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The Ins and “Outs” of Contractual Performance
in Today’s Economy
May 19, 2009
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Panelists
• Oliver J. ArmasPartner, Chadbourne & Parke LLP
• Thomas J. HallPartner, Chadbourne & Parke LLP
• Alex San MiguelGeneral Counsel, GLG Partners, Inc.
• Prof. Jack F. WilliamsManaging Director, BDO Consulting (BDO Seidman, LLP)
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Topics
•Force Majeure
•Changed Circumstances / MAC Clauses
•Drafting Tips
•Q&A
Force Majeure
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Example: Tsunami
“natural disaster such as but not limited to violent storm, cyclone, typhoon, hurricane, tornado, blizzard, earthquake, volcanic activity, landslide, tidal wave, tsunami, flood, damage or destruction by lightning, drought.”
ICC Force Majeure clause, Section 3 (e)
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The Financial Crisis: A Tsunami?
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The Financial Crisis: A Tsunami?
“We are in the midst of a once-in-a century credit tsunami. Central banks and governments are being required to take unprecedented measures.”
Alan Greenspan, October 23, 2008
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And thus Force Majeure?
“Based on the limited information before the court, this year’s credit ‘tsunami’ appears to have been the primary reason that Ambac’s credit rating fell.”
Hoosier Energy Rural Elec. Coop., Inc. v. John Hancock Life Ins. Co.,No. 1:08-cv-01560-DFH-DML (S.D. Ind. Nov. 25, 2008)
citing Alan Greenspan
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Hypo 1: Rock Meets Steel• 2004: 30 Rock Bank/Resolution
Steel — $500m financing • construction of steel plant
• outstanding debt due June 2009
• no force majeure or MAC clause
• 2009: financial crisis • demand/prices for steel plummet
• earnings well below expected level
• insufficient funds to cover balance outstanding
• banks demand guaranty from corporate parent and delay of next phase of construction
• ResolutionSteel/Ronald Remington sue 30 Rock Bank: “force majeure”
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Specialty Tyres of America v.CIT Group/Equipment Financing82 F.Supp. 2d 434 (W.D.Pa. 2000)
“A court cannot improve matters by intervention after the fact. It can only destabilize the institution of contract, increase risk and make parties worse off.”
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Force Majeure – NY Common Law
•Event• Destruction of means of performance
•Foreseeability• If foreseeable, risk allocated in contract
•Impossibility• Financial disadvantage not enough
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Hypo 2: The Trump Card
“(i) acts of declared or undeclared war by a foreign enemy or terrorist acts; (ii) riots, civil commotion, or insurrection; (iii) casualty or condemnation; (iv) fire, floods, hurricane, or other casualty; (v) earthquakes; … (xi) any other event or circumstance not within the reasonable control of Resolution Steel or any Trade Contractor. . . .”
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Application of Impossibilityand Hardship Outside Of the U.S.
•Force Majeure – Impossibility• Remedy = suspension or termination
•Changed Circumstances – Hardship• Remedy = reformation
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Force Majeure – International Contracts
• Contract language
• Applicable law of the Contract• typical elements• unforseeable
• unavoidable
• external
• renders performance impossible (at all or for certain time)
• UN Convention on Contracts for the International Sale of Goods (“CISG,” “Vienna Convention”)• worldwide acceptance – 70+ states (not: UK, Brazil, India)
• applies to international sale of goods
• info: www.cisg.law.pace.edu
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Force Majeure – CISG (Article 79)
•Party not liable for failure to perform if due to an impediment• beyond his control
• that he could not have reasonably foreseen or
• that he could have avoided or overcome
•Remedy = exemption for period while impediment exists
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Changed Circumstances – Hardship
•Does CISG address “hardship”?
•How will a court or arbitral tribunal fill the gap?• Applicable law of the contract
• lex mercatoria• International Institute for the Unification of Private Law (UNIDROIT)
Principles of International Commercial Contracts (2004)
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Hardship – Unidroit Principles
Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship.
Article 6.2.1 (Contract to be observed)
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Hardship – Unidroit PrinciplesHardship alters equilibrium of the contract
• because cost has increased; or
• because value has diminished
and
• events occur after conclusion of contract,
• were not reasonably foreseeable,
• beyond control of disadvantaged party, and
• risk was not assumed.
Article 6.2.2 (Definition of hardship)
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Hardship – Unidroit Principles• In case of hardship, disadvantaged party• entitled to request renegotiations• but cannot withhold performance
• If no agreement within reasonable time, either party may resort to “court”
• If the court finds hardship it may, if reasonable,• terminate contract, or• adapt contract with a view to restoring
equilibrium
Article 6.2.3 (Effects of hardship)
MAC Clauses
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Hypo 3: Heavy Metals – Amalgamated? • Resolution Steel, Quality Copper agree
to merge
“Material Adverse Change … in the condition (financial or otherwise), business, assets, liabilities or results of operations … taken as a whole… .”
• After signing:• production costs ↑, demand ↓
• historic earnings ↓ 64%
• projected earnings ↓ 33%
• news: inexpensive synthetic copper
• Resolution Steel refuses to close transaction
• Quality Copper files suit seeking specific performance
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IBP v. Tyson Foods789 A.2d 14 (Del. Ch. 2001)
• Party seeking to terminate agreement has burden of proving that MAC has occurred
• MAC closing condition protects acquirer from• unknown events that
• substantially threaten target’s overall earning potential
• in durationally significant manner
See also Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008)
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Drafting Tips
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Practical Guidance
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CLE Certificate
Your Code:
051909
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Drafting Force Majeure Clauses
• Two common forms: open and closed• Open clause: general terms
• Closed clause: specifies exactly what incidents constitute a force majeure event
• International Chamber of Commerce (ICC) Force Majeure Clause (2003)
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Drafting Force Majeure Clauses
•Tasks• foresee the unforeseeable
• predict the unpredictable
• define purpose of contract (frustration)
•Deal Points• “Neither party shall be liable…”
• “…including but not limited to…”
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Traditional MAC (T-MAC) Clause
“‘Material adverse change’ means any material adverse change in the business, results of operations, assets, liabilities, or financial results of operations of the Seller and its subsidiaries.”
