure,exclusivityandother featuresof theparties’actions relating to the proposed transaction. Also called an "agreement in principle." Compare"CommitmentLetter"and"ProposalLetter."

LIBOR:TheLondon InterbankOfferedRate.An interest ratebasedon the ratepaidbybanks toobtaindollardepositsintheLondoninterbankmarket.

LICENSE AGREEMENT: An agreement pursuant to which an owner of intellectual property (the"licensor")permitsanotherparty(the"licensee")tousesuchintellectualpropertyinaspecifiedmanner.

LICENSEE:See"LicenseAgreement."

LICENSOR:See"LicenseAgreement."

LIENCOVENANT:Acovenantrestrictingaparty’sabilitytocreateliensonalloraspecifiedportionofitsassets.Alsocalleda"negativepledgeclause."

LINEOFCREDIT:An arrangement underwhich a lender indicates itswillingness tomake loans to aborrowerfromtimetotimeuptoastatedmaximumoutstandingamount,butwithoutanycommitmenttodo

so.

LIQUIDATEDDAMAGECLAUSE:Aprovisionunderwhichonepartymakesaspecifiedpayment totheotherpartyupontheoccurrenceofcertainevents.

LOSS PAYEE ENDORSEMENT: A provision in a casualty insurance policy that requires paymentsthereunder tobemade toaspecified thirdparty(mostoften,asecuredcreditorof the insured).Compare"AdditionalInsuredEndorsement."

MAC:See"MaterialAdverseChangeClause."

MAKE-WHOLEPROVISION:A provision setting forth a formula for compensating a lender for lostincomeonaloanthatisprepaidbeforeitsstatedmaturity.Compare"BreakageProvision"and"PrepaymentPenalty."

MANDATORYPREPAYMENT:See"Prepayment."

MARGIN:See"InterestRate."

MARKET:Anadjectiveused to indicate that a term is inkeepingwithmarket standards, as in "it isn’tmarketforapartytobeindemnifiedagainstitsowngrossnegligence."

MARKETFLEXPROVISION:See"FlexProvision."

MARKETOUT: A condition precedent that is satisfied only if there has not been a material adversechangeinthefinancialmarkets.

MATERIALADVERSECHANGECLAUSE:Arepresentation,conditionprecedentoreventofdefaultthatisbasedonwhetheraparty’sconditionhasdeterioratedtoamaterialextent.

MATERIALADVERSEEFFECT:Atermusedtomodifycontractprovisionsonthebasisofwhetheraparticularevent, actorcircumstance results inachange that isbothmaterial andadverse toapartyoraparty’sposition.

MATURITY:Thedateonwhichadebtobligationbecomesdue.

MERGERAGREEMENT:Anagreementtoeffectamergeroftwoentities.

MERGERCLAUSE:See"IntegrationClause."

MERGERCOVENANT:Acovenantrestrictingaparty’sabilitytoenterintomergertransactions.

MILESTONES: Required levels of performance contained in a contract. See "Construction LoanAgreement."

MORTGAGE:Anagreementpursuanttowhichalienonrealpropertyinterestsisgrantedbytheownerorlesseethereof(the"mortgagor")infavorofitscreditor(the"mortgagee").

MORTGAGESATISFACTION:Arecordableinstrumentpursuanttowhichamortgageisreleased.

MORTGAGEE:See"Mortgage."

MORTGAGOR:See"Mortgage."

MUTATISMUTANDIS:Aphraseusedwhenaprovisionfromanothercontractisbeingincorporatedbyreference,indicatingthatsuchotherprovisionisdeemedtobemodifiedasnecessarytofitthecontext.

NATURALPERSON:Anindividual,asopposedtoalegalentity.

NEGATIVECOVENANT:See"Covenant."

NEGATIVEPLEDGECLAUSE:See"LienCovenant."

NET:Afterdeductionofotheramounts.Anamountbeforeanysuchdeductionisthe"gross"amount.

NON-RECOURSE:A securedobligation is non-recourse to a personwhen theperson is not personallyresponsible for the obligation and the creditor’s only remedy is to proceed against the collateral for theobligation; no damage claim is available if the collateral is not sufficient to satisfy the debt. A typicalexampleisarealestatefinancingwherethelenderhasalienonthepropertybutnoseparateclaimagainsttheownerifthevalueofthepropertyisn’tsufficienttosatisfytheloan.Notethatthenon-recoursenatureofanobligationmaybedisregardedunderSection1111(b)oftheBankruptcyCode.

NORAIDCLAUSE:Aprovision inanacquisitionagreementora letterof intent inwhichoneorbothpartiesagreenottosolicitorhiretheother’semployees.

NOSHOPCLAUSE:Inanacquisitionagreementoraletterofintent,aprovisionunderwhichapublicly-heldtargetisprohibitedfromsolicitingornegotiatingacompetingoffer.Thereisusuallya"fiduciaryout,"whichpermitsthetargettoengageintheprohibitedactionsiffailuretodosowouldresultinthebreachofthefiduciarydutiesofthetarget’sboardofdirectorsorsimilargoverningbody.

