Transactional Law: Thinking like a transactional lawyer

Transcription

1 Transactional Law: Thinking like a transactional lawyer Dr William Higgs Barrister, Elizabeth Street Chambers & Adjunct Fellow, Western Sydney University

2 Transactional lawyers Transactional lawyers are principally involved in assisting their clients in structuring and executing financing transactions. Transactional lawyers are also sometimes referred to as deal lawyers

3 Transactional lawyers The role of a transactional lawyer is fundamentally different to the role of a litigator. At law school you were taught to think like a litigator. At law school the emphasis was on learning the law, which involved reading and interpreting case law and legislation. What you were not taught at law school is what transactional lawyers do and how to become a competent transactional lawyer.

4 Transactional lawyers Most transactional lawyers learn how to be transactional lawyers while working as a lawyer in a commercial team of a law firm or in an in-house transactional legal team. Essentially, most transactional lawyers learn how to become transactional lawyers by trial and error. Intrinsically, this is not the best way to learn anything. In this way the learning curve to becoming a transactional lawyer is a steep one.

5 Transactional lawyers That s why we have this new subject Aim is to teach you things you didn t know before Aim is to prepare you for practice So, the first time you have to draft something is not at work.

6 Transactional Lawyer As a litigator you read a contract boring! The difference is that if you are a transactional lawyer, you don't encounter a contract in its final written form. You have to create it. It comes to life in your practice as a term sheet a set of business terms that the parties to the deal have agreed to already and that you need to translate into one of those full-blown contracts that someone is going to read and review before signing.

7 Translating So, our initial task as transactional lawyers is to translate these business terms into legal concepts into contract concepts. Business terms speak & engage to your client Unfiltered Take notes What I'm going to go over with you is what those contract concepts are and how to recognize them in business terms.

8 Contract Concepts The key contract concepts are representations, warranties, covenants, rights, conditions, discretionary authority, and declarations. Representations warranties covenants rights conditions discretionary authority declarations

9 Translating If you can master the act and process of translating, you are well on your way to becoming a competent transactional lawyer. It is important to stress at this stage that the task of translating a client s commercial goals into contract concepts can be learned, much like any other skill. You do not need to be a natural. It is fair to say that some transactional lawyers are better than others when it comes to undertaking this task. The reason why some transactional lawyers are better than others is largely down to experience, so the quicker you can acquire and develop the skill of translating, the quicker you become proficient at it. The process of translating is one of the key foundation skills of a transactional lawyer.

10 Translating You must ask yourself the following question: what does a client hope to achieve by structuring and executing a proposed financing transaction? The analytical skill required of you as a transactional lawyer is the ability to identify those contract concepts that reflect a client s commercial goals and, in so doing, ensure that a client s commercial goals are achieved

11 Representations and Warranties A representation is a party's statement of fact as of a moment in time intended to induce reliance by a second party, and based upon that reliance, intended to cause the second party to take an action. Example of a representation of an owner of a car to a potential purchaser: The car has been driven 50,000 miles. or I represent that the car has been driven 50,000 miles. This statement is made today (a moment in time) by the owner to induce reliance by another party (to induce the potential purchaser to rely), and based upon that reliance, to cause the potential purchaser to take an action (to purchase the car).

12 Representations and Warranties A warranty is a contractual assurance or promise. Example of a representation and warranty of an owner of a car to a potential purchaser: I represent and warrant that the car has been driven 50,000 miles.

13 Representations and Warranties (cont) A representation is a statement of fact, which is relied upon by a buyer and induces him to enter into a contract. Where a false representation has been made (misrepresentation), a contract may be voidable (rescission): the buyer was misled into making the contract, may set it aside and be put back in the position he was in before the contract, as though it had never existed. A warranty is a term of the contract. The remedy for breach of a contract term is to put the wronged party into the position that he would have been, had the breached term been performed correctly. If the breach is fundamental to the contract (repudiation), the wronged party may also have the right to terminate the contract, with damages assessed at the point of termination. However, the contract is not undone as though it never existed.