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MOD-MAC Example“Material Adverse Effect” means, with respect to the Company, an effect, event, development or change that is materially adverse to the business, results of operations or financial condition of the Company and the Company Subsidiaries, taken as a whole; provided, however, that in no event shall any of the following, alone or in combination, be deemed to constitute, nor shall any of the following be taken into account in determining whether there has been, a Material Adverse Effect: (a) a decrease in the market price or trading volume of Company Common Shares (but not any effect, event, development or change underlying such decrease to the extent that such effect, event, development or change would otherwise constitute a Material Adverse Effect); (b) (i) changes in conditions in the U.S. or global economy or capital or financial markets generally, including changes in interest or exchange rates; (ii) changes in applicable Law or general legal, tax, regulatory or political conditions of a type and scope that, as of the date of this Agreement, could reasonably be expected to occur, based on information that is generally available to the public or has been Previously Disclosed; or (iii) changes generally affecting the industry in which the Company and the Company Subsidiaries operate; provided, in the case of clause (i), (ii) or (iii), that such changes do not disproportionately affect the Company and the Company Subsidiaries as compared to other companies operating in the industry in which the Company and the Company Subsidiaries operate; (c) changes in GAAP; (d) the negotiation, execution, announcement or pendency of this Agreement or the transactions contemplated hereby or the consummation of the transactions contemplated by this Agreement, including the impact thereof on relationships, contractual or otherwise, with customers, suppliers, vendors, lenders, mortgage brokers, investors, venture partners or employees; (e) earthquakes, hurricanes, floods, or other natural disasters; (f) any affirmative action knowingly taken by Parent or Purchaser that could reasonably be expected to give rise to a Material Adverse Effect (without giving effect to this clause (f) in the definition thereof); (g) any action taken by the Company at the request or with the express consent of any of the Buyer Parties; (h) failure by the Company or the Company Subsidiaries to meet any projections, estimates or budgets for any period prior to, on or after the dates of this Agreement (but not any effect, event, development or change underlying such failure to the extent such effect, event, development or change would otherwise constitute a Material Adverse Effect); (i) any deterioration in the business, results of operations, financial condition, liquidity, stockholders’ equity and/or prospects of the Company and/or the Company Subsidiaries substantially resulting from circumstances or conditions existing as of the date of this Agreement that were generally publicly known as of the date of this Agreement or that were Previously Disclosed; (j) any litigation or regulatory proceeding set forth in Section 5.09 of the Company Disclosure Schedule (but only to the extent of the specific claims and allegations comprising such litigation or regulatory proceeding existing as of the date of this Agreement; and (k) any action, claim, audit, arbitration, mediation, investigation, proceeding or other legal proceeding (in each case whether threatened, pending or otherwise), or any penalties, sanctions, fines, injunctive relief, remediation or any other civil or criminal sanction solely resulting from, relating to or arising out of the failure by either the Company or the Reporting Subsidiary to file in a timely manner its Annual Report on Form 10-K for the fiscal year ended December 31, 2006, its Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, and/or the Quarterly Report on Form 10-Q for the second and third quarters of 2007.
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Traditional MAC (T-MAC) Clause:Points of Contention
• Instead of “would have”:• “would reasonably likely to have”• “would be reasonably expected to have”• “could reasonably be expected to have”• “insofar as can reasonably be foreseen, is likely to result in”
• Instead of “material adverse change”: “material adverse effect”
•Change perspective to “a reasonable person in the Purchaser’s position”
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Empirical Research Results– MAC Exceptions
Approx. 821 randomly selected M&A agreements (2007-2008) – Changes not constituting a MAC:
• 84% - economy or business in general
• 76% - conditions of specific industry
• 74% - announcement of the transaction
• 65% - GAAP
• 64% - law
• 58% - securities market
• 41% - political environment
• 40% - trading volume/price of target stock
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Empirical Research Results– MAC ElementsApprox. 821 randomly selected M&A agreements (2007-2008)
• 100% had a MAC clause
• 98% defined key terms
• 95% referenced “business, operations, or financial condition of the target”
• 88% defined “material”
• 77% tied MAC to perspective of purchaser
• 55% referenced seller’s ability to close transaction
• 28% referenced buyer’s ability to close transaction
• 6% used specific dollar thresholds to determine materiality of losses during interim period
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Modern MAC (Mod-MAC) Clause
• Intensely negotiated
•Rule-based system, very detailed
•Used in litigation more as excuse for non-performance and less as leveraging tool to re-trade the deal
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Thank you.
Questions?
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ContactJ. Allen Miller (212) 408-5454
Oliver J. Armas (212) [email protected]
Thomas J. Hall (212) [email protected]
Alex San Miguel (212) [email protected]
Prof. Jack F. Williams (404) [email protected]
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Download
For a copy of this presentation,please go to
www.chadbourne.com/events/2009/insandouts/
Disclaimer
These materials may constitute Attorney Advertising in some jurisdictions. Prior results do not guarantee a similar outcome.
This information has been provided for general information purposes only. It does not constitute the legal advice of Chadbourne & Parke LLP or BDO Consulting/BDO Seidman, LLP and it is not a substitute for fact specific legal counsel.