NOTE:See"PromissoryNote."

NOTIONALAMOUNT:Anamountusedinacomputation,theonlyfunctionofwhichisasabasisforthecomputation.Themostcommonuseisininterestrateswaps,wheretheamountofpaymentiscomputedbyapplyingaspecifiedinterestratetoanotionalamount.Incontrast,theprincipalamountofanoteisalsothebasisforthecalculationofinterest,butisnotanotionalamountbecausetheprincipalmustberepaid.

NOVATION:AnassignmentbyPartyAofitsrightsanddelegationofitsobligationsunderanagreementto Party B, such that Party B becomes a party to the agreement and PartyA ceases to be a party. Thecounterpartytothecontractmustconsent.

OBLIGEE:See"Obligor."

OBLIGOR:Apartythatowespaymentorperformancetoanotherparty(the"obligee").

OPERATINGCOMPANY:Anentitythatownsoperatingassets.Compare"HoldingCompany."

OPERATINGLEASE:A lease as towhich the leased asset appears as an asset on the lessor’s balancesheet,andwhichdoesnotgiverisetoaliabilityonthelessee’sbalancesheet.Alsoknownasa"truelease."Compare"CapitalizedLease."

OPINION:Awrittenstatementoflegalconclusionsastoelementsofatransaction,providedbyoneparty’slawyer to the other party. An opinion is often required as a condition precedent to the closing of atransaction.Alsoreferredtoasa"legalopinion."

OPTIONALPREPAYMENT:See"Prepayment."

OUT:Aconditionprecedentthat,ifnotsatisfied,givesapartytherighttoterminatethecontractorcertainofitsobligations.

PAR:Thefaceamountofadebtsecurity.Adebtsecuritythatistrading"belowpar"istradingforlessthanitsfaceamount.Compare"Discount,""Premium"and"ZeroCoupon."

PARIPASSU:Atermthatindicatesthattwoormoreclaimsagainstasingleobligorhavethesamelevelofpriority.Compare"Priority."

PARTICIPANT:See"ParticipationAgreement."

PARTICIPATION:See"ParticipationAgreement."

PARTICIPATIONAGREEMENT:Anagreementpursuant towhichoneparty transfers to another (the"participant")aninterest(the"participation")inthefirstparty’srightsunderanothercontractwithathirdparty (usually a debt financing agreement). There is no direct contractual relationship between theparticipantandthethirdparty.Compare"Assignment."

PAYEE:See"PromissoryNote."

PAYMENT INKIND:A feature of a securitywhereby dividends (in the case of an equity security) orinterest(inthecaseofadebtsecurity)arepaidintheformofadditionalsecuritiesofthesametype.Alsocalled"PIK."Compare"Accretion,""CashPay"and"Compounding."

PAYOFFLETTER:Aletterfromalenderspecifyingtheamountofoutstandingprincipalandinterestonaloanthatmustbepaidfortheloanobligationstobecompletelysatisfied.Payofflettersareoftenrequiredinconnectionwithrefinancings.Apayoffletterrelatingtosecureddebttypicallyincludesanagreementbythelendertoreleaseitslienswhentheloanobligationsaresatisfied.

PAYOR:See"PromissoryNote."

PERANNUM:Peryear.Usedinthedesignationofinterestrates,asin"8%perannum."

PERFECTION:Thelegalstepsnecessary tomakeasecurity interest inpropertysubject to theUniformCommercialCodeenforceable against thirdparties.For example, a security interest inmost inventory isperfectedbyfilingafinancingstatementinthefilingofficeofthejurisdictionwherethedebtorislocated,inaccordancewiththeapplicableUniformCommercialCode.

PERFORMANCE:Thesatisfactionofcontractualobligations.

PERSON:Usuallydefinedincontractstoincludebothnaturalpersonsandentities.Referencesto"person"inthisglossaryhavethismeaning.

PIGGYBACKREGISTRATIONRIGHT:TherightofasecurityholdertocausetheissuertoregisteritssecuritiesundertheSecuritiesActof1933,inconnectionwitharegistrationofothersecuritiesofthesametype.

PIK:See"PaymentinKind."

PLEDGEAGREEMENT:Atypeofsecurityagreementpursuanttowhichasecurityinterestisgrantedoninstrumentsorsecurities,includingequityinterestsandnotes.

POISONPILL:See"RightsAgreement."

POWEROFATTORNEY:Adocumentpursuanttowhichtheexecutingpartygrantsauthoritytoanamedperson(the"attorney-in-fact")totakespecifiedlegalactionontheexecutingparty’sbehalf.

PREAMBLE:See"Recitals."

PRECEDENT: A form or existing agreement which is used as the starting point for drafting a newagreement.

PREFERENCE:Apaymentorothertransfermadebyapersonpriortosuchperson’sbankruptcythat isrequiredtobereturnedtoitsbankruptcyestateunderBankruptcyCodeSection547.