14 Representations and Warranties (cont) damages for a tortious misrepresentation that induced the contract are calculated to put the parties back to their pre-contract positions whereas damages for breach of a contractual warranty are to be calculated so as to put the claimant in the position it would have been in but for the breach, that is, as if the warranty had in fact been true rather than untrue the books and records fair and accurate rather than improperly inflated

15 Representations and Warranties (cont) If represents and warrants. Every statement that is a representation is simultaneously a warranty. The same words are used to create both concepts. The classic way of creating representations and warranties is to use language along the following lines: The Borrower represents and warrants to the Bank as follows:

16 Differences between representations and warranties features that are commonly, but unwisely, glossed over when drafting agreements

17 Representations and Warranties (cont) Be careful! Sycamore Bidco Ltd v Breslin [2012] EWHC 3443 (Ch) Judgment dated 30 November The case in question concerned the acquisition of the entire issued share capital of Gissings Group Limited ( GGL ) by Sycamore Bidco Limited ( Sycamore ), a special purpose vehicle formed specifically for the acquisition, of which the majority shareholder was a private equity house. After completion of the acquisition of GGL, Sycamore claimed that there were accounting errors in GGL s pre-transaction audited accounts ( Accounts ). The Accounts were subject to a number of express warranties set out in the share purchase agreement ( SPA ) entered into between (1) Sycamore and (2) Mr Breslin and Mr Dawson ( Sellers ). Sycamore sued the Sellers for breach of warranty and also asserted, in the alternative, that each breached warranty also constituted a false representation which had induced Sycamore to acquire GGL. On this alternative argument, Sycamore sought damages for misrepresentation. The High Court (UK) held that, on the correct interpretation of the SPA, the express warranties were only warranties and did not comprise representations as such.

18 Representations and Warranties (cont) On the particular facts of this case, the judge provided that the following points were persuasive in forming his decision: the drafting of the SPA drew clear distinctions between representations and warranties within that document and the respective terms were each referred to in separate clauses of the SPA; the language in the warranty clause contained words of warranty and not of representation. Accordingly, it was not appropriate to extend the warranty wording beyond its natural meaning on the basis that the subject matter of the warranty in question was also capable of being a representation; the disclosure letter referred to within the SPA distinguished between representations and warranties by listing them separately and providing that: "The disclosure of any matter shall not imply any representation, warranty or undertaking not expressly given in the Agreement "; and the limitation of liability clause within the SPA referred to the Warranties only and not representations, which the judge considered would not have been commercial or intended if the warranties were indeed understood to be representations.

19 Representations and Warranties (cont) The loss arising from the breaches of warranty was held to be the difference between the value that GGL would have had if the relevant warranties had been true (being the purchase price of 16.75m paid by Sycamore) and the actual value of GGL as at the date of the SPA (which the judge found to be 12m). It should be noted that the amount of damages awarded for breach of warranty was considerably less than the amount which might have been due for a successful claim for misrepresentation ( million).

20 Representations and Warranties (cont) Sycamore argued under its rejected claim for misrepresentation that, if it had been aware of the target company s true financial position, then it simply would not have bought the company and demanded repayment of the entire 16 million it had paid. In awarding Sycamore only damages for breach of warranty, Mr. Justice Mann based his calculation on the difference between the amount Sycamore paid for the company and what the company was actually worth, or what he found Sycamore would have paid had the warranty of financial condition been true. That came to around 4.75 million.

21 Representations and Warranties (cont) This case makes it clear that the question of whether a statement is a representation, a warranty, or both, is a matter of contractual interpretation on the wording and context of the relevant contract. Given the differing remedies for breach of representation and warranty respectively, it is important that contracting parties carefully consider their intentions. To avoid pre contractual representations creeping into the agreement use an entire agreement clause.

22 Representations and Warranties (cont) Representations and warranties are risk allocation mechanisms. There are flat representations and qualified representations. A flat representation is a statement that is posited as an absolute, without any kind of wiggle room. For example: The Seller represents and warrants that the car has been driven 50,000 miles. A flat representation is the most risky type of representation for the person making the statement. Any error results in the recipient of the representation having a claim for damages or other appropriate remedy.

