In Business Deals, the Details Matter

January 7, 2020 | Evan H. Krinick | Commercial Litigation | Corporate

The “devil is in the details.”

How many times has that truism been proven true? Like when your high school child tells you that he and his friends are off to Mexico for spring break. Or when a travel agent lets you in on the deal of a lifetime for an all-inclusive cruise to a Caribbean paradise.

Understanding the details in those situations is important.

To be sure, the same is true during business negotiations. As soon as the principals in a business deal reach some sort of understanding as to the major points of interest, the attorneys who will be responsible for drafting the documents will immediately warn their clients that while it all seems good in theory, the need to document the deal will expose the details that will present the larger challenge to success.

Oftentimes, the details that may derail the deal involve the very substance of the transaction. For example, consider a situation where four individuals own 25 percent of a company. Three of the owners agree with the fourth owner to buy out his interest based on a valuation of the business. Sounds simple and fair. But the purchase price will be different if the valuation is 25 percent of the value of the whole company versus the value of a 25 percent interest in the company.

The details also include the “boilerplate” miscellaneous provisions that are in every contract and sometimes receive inadequate attention.

Those standard provisions discuss issues such as: 1) whether any disputes must be arbitrated, and if so, which types of dispute and the forum and rules for arbitration; 2) if there is not an arbitration clause, then the agreed-upon venue (state court or federal court) and location of any lawsuit; 3) the absence of third-party beneficiaries with rights to enforce the agreement; 4) the absence of additional written agreements and the lack of any oral agreements; 5) the rules of interpretation of the agreement, among others.

A significant provision, often overlooked, is the choice of which state’s law will govern any dispute. This provision was at the heart of a recent decision in November by the Appellate Division. In this case, there were numerous related agreements and some provided for the application of New York law and others provided for the application of Delaware law.

The dispute concerned the applicability of the attorney-client privilege to documents of an entity that was purchased by another entity. Under New York law, the attorney-client privilege regarding pre-merger communications between an attorney and his/her client that are related to a business merger does not pass fully to the new or surviving company but remains with the former shareholders of the prior company. Delaware has a statute that provides that the rights to the privileged communications between a predecessor corporation and counsel pass to the surviving corporation.

Due to the conflicting provisions in the agreements, the appellate court looked to other factors – where the communications were made, the location of the people engaged in the communications and the subject matter of the communications – to conclude that New York law applied.

In another case, decided this past October, a court dismissed a lawsuit brought in New York because the forum selection clause in the Manufacturing and Supply Agreement (MSA) mandated that the exclusive place of jurisdiction under the agreement shall be Berlin. The attempt to litigate the dispute in New York, based on the forum selection clause of another agreement which incorporated the MSA was rejected. I hear Berlin is lovely this time of year.

The details matter in all parts of your contracts, including the misnamed “boilerplate” provisions. And also, and especially, before your teenager goes to Mexico with his friends.

This article appeared in the January 3, 2020, issue of Long Island Business News. ©2020 Long Island Business News.

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