PREMIUM:Anincreasetothestatedamountofapaymentoranobligation.Adebtsecurityissoldata

premiumwhenthepurchasepricepaidthereforismorethanthefaceamount.Compare"Discount,""Par"and"ZeroCoupon."

PREPAYMENT: Payment of all or part of a loan or debt security prior to its scheduledmaturity. Theagreement governing the debt may provide for prepayment at the borrower’s or issuer’s option, or amandatoryprepayment, involvingaprepaymentrequiredasa resultofspecifiedeventsorcircumstances.See"Redemption."

PREPAYMENT PENALTY: A penalty imposed on the prepayment of a loan. Compare "BreakageProvision"and"Make-WholeProvision."

PRESENTVALUE:Thevalueofafuturepayment,reducedbyanamount(expressedasapercentage,the"discount")thatreflectsthetimevalueofmoney.

PRICINGGRID:Aprovisionpursuanttowhichinterestrates,feesorotherpaymentsareadjustedbasedonaparty’screditratingorfinancialcondition.

PRIORITY:(a)Thestatusofonesecurityinteresthavingaclaimtocollateralthatissuperiortoanothersecurity interest in the same collateral. (b) The status of one creditor having a claim against a commonobligor that issuperior toanothercreditor’sclaim. Ineachcase, thesuperiorsecurity interestorclaim isreferredtoas"senior,"theotheras"subordinated"or"junior."Compare"PariPassu."

PRIVATEPLACEMENT:AnissuanceofsecuritiesthatisexemptfromtheregistrationrequirementsoftheSecuritiesActof1933underSection4(2)thereofbecauseitdoesnotinvolveapublicoffering.

PROFORMA: (a)Theadjustmentof existing financial statementsor levelsof financialperformance toreflectaneventortransactionnototherwisetakenintoaccount.(b)Afinancialstatementassoadjusted.

PROJECTION:Anestimateoffinancialconditionandfinancialperformanceforfuturedatesandperiodsoftime.

PROMISSORYNOTE:An instrumentexecutedbyoneparty(the"payor")pursuant towhich thepayorpromises to pay to the holder (the "payee") a specified principal amount at a specified time or times,togetherwithinterestcomputedataspecifiedrate.Alsoreferredtoasa"note."

PROPOSALLETTER:A letteroutlining the termsofaproposed transaction that isnotacommitment.Compare"CommitmentLetter"and"LetterofIntent."

PRORATA:Apportionedbasedonrelativeamounts.Forexample,lendersinasyndicatedloanfacilityarerequired to lend their pro rata share of each loan—that is, the lender that has committed to 50%of thefacilitymust advanceanamount equal toone-halfof the loan. "Ratably"and "ratable" express the sameconcept.

PROVISO: A clause commencing with the words "provided" or "provided, however" that contains anexceptiontotheconceptitfollows.

PURCHASE MONEY DEBT: Debt the proceeds of which are used to acquire specified assets. Apromissory note issued to the seller of assets (a "seller note") is a form of purchasemoney debt. Alsoreferredtoas"purchasemoneyfinancing."

PURCHASEPRICEADJUSTMENT: A provision in an acquisition agreement pursuant to which thepurchasepriceisadjustedafterclosing,usuallybycomparingthetarget’sfinancialconditionatclosingwithitsfinancialconditionasofthedateofitsfinancialstatementsdeliveredtotheacquirorpriortoclosing.

PUT:Arighttosellaspecifiedassetinthefutureatasetprice.Compare"Call."

RATABLE:See"ProRata."

RATINGSTRIGGER:Aprovisionproviding forcontract terminationorsomeadditionalbenefit tooneparty(e.g.,anincreaseininterestratesorarequirementthatcollateralbeprovided)ifthecreditratingsoftheotherpartyarereducedtospecifiedlevels.

REASONEDOPINION:Anopinion that sets forth the reasoningbehind the legal conclusions set forththerein.

RECEIVABLE:See"AccountReceivable."

RECITALS:Theprefatoryparagraphsofanagreementthatdescribethepartiesandthecircumstancesofthetransaction.Alsoknownas"whereasclauses"orthe"preamble."

RECORDOWNERSHIP:See"BeneficialOwnership."

RECORDINGTAX:Ataximposedontherecordingofadeed,lease,mortgageorotherdocumentintherealestaterecords.

REDEMPTION: Purchase by an issuer of its debt or equity securities from the holder thereof. Aredemptionofadebtsecurityisanalogoustotheprepaymentofaloan.See"Prepayment."

REDLINING:See"Blacklining."

REFINANCING: A financing the proceeds of which are used to pay in full and terminate an existingfinancing.

REGISTRATIONRIGHTS:TherightofaholderofsecuritiestocausetheissuertoregisterthesecuritiesundertheSecuritiesActof1933.

REIMBURSEMENTAGREEMENT:See"LetterofCredit."