23 Representations and warranties as risk allocation mechanisms

24 Attitude One party have an incentive to keep its representations and warranties as narrowly drawn as possible; Other party or counterparty wants those representations and warranties to cast a wide net; absolute versus qualified tension. qualify the representations and warranties to its knowledge, materiality and disclosure unqualified (i.e., flat representations and warranties, not qualified by knowledge, materiality and disclosure or anything else). Another issue is whether the representations and warranties should be repeated and if so, which representations and warranties should be made on the date of signing and which ones can be repeated.

25 Attitude One party have an incentive to keep its representations and warranties as narrowly drawn as possible; Other party or counterparty wants those representations and warranties to cast a wide net; absolute versus qualified tension. qualify the representations and warranties to its knowledge, materiality and disclosure unqualified (i.e., flat representations and warranties, not qualified by knowledge, materiality and disclosure or anything else). Another issue is whether the representations and warranties should be repeated and if so, which representations and warranties should be made on the date of signing and which ones can be repeated.

26 Representations and Warranties (cont) A qualified representation is a statement that moderates the flat statement. For example: The Seller represents and warrants that the car has been driven approximately 50,000 miles. The Seller represents and warrants that there is no material default under any contract to which Seller is a party. By adding the qualifier "approximately" to the representation, the Seller has given itself some leeway. Also, a small, immaterial error will not result in a misrepresentation. Thus the Sellers risk has decreased and the Buyer's risk has increased.

27 Representations and Warranties (cont) Representations and warranties may be drafted with respect to the present or past. They should not however, be drafted with respect to the future for two reasons. A representation and warranty with respect to the future is, in reality, a disguised covenant and should be drafted as a covenant. The benefit of the covenant is that it proffers the possibility of an additional remedy beyond damages: specific performance. The second reason that representations and warranties should not be drafted with respect to the future is that the courts will not give them effect. The cases hold that representations or warranties as to the future are merely the opinion of the maker of the statements.

28 Knowledge Qualifiers No litigation is pending or threatened against the Seller. [FLAT] Except as set forth in Schedule 3.03, no litigation is pending or threatened against the Seller. Except as set forth in Schedule 3.03, no litigation is pending or, to the knowledge of the Seller, threatened against the Seller. Except as set forth in Schedule 3.03, no litigation is pending or, to the knowledge of any of the Seller's officers, threatened against the Seller. Except as set forth in Schedule 3.03, no litigation is pending or, to the knowledge of any of the Seller's three executive officers, threatened against the Seller.

29 Knowledge Qualifiers Except as set forth in Schedule 3.03, no litigation is pending or, to the knowledge of any of the Seller's three executive officers, threatened against the Seller. For the purposes of this provision, "knowledge" means (i) each executive officer's actual knowledge; and (ii) the knowledge that each executive officer should have had after diligent investigation. Except as set forth in Schedule 3.03, the Seller does not know, and has no reasonable grounds to know, of any basis for assertion against it of any claim or liability. Whenever the Seller makes a representation and warranty "to its knowledge," the Seller has inquired of one or more of the following personnel regarding the matters that the representation and warranty covers: the President, the Vice President and General Manager, the Vice President of Purchasing, the Secretary, and the Treasurer.

30 Knowledge A representation and warranty may be qualified by reference to its own knowledge by using language such as to the best of the borrower s knowledge, information and belief or (and this is thought to carry a lower degree of liability) so far as the borrower is aware so far as the borrower is aware having made reasonable enquiry to the best of the borrower s knowledge, information and belief having made reasonable enquiry

31 Some but not all portions qualified by knowledge Sometimes, a representation and warranty will have some but not all portions qualified by knowledge. Three examples follow: No third party has made any claim asserting that any Intellectual Property Rights owned or held by the Company should be transferred to or placed under the control of a third party, nor has any third party made a request or demand that any such transfer be made by the Company other than in an arm's length transaction and in exchange for full and fair market value; and to the Seller's knowledge, the Intellectual Property Rights owned by or licensed to the Company have not been infringed, misappropriated or conflicted by other Persons. What do we think of this? Why has this been qualified?

