The Cerberus Case and Lessons in Law, Society, and Language
posted by Jeffrey Lipshaw
Over in the M&A world (that’s mergers and acquisitions for all you non-corporate types), there’s a recent decision from the Delaware Chancery Court, written by Chancellor William Chandler, that is getting a fair bit of play in the blogosphere, including from my friends Larry Ribstein and Steve Davidoff.
One of the reasons I love complex acquisition agreements as the subject of contract theory is that, like life, they are incredibly complex. No mere agreement to buy 100 bushels of wheat in thirty days at X dollars per bushel here! No, the agreements attempt to map a highly contingent future, one in which the environment or the businesses can change, financing may not be available, bet the company lawsuits can be filed, shareholder actions begun, and so on. I’ve argued before that language is often a blunt instrument used to capture the fine lines of an understanding.
I’ve not fully studied the opinion, but it is a fine piece of analysis, even where in very subtle ways I disagree with it. And with all due respect to Larry Ribstein and Steve Davidoff, I think Chancellor Chandler has a better feel for the limitations of law and language. Yes, this could be “sloppy drafting,” but as I alluded in an earlier post, lawyers, for all their pretensions of being at the center of a deal are often flies swarming around the galloping steed that is the deal itself, and the focus on the contract as the source of the problem is merely a fly’s-eye view.
In simple terms, what is the issue? Section 9.10 of the agreement says that the merger target (i.e. the company whose shareholders are going to walk away with cash – let’s call it the seller for ease of reference) has the right to enforce the agreement by injunctive relief for specific performance for a whole bunch of things, including forcing the deal to close. But Section 9.10 says it is “subject to” Section 8.2, which says “notwithstanding” any other provsion in the agreement, the seller’s sole remedy if the buyer walks away is a $100 million termination fee. The buyer walks away, and the issue is simply whether it must close under 9.10 or can walk away for a price of $100 million under 8.2. Got it?
Chancellor Chandler’s opinion says (i) the language is ambiguous on the walk-away right, but (ii) the circumstances of the negotiation make it clear that the seller understood its rights were limited to the $100 million walk-away fee. The crux of the ambiguity (and the source of the “sloppy drafting” criticism) is the fact that one provision (the “left hand”) appears to be taking away what another provision (the “right hand”) is giving. Why would that happen? And, indeed, there was testimony to the effect that it would have been clearer if one of the provisions had been deleted rather than having this “subject to/notwithstanding” trumpery.
I have read the two provisions, and I don’t think they are ambiguous. From the standpoint of the logical construction, the contract is doubly clear that the walk-away right dominates over the injunctive right. This, it seems to me, is as close as we come in the law to a semantical paradox, like the Liar’s Paradox (“this sentence is false”). The problem is that the grammar and syntax are absolute clear, but we rebel against the contradictory content. In short, why is it there? Try this: “Underlying the semantical paradoxes is our naive intuition that ‘paradoxical sentences because they are not ungrammatical, vague, or sortally suspect and encompass no false presuppositions, must yield statements when used.’” (Oren Perez, “Law in the Air: A Prologue to the World of Legal Paradoxes,” in Perez & Teubner, Paradoxes and Inconsistencies in the Law, quoting L. Goldstein, “A Unified Solution to Some Paradoxes,” in Proceedings of the Aristotelian Society.)
Perhaps it is because I have actually been in the shoes of an M&A lawyer trying to craft a linguistic solution, or have been the client of M&A lawyers trying to craft linguistic solutions for me, that I chuckle at the charges of “sloppy drafting” as though lawyers have the absolute power (a reductive, rational, scientific, but unrealistic assumption) to control all outcomes through language. One of my rules of thumb in negotiating language was to change as little as possible to achieve the desired outcome. That’s an art not a science, and Cerberus’ lawyer’s judgment ultimately bore out in this case. Who knows what would have happened if he tried to make the change by deleting rather than trumping?
Moreover, we don’t know what the lawyers were saying to their clients. We do know from the testimony that the seller’s lawyers understood that the walk-away right essentially created a $100 million option. How do we know that the following conversation did not occur in the seller’s executive suite or boardroom – “look, we aren’t going to do much better than this – we will be able to make an argument there’s an ambiguity on the walk-away right, but Cerberus is probably going to win it in the end. On the other hand, the worst thing that happens if we lose is that we get $100 million, and that should be a sufficient litigation war chest if we want to pursue an injunction.”
My point is that the contract, as important as it is, is only a piece of the entire social system that is a complex business acquisition. There can be sloppy drafting, but that’s an easy default.
For those interested, I’ve addressed this previously in two respects: (a) the illusion that there was an original mutual intention of the parties when a contract is later capable of colorable conflicting interpretations (The Bewitchment of Intelligence: Language and Ex Post Illusions of Intention, 78 Temple L. Rev. 99 (2005), and (b) the lawyers’ illusion that a contract is the deal (i.e. the game), when in fact it is just a model of the deal.