RELEASE:An agreement by a party to terminate a claim against another party or portion of a lien onanotherparty’sassets(ifalienonallcollateralisreleased,itisreferredtoasa"termination").

RENT:Apaymentmadebyalesseeunderalease.

REPRESENTATION:Aprovisioninwhichonepartymakesastatementoffactasofaparticularpointintimetobereliedonbyanotherparty.

RESTRICTEDPAYMENT:Atermusedinindenturesandotherdebtagreementsthatincludesdividends,equityrepurchasesandredemptions,otherdistributionsonequity,andsometimesinvestments.

RESTRICTED PAYMENTSCOVENANT: A covenant restricting a party’s ability to make restrictedpayments.

RESTRICTEDSUBSIDIARY:See"UnrestrictedSubsidiary."

REVOLVING LOAN: A type of debt financing involving loans that can be borrowed, repaid andreborrowed.

RIGHTSAGREEMENT:Anagreementgivingtheshareholdersofapubliccompanytherighttoacquireadditional shares at a discount if there is a change of control, intended to repel hos tile takeovers.Alsocalleda"shareholders’rightsplan"ora"poisonpill."

ROYALTY:Apaymentmadebyalicenseeunderalicenseagreement.

SAVINGSCLAUSE:Aprovisionthatpreventsanotherprovisionintheagreementfromviolatingthelawor another agreement.For example, a usury savings clause states that a floating rateof interestmaynotexceedtheapplicableusuryrate.

SCHEDULE:Anattachmenttoacontractwhichusuallysetsforthfactualmaterial.Compare"Exhibit."

SECOND-TIERSUBSIDIARY:Asubsidiaryofasubsidiary.

SECUREDPARTY:See"SecurityInterest."

SECUREDTRANSACTION:Atransaction(usuallyadebtfinancing)inwhichobligationsaresecuredbythegrantofasecurityinterest.

SECURITYAGREEMENT:Anagreementpursuanttowhichasecurityinterestisgranted.

SECURITYINTEREST:Aconditionalinterestinpersonalpropertygrantedbyanobligor(the"debtor")toitscreditor(the"securedparty")tosecurethepaymentofthedebtor’sobligations.Afterdefaultbythedebtor, the secured party has the right to sell the property (a "foreclosure") and apply the proceeds insatisfactionofthesecuredobligations.Theterm"securityinterest"asdefinedintheUniformCommercialCode also includes (a) certain leases and (b) the sale of certain notes and contracts (e.g., chattel paper,accountsandpaymentintangibles).

SELLERNOTE:See"PurchaseMoneyDebt."

SENIOR:See"Priority."

SETOFF PROVISION: A provision permitting Party A to satisfy a claim owed to it by Party B bycancelling an obligation owed to Party B by Party A. An example is a bank that is owedmoney by aborrowerapplyingamountsinadepositaccountoftheborrowerinsatisfactionofsuchobligation.

SEVERANCE AGREEMENT: An agreement requiring an employer to provide compensation and/orotherbenefitstoanemployeewhoisterminated.Sometimesreferredtoasa"goldenparachute."

SHAREHOLDERS’RIGHTSPLAN:See"RightsAgreement."

SIDELETTER:Anagreementintendedtomodifyorsupplementanotheragreementthatisenteredintoatthesametime.If theagreementbeingmodifiedorsupplementedhasan integrationclause, theside lettermaynotbeenforceable.

SIGNATUREPAGES:Thepagesattheendofacontractwherethepartiessign.

SOLVENCYOPINION:Anopinionofanindependentfinancialexpertastothesolvencyofapartytoatransaction, after giving effect to that transaction. This is often required as a condition precedent tofinancingtransactions.See"FraudulentConveyance."

SOURCESANDUSES:Atableshowingthesourcesoffundsbeingusedinatransaction,andtheusestowhichsuchfundsareapplied.

SPECIALPURPOSEENTITY:Anentity that ispreventedbycontractor itsorganizationaldocumentsfromconductingbusinessexceptforspecifiedactivities.Itisoftenabankuptcy-remoteentity.Alsoreferredtoasa"specialpurposevehicle."

SPECIALPURPOSEVEHICLE:See"SpecialPurposeEntity."

SPREAD:See"InterestRate."

STANDBYLETTEROFCREDIT:See"LetterofCredit."

STANDSTILL AGREEMENT: (a) An agreement in which a party (usually a creditor) agrees not toexerciseitscontractualrightsagainstanotherparty.Alsoreferredtoasa"forbearance."(b)Anagreementinwhichapartyagreesnottoacquirestockorotherwiseseektogaincontrolofapubliccompany.

STIPULATEDLOSSVALUE:Atermusedinaleasedescribingtheamounttobepaidbythelesseetothelessorintheeventofacasualtylosstotheleasedproperty.

STOCKPURCHASEAGREEMENT:Anacquisitionagreementprovidingforthesaleofalloraportionofthestockofacorporation.Ifthetargetisnotanentitythatissuesstock(e.g.,alimitedpartnershiporalimitedliabilitycompany),theagreementwillbenamedaccordingly.