32 Some but not all portions qualified by knowledge Sometimes, a representation and warranty will have some but not all portions qualified by knowledge. No notices have been received by and no claims have been filed against the Company alleging a violation of any applicable laws, ordinances, codes, rules, requirements or regulations, and, to the knowledge of the Seller, the Company has not been subject to any adverse inspection, finding, investigation, penalty assessment, audit or other compliance or enforcement action. What do we think of this? Why has this been qualified?

33 Some but not all portions qualified by knowledge Sometimes, a representation and warranty will have some but not all portions qualified by knowledge. There are no (and, during the five years preceding the date hereof, there have not been any) actions, suits, proceedings, orders, investigations or claims pending or, to the Seller's knowledge, threatened against or affecting the Company or the Assets (or to the Seller's knowledge, pending or threatened against or affecting any of the officers, directors or employees of the Company with respect to their business activities). What do we think of this? Why has this been qualified?

34 Example (i) each of the Issuer and its subsidiaries is and has been in compliance with all applicable anti-money laundering laws, rules and regulations, including but not limited to applicable financial record keeping and reporting requirements in Hong Kong and the PRC and all jurisdictions in which the Issuer and its subsidiaries conduct business (collectively, Money Laundering Laws); and (ii) no action, suit or proceeding by or before any court or agency, authority or body or any arbitrator involving the Issuer and its subsidiaries with respect to Money Laundering Laws is pending or to the best of its knowledge (having made reasonable enquiries) no such actions, suits or proceedings are threatened or contemplated; and

35 Example the Issuer or any of its subsidiaries are in compliance in all material respects with all applicable Environmental Laws and, to the best of the Issuer's knowledge, the Issuer or any of its subsidiaries (i) have not received notice of any actual or potential liability, (ii) are not the subject of any investigation, (iii) are not a party to or affected by any pending or threatened action, suit or proceeding, (iv) are not bound by any judgment, decree or order, (v) have not entered into any agreement, in each case relating to any alleged violation of any applicable

36 Example the Issuer or any of its subsidiaries, or any director or officer of the Issuer or any of its subsidiaries or, to the best of its knowledge, any employee or agent have (i) not used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity or made any direct or indirect unlawful payment to any government official or employee from corporate funds, (ii) to the best of its knowledge, not violated or is in violation of any applicable anti-bribery legislation (collectively, the Anti-Bribery Laws);

37 Who s knowledge A buyer's agreement that a particular seller representation and warranty will be qualified by knowledge usually is not the end of the discussion. The parties then will negotiate the scope of the seller's knowledge. In general, there are two principal components to this discussion: (i) first, whether the seller's knowledge is actual knowledge only, or whether it includes constructive knowledge as well; and (ii) second, whether the seller's knowledge is to be tied to the knowledge of specifically identified persons (or categories of persons).

38 Actual Knowledge means, when referring to the knowledge of the Seller, or any similar phrase or qualification based on knowledge, the actual and conscious knowledge (but excluding any constructive knowledge) of.

39 Constructive knowledge Constructive knowledge is, in effect, imputed knowledge in this context, so there are different variations of this concept. Constructive knowledge could be defined, for example, as the knowledge that any given individual would be expected to learn after some reasonable level of diligence, or what that individual would be expected to know in his or her capacity as an officer, director, or employee, etc. (as applicable) of the target. For example: Knowledge means, when referring to the knowledge of the Seller, or any similar phrase or qualification based on knowledge, the actual knowledge of [named individuals], and the knowledge that each such person would have reasonably obtained after making due and appropriate inquiry with respect to the particular matter in question.

40 Constructive knowledge Knowledge Group (specific people) Knowledge means, when referring to the knowledge of the Seller, or any similar phrase or qualification based on knowledge, the actual knowledge of [named individuals], and the knowledge that each such person would have reasonably obtained after making due and appropriate inquiry with respect to the particular matter in question, including, without limitation, inquiry of [employee X with respect to general topic Y, etc.]. Knowledge Group (officers) Knowledge means, when referring to the knowledge of the Seller, or any similar phrase or qualification based on knowledge, the actual knowledge of [named individuals], and the knowledge that each such person would have reasonably obtained in the performance of each such person's duties as [Chief Executive Officer, President, etc.] of the Company.

