Guidant/JJ Litigation

Dave Hoffman

Dave Hoffman is the Murray Shusterman Professor of Transactional and Business Law at Temple Law School. He specializes in law and psychology, contracts, and quantitative analysis of civil procedure. He currently teaches contracts, civil procedure, corporations, and law and economics.

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3 Responses

  1. I wouldn’t fault J&J or its counsel for not doing a better job protecting against this type of risk. Walk-away rights (provisions that dictate when a party can back out of a deal with no liability) in merger agreements are always subject to intense negotiation. Obviously, the acquiror would like a broad right, and the target would like a narrow right. Unless one side has superior bargaining power, the parties end up compromising on a “material adverse effect” or similar standard, as they did in the J&J/Guidant deal. There will then be intense negotiation as to how to define the standard, if at all. I suspect J&J did the best it could in the situation.

  2. Dave Hoffman says:

    Bill,

    I don’t disagree that walk-away rights are likely to be tightly contested, and it might make economic sense for the parties to externalize the costs of such a negotiation as much as possible onto the judicial system. Of course, J&J was at some risk if it pushed for more definition and failed to get it, to the extent that the court uses evidence of those terms non-inclusion as interpretative aids (notwithstanding a merger clause).

  3. I think you said it Dave — the transaction costs of negotiating a specific MAC/MAE clause are fairly high and most parties leave some ambiguity on the table to be fought out later if necessary. I think it’s interesting to remember that Enron & Dynegy had agreed to merge when things for Enron had taken a turn but before the final collapse and before Enron’s investigation began. Dynegy withdrew; Enron sued for billions; the two parties settled for $25 million. Dynegy knew that Enron was having troubles, but Dynegy apparently didn’t negotiate an iron-clad MAE clause, either.