STRUCTURALSUBORDINATION:WhereCreditorB has a claim against another party andPartyAdoesnot,PartyAisstructurallysubordinatedtoPartyB.Example:BothCreditorsAandBhaveloanstoParty X. Party X’s subsidiary has guaranteed Creditor B’s loan but not Creditor A’s. Creditor A isstructurallysubordinatedtoCreditorBinrelationtothesubsidiary.Compare"SubordinationAgreement."

SUBORDINATED:See"Priority."

SUBORDINATIONAGREEMENT:Anagreementbetweentwopartieshavingclaimsagainst,orliensontheassetsof,thesamedebtor,inwhichthepartiesagreeontherelativepriorityofsuchclaimsorliens.Alsoknownasan"IntercreditorAgreement."Compare"StructuralSubordination."

SUBROGATION:Therightofaguarantorthathasmadepaymentunderaguaranteetostepintotheshoesofthecreditorreceivingsuchpaymentandtoenforcetheobligationsinrespectofwhichsuchpaymentwasmadeagainsttheobligor.

SUBSIDIARY: An entity, the majority of the voting equity of which is owned by another entity (the"parent").

SUPPLEMENTALINDENTURE:Anamendmenttoanindenture.

SWINGLINE: An arrangement in a syndicated revolving loan facility in which a single lender makesrevolving advances to the borrower in smaller amounts, and on shorter notice, thanwould otherwise beavailable.

SYNDICATION:Theprocessbywhicha loanor investment isdividedupamongagroupof lendersorinvestors(the"syndicate").Asyndicatedloanagreementisoneinwhichtheloansaremadebyanumberoflenders,eachofwhichisresponsibletofunditsproratashareoftheloans.

SYNTHETICLEASE:Aleasethat is treatedasanoperatingleaseforaccountingpurposes(i.e.,neithertheleasedassetnortheleaseliabilityappearsonthelessee’sbalancesheet),butthelesseeistreatedastheowneroftheleasedpropertyfortaxpurposes.

TAGALONGRIGHT:Arightofonesecurityholdertohaveitssecuritiesincludedinasaleofthesamesecuritiesbyanothersecurityholder.

TAKEDOWN:See"Drawdown."

TARGET:Theentitythatisacquiredinanacquisition.

10-B5REPRESENTATION:Arepresentationstatingthatallotherrepresentationsinanagreement,takentogether,donotcontainanymaterialmisstatementanddonotomittostateanymaterialfactnecessaryinordertopreventsuchrepresentationsfrombeingmisleading.

TERMSHEET:Asummaryoftermsoutliningaproposedtransaction.Termsheetsareoftenattachedtocommitmentlettersorlettersofintent.

TICKINGFEE:Afeepaidforafinancingcommitmentthataccruesataperannumratepriortoclosing.

TITLEINSURANCE:Insuranceagainsttheexistenceofadverseclaimstorealestate.

TITLE SEARCH: A search of the real estate records determining whether there are any recordedencumbrancesoradverseclaimstorealestate.

TRADELETTEROFCREDIT:See"LetterofCredit."

TRANCHE:Atermusedtodistinguishdifferentloanfacilitiesprovidedunderthesameloanagreement.Differenttranchesmay,ormaynot,havedifferentmaturities,amortizationschedulesandinterestrates.

TRANSACTIONSWITHAFFILIATESCOVENANT:Acovenant restrictingaparty’sability toenterintotransactionswithitsaffiliates.

TRUELEASE:See"OperatingLease."

TRUESALE:A sale transaction that cannotbe recharacterizedasa financing in the seller’sbankruptcyproceeding—i.e.,thesoldassetswillnotbetreatedasassetsoftheseller’sbankruptcyestate.

TURNINGPAGES:Theprocessinwhichclientsand/orcounselgothroughanagreement(orcommentsthereto)page-by-page.

ULTRAVIRES:Descriptiveofanactbyanentitythatis(a)outsideitsstatutorypowers,(b)notpermittedunder its organizational documents, or (c) not properly authorized by its board of directors or similargoverningbody.

UNDERWATER:Whenastockoption’sexercisepriceisgreaterthanthemarketvalueoftheunderlyingshares,itissaidtobe"underwater."

UNDERWRITER:Afinancialinstitutionthatagreestopurchasedebtorequitysecuritiesinordertoreselltheminapublicoffering.

UNDERWRITINGAGREEMENT:Anagreementpursuant towhichanunderwriteragrees topurchasedebtorequitysecuritiesfromtheissuerorsellerthereofinordertoreselltheminapublicoffering.

UNRESTRICTEDSUBSIDIARY:Inadebtagreement,adesignatedsubsidiaryoftheborrowerorissuerthat is not subject to the agreement’s covenants or representations. All other subsidiaries are called"restrictedsubsidiaries."