41 Constructive knowledge From a buyer's perspective, the knowledge group should include those individuals having control over, and in any event those most likely to have knowledge of relevant facts with respect to, the items covered by the relevant representations and warranties qualified by knowledge. In smaller, closely held corporations with a small group of shareholders active in the business, it may be appropriate to have all shareholders in the knowledge group. When the seller is a larger company with multiple operational functions, specific individuals might be included as to particular areas e.g., including the seller's human resources director as to the employment and HR representations only, the risk management director with respect to insurance, etc.

42 Materiality A representation and warranty may be qualified by reference to materiality. For example, in relation to the no litigation warranty even if the seller is not aware of any litigation, if the effect would be to prejudice its ability to perform its obligations, the buyer should be able to take action to recover. They seller is that a revised to attempt to qualify the representations and warranties on the basis of materiality say that, although the risk has occurred, it will only have consequences if the effect is material in adversely to affect the financial condition of the seller or its ability to perform its obligations. In this way the seller protected from the de-minimus breaches.

43 Disclosure A representation and warranty may be qualified by reference to disclosure. For example a representation and warranty may be premised with unless otherwise disclosed (pursuant to a disclosure leather) or as disclosed in the offering document. There will usually be a schedule to the Purchase Agreement setting out the disclosures ie disclosures against representations

44 Combination save as disclosed in the Offering Circulars or the PRC Legal Opinion, (i) neither the Issuer nor any of its subsidiaries are in breach of the terms of, or in default under, any instrument, agreement or order to which they are a party or by which they or their property or assets are bound and no event has occurred which, with the giving of notice or lapse of time or other condition, would constitute a default under any such instrument, agreement or order, in each case that would have a Material Adverse Effect; (ii) neither the Issuer or any of its subsidiaries are or have been engaged (whether as defendant or otherwise) in, nor has the Issuer knowledge of the existence of, any legal, governmental or administrative investigation, arbitration or proceeding which may have or have had, during the 12 months preceding the date of the Offering Circulars, significant effects on the financial position or profitability of the Issuer, nor as far as the Issuer is aware, is any such legal, governmental or administrative investigation, arbitration or proceeding pending or threatened; (iii) the Issuer or any of its subsidiaries have not taken any action nor, to the best of their knowledge or belief having made all reasonable enquiries, have any steps been taken or legal proceedings commenced for the winding up or dissolution of the Issuer or any of its subsidiaries;

45 Limitation of warranty claims Sale and purchase agreements. The Seller is not liable in respect of a Warranty Claim if the fact, matter or circumstance giving rise to the Warranty Claim: (a) is disclosed or described in [this agreement][any Transaction Document]; (b) is fairly disclosed in the Disclosure Letter][the Due Diligence Materials]; or (c) would have been disclosed to the Buyer had the Buyer conducted searches [2] Business Days before the date of this agreement of the public records maintained by ASIC in respect of the Seller and [insert details of other records actually searched by the Buyer].

46 Summary Buyer and seller will be expected to negotiate: (i) which seller representations and warranties are to be qualified by knowledge; (ii) how knowledge is to be defined (i.e., actual knowledge only, or actual and constructive knowledge); and (iii) who is in the knowledge group. As a general proposition (and there are always exceptions to reflect the particulars of any given transaction), knowledge qualifiers are usually most appropriate for facts or matters which are outside the seller's control or which cannot reasonably be determined through the seller's diligence for example, whether or not litigation is being threatened but not yet asserted in the form of a demand notice or complaint.

47 Representations and Warranties (cont) Representations and warranties usually survive for specifically negotiated time periods following the closing often months though certain fundamental representations (such as those relating to title etc.) often survive Capped to a finite amount; also minimum claim size Guaranteed and Indemnified by the party or some other party Secured or even collateralised

48 Covenants A covenant is a promise to do or not to do something. Covenants are another kind of risk allocation mechanism. They establish a standard of liability. That standard can change by changing the degree of obligation. The Seller shall maintain the equipