Comments on: Guidant/JJ Litigation http://www.concurringopinions.com/archives/2005/11/guidantjj_litig_1.html The Law, the Universe, and Everything Tue, 14 Feb 2012 11:44:40 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: Christine Hurt http://www.concurringopinions.com/archives/2005/11/guidantjj_litig_1.html/comment-page-1#comment-62272 Christine Hurt Tue, 08 Nov 2005 21:29:11 +0000 http://www.solove.org/archives/2005/11/guidantjj-litigation.html#comment-62272 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. 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.

]]> By: Dave Hoffman http://www.concurringopinions.com/archives/2005/11/guidantjj_litig_1.html/comment-page-1#comment-62271 Dave Hoffman Tue, 08 Nov 2005 20:19:26 +0000 http://www.solove.org/archives/2005/11/guidantjj-litigation.html#comment-62271 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). 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).

]]> By: Bill Sjostrom http://www.concurringopinions.com/archives/2005/11/guidantjj_litig_1.html/comment-page-1#comment-62270 Bill Sjostrom Tue, 08 Nov 2005 19:48:17 +0000 http://www.solove.org/archives/2005/11/guidantjj-litigation.html#comment-62270 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. 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.

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