UPSTREAM GUARANTEE: A guarantee by a subsidiary of its parent’s obligations. This type ofguaranteepresentspotentialfraudulentconveyanceconcerns,becauseinmostcasesthesubsidiaryreceivesnobenefitforprovidingtheguarantee.

VENDEE:Asellerofgoods.

VENDOR:Abuyerofgoods.

WAIVER:Anagreementtogiveupordelaythetimeforperformanceofacontractualright.

WAIVEROFSOVEREIGNIMMUNITY:Aprovisionunderwhichasovereignentitywaivesitsrighttoassertsovereignimmunity.

WATERFALLPROVISION: A provision providing for the application of specified funds to differentpurposesinaspecifiedorder.

WHEREASCLAUSE:See"Recitals."

WORKING CAPITAL: A company’s current assets (receivables, inventory and cash) less its currentliabilities.

WORKINGCAPITALADJUSTMENT: Inapurchaseagreement, anadjustmentmade to thepurchasepriceifthetarget’sworkingcapitalatclosingisgreaterorlessthanaprojectedlevel.

WORKOUT:Arestructuringofdebtobligationsoutsideofbankruptcy.

ZEROCOUPON:A typeofdebtsecurity that is issuedatadiscount to its faceamount,and that isnotinterest-bearing.Theprincipalamountofthesecurityaccretesfromtheoriginalpurchasepriceamounttothestatedprincipalamount,atmaturity.Compare"Discount,""Par"and"Premium."

____________________1Asisthecasewithdefinedtermsincontracts,manyofthedefinitionsinthisglossaryincludetermsthatarealsoseparatelydefined.

Index

A

"Absentmanifesterror,"106 Acceleration,26,218 Accountingterms,99 Acknowledgment,159 Acquisitions Restrictedbyinvestmentcovenant,211

Typicalprovisions,221–244Activevs.passivevoice,76

Additionalinsuredendorsement,194 Affiliates Covenantrestrictingtransactionswith,212–213

Affirmativecovenants Increditdocuments,187

Ambiguity Reasonsfor,4

Amendments,143–150 Contractprovisionasto,148–150

Distinguishedfromconsentsandwaivers,144–145 Importanceoflocatingwhenreviewingacontract,119 Toassignedcontracts,150Amendmentandrestatement,147

"Amountequalto,"101–102 Antecedents,useof,71 Anti-assignmentprovisions,132,142,214 "Arm’s-lengthbasis,"113–114 Assetsalecovenant,205–207,215 Assignmentrestrictions,214 "Asthecasemaybe,"116 Automaticstay,176 Averageweightedlife,201

B

Bankruptcy Overviewofdistributionrules,178

Bankruptcyandequitableprinciplesexception,176 Basket Inindemnificationprovisions,27,114,241–244

Incovenants,19Bestefforts,90–91

Bestevidencerule,157 Bestofknowledge,10,91 Blacklining,43 Boardofdirectorsapproval,112 Booksandrecords Covenantasto,191–192

Representationasto,227Bringdownofrepresentation,23

Buildingblocks,8–32 Acquisition-related,220–243

Credit-related,177–220

C

Caps Inindemnificationprovisions,27

Capitalexpenditurescovenant,216

Capitalization Representationasto,228–229

Capitalizedleases,197 Liencovenantexception,202

Carveouts,19 Cashequivalents,212 Caveatemptor,10 Ceilings,103 Choiceoflaw,seeGoverninglawclause Clients Educationof,37–38,46–48

Reviewofdisclosureschedules,52–55Closingchecklist,63–65

Closingconditions,seeConditionsprecedent Closings,20–21,63–65 Compliancecertificate,189–190 Compliancewithlaw Covenantasto,192

Representationasto,185Conditionsprecedent,20–24

As"outs,"21–22 Certificates,65 Delayedclosings,20–21 Duediligence,59–60 Financingcondition,240 Inacquisitionagreements,235–237 Lawyer’srole,55–62 Opinions,62–63,240–241 Simultaneousclosings,20–21 Subjective,56–59 Third-partydeliveries,61–62Confidentialitycovenant,234–235

Conflictsbetweenagreements,174–175 Consenttojurisdiction,248–249 Consents,143–150 Distinguishedfromamendmentsandwaivers,144–147

Importanceoflocatingwhenreviewingacontract,119 "Notunreasonablywithheld,"89Consistency,79–81

Inexceptions,108"Consistentwithpastpractice,"95

Consolidated,103–104 Financialstatements,181,187–188

Contractdraftingvs.expositorywriting,4 Conveyanceprovisions,74 Corporateexistence,225 Covenantasto,113,194–195

Representationasto,172Corporateseals,159

"Couldreasonablybeexpectedto,"128,215 Counterparts,249 Covenants,16–19 Credit-related,17–18,186–217

Exceptions,18–19 Helpingtheclientunderstand,52 Inacquisitionagreements,231–235 Increditagreements,17,186–218Covenantnottocompete,235

Coverpage,161

Creditpackage,177–181 Credit-relatedprovisions,177–221 Covenants,17,181,186–219

Eventsofdefault,219–220 Representations,181–186Creditrisk,177–181

Cross-default,145

D

Dateofcontracts,162–163 Debt Covenantasto,195–200

Definition,196 Intercompany,198 Maintenancevs.incurrencetests,196 Refinancing,200Default

Comparedtoeventofdefault,218–220 Noticeof,190Definitions,29–33

Importanceinreviewingdocuments,121 Nesting,32 Purpose,30–31 Usedtoavoidinconsistency,30Delivery,157–158,174

Diligentcontestexception Examples,185,194

Diligentefforts,70 Disclosureschedules,52–55 Inacquisitionagreements,222

Ofexistingdebt,andliens,198,203Discretion

Asanissueinconditionsprecedent,55–57Draftingprocess,39–48

Distributionofdraftsubjecttoclient’scomments,46 Importanceofbeingthedraftsman,39–40 Issuesarisingwhiledrafting,39 Mark-uptechniques,44 Roleofnon-draftinglawyer,48–50 Useofprecedent,42–43Drop-deaddate,24

Duediligence,130–141 Conditionprecedent,59–60

Ofaborrower’scontracts,140–141 Ofanassetpurchaser’scontracts,133–134 Ofanassetseller’scontracts,131–132 Ofastockissuer’scontracts,137–139 Ofastockpurchaser’scontracts,137–138 Ofastockseller’scontracts,136–137 Ofatarget’scontractsinastockacquisition,134–136 Scopeoftheassignment,120,130–131Dueexecutionanddeliveryrepresentation,174

E

EBITDA,217–218 Enforceabilityrepresentations,171–177,240 Eventsofdefault Increditagreements,218

"Exceptasotherwiseprovided,"99

Exceptions Disclosureschedules,52–54

Disorganized,111–112 Needforconsistency,108 Unnecessary,109–110Exclusion,termsof,107–109

Toavoiddoubt,108–109Execution,153–157,173–175

Exhibits Useinconditionsprecedent,56–57

F

Financialconditionvs.financialperformance,216–217 Financialcovenants,216–218 CalculationusingfrozenGAAP,104–105

Financialreportingcovenants,186–191 Financialstatements Auditedvs.unaudited,182

Covenanttodeliver,187–191 Representationasto,181–186,226Financingcondition,240

Firstdrafts,41–49 Fixedchargecoverageratio,217 Floors,103 Fonts,166–167,261 "Foraparty’saccount,"116 Forbearance,145 Forcemajeureclauses Examples,126–128

Formalities,152–153,159

"Formandsubstancesatisfactory,"93–94 Formulas,101–103 Needforpropernumbering,101–102

Time-drivencalculations,102–103Forumnonconveniens

Waiverof,249"Fromtimetotime,"116

Furtherassurancesclause,255–256

G

GAAP,seeGenerallyacceptedaccountingprinciples Generallyacceptedaccountingprinciples Frozen,104–105

Goodfaithefforts,28,182,185,194,202 Governinglawclause,248 Governmentalapprovalsrepresentation,175 Graceperiods,29,219 Grossnegligence Asanexclusiontoanindemnityprovision,114–115

H

Headings,164,250

I

"Immediately,"93 "Inadvance,"106 "Inarrears,"106 "Includingwithoutlimitation,"110–111 Inclusion,termsof,107–108,109–110 "Includingwithoutlimitation,"110–111

Inconsistencies

Amongagreements,99 Inexceptions,108 Withinagreements,92,97Incorporationbyreference,112–113

Incumbencycertificate,23,174 Indebtedness,seeDebt Indemnification,27,254–255 Exclusionfor"grossnegligenceandwillfulmisconduct,"114–115

Inacquisitionagreements,242–243Inspectionrights

Covenantasto,191–192Insurance

Covenanttomaintain,192–193Integrationclause,250

"Intentionallyomitted,"146 Interestcoverageratio,217 Interpretation Difficultiesgenerally,118

Findingtherightagreement,118–119Investmentcovenant,198,211–212,216

"Itbeingunderstood,"109

J

Jointventure Restrictedbyinvestmentcovenant,210–211

Jurisdiction,consentto,245 Jurytrial Waiverof,249

K

Knowledgequalification,91,184

L

Legalese,73–74,260 Legalopinions,seeOpinions Legalwriting Comparedtoexpositorywriting,67–69

Letteragreements,160 Lettersofcredit,196 Leverageratio,218 Liens Covenantasto,200–204

Definition,200–201 Deposits,202 Judgmentliens,204 Taxliens,201Liquidateddamages,28

Litigation Conditionprecedent,235–236

Covenanttoprovidenoticeof,190–191 Representationasto,183–184Losspayeeendorsement,192–193

M

Make-wholeprovision,28 Markups,44 Materiality,85–88 Inremedies,28–29

Inrepresentations,221 Materialadversechange

Distinguishedfrommaterialadverseeffect,87–88 Representationasto,183,227Materialadverseeffect,86–88

Distinguishedfrommaterialadversechange,87–88 Examples,127,172,183–184,190,192,194,195Mergercovenant,216

Miscellaneoussection,164,166,252 "Mutatismutandis,"113

N

Necessarycorporateactionrepresentation,173 Negativecovenants Increditdocuments,195–218

Netcashproceeds,205 Networthtest,218 Noconflictrepresentation,174–175 Notarization,159 Notice Ofdefault,190

Oflitigation,190"Notmorerestrictive,"95–96

"Notwithstandinganythingtothecontrary,"98–99 Comparedtoproviso,98–99

Novation,252

O

Opinions Conditionprecedentinacquisitionagreement,238

Overlapwithrepresentations,177 Reviewofcontractsinconnectionwith,129 "Ordinarycourseofbusiness,"94–95

Insalesofinventory,205Originalcontracts

Needfor,156"Outstanding,"105

P

Paymentofclaims Covenantasto,195

Paymentoftaxes Covenantasto,194

Representationasto,185Paymentrestrictionsaffectingsubsidiariescovenant,213–215

Duediligencereview,134,138,141"Perannum,"105

Post-closingconditions,22 Powerandauthorityrepresentation,172–173,225 Powerofattorney,154 Preamble,seeWhereasClause Precedents,42–43 Precision,69–70 Prepositions Useof,257

Projections Covenanttodeliver,189

Representationasto,182"Promptly,"93

"Prospects" Asacomponentofmaterialadverseeffect,87

Provisos,97

Incorrectuseof,97Purchasemoneyfinancing,197

Liencovenantexception,201

R

Reasonableefforts,60,90,257 Reasonableness,88–89 Modifyingaparty’sdiscretion,89

Modifying"informandsubstancesatisfactory,"93–94 Useinconditionsprecedent,57Recital,seeWhereasClause

Refinancing Exceptiontodebtcovenant,200

Remedies,19,241–243 Acceleration,26–27

Exercisableonlyupontheoccurrenceandduringthecontinuanceofaneventofdefault,114

Graceperiods,29 Inacquisitionagreements,241–242 Indemnification,27,242–243 Liquidateddamages,28 Termination,26,241–242 Triggeringevents,24–25Representations,9–15

Asaresponsetotheruleofcaveatemptor,10–11 Asariskallocationmechanism,11 Astothecontract,11,51–52 Enforceability,176

Executionanddelivery,174 Governmentalapprovals,175 Necessaryaction,49,173 Noconflict,50,174–175,224–225 Organization,49,172 Powerandauthority,49,172,223Astotheparties,12–13

Astosubjectmatter,12 Bringdowns,14–15 Bestofknowledgequalification,10 Client’sreview,47 Comparedtowarranties,9 Credit-related,181–186 Disclosureschedules,52–54,110,221–222 Exceptions,13 Givingrisetodisclosure,222 Inacquisitionagreements,220–229 Increditagreements,181–186 Knowledgequalification,91,184 Materialityqualification,222 Mergerclause,15

Survival,15 Trueandcompletedisclosure,185"Respectively,"116

Restrictedpaymentscovenant,120–121,208–209 Restrictedpaymentsbasket,209 Reviewofcontracts,52,118–142 Degreesofcertainty,128–130

Duediligence,130–142 Identifyingtherightcontracts,118–119 Inconnectionwithalegalopinion,129

Issuescoveredbymorethanoneprovision,120 Levelsofreview,125–130 Necessityofreviewingthedefinitions,121 Scope,120 Timingissues,123Riders,44,48,50

S

Sale-leasebacks,207 Schedules,seeDisclosureschedules Sellernote,205 Severabilityclause,250 Signatureblocks,155 Simplicity,74–78 Standstill,145 Stockacquisitionsvs.assetacquisitions,220–221 "Substantialportion,"94 "Substantiallyall,"94 "Substantiallyintheformof,"92 Survivalofrepresentations,15

T

Tableofcontents,153,159,161–162 "Takenasawhole,"103–104 Example,104,183,186

Taxes Representationasto,185

Covenantasto,19410b-5representation,186

Titleofcontract,161

Titletoassets Representationasto,228

"Totheextentpermittedbylaw,"92 Tradepayables,196–197 Trailingfour-quartertests,217 Transactionswithaffiliatescovenants,120,135,212 Trueandcompletedisclosure Representationasto,186

Trumpingprovisions,97,100–101

U

Unnecessarywords,74,76–77

W

Waivers,143–150 Distinguishedfromamendmentsandconsents,144

Importanceoflocatingwhenreviewingacontract,119 Limitationonscopeof,249Whereasclause,160,164

Willfulmisconduct Asanexclusiontoanindemnityprovision,114–115

Wiretransfers,72,237 "Withoutduplication,"263 "Withoutlimitingthegeneralityoftheforegoing,"100 "Wouldreasonablybeexpectedto,"96,172 Wouldvs.could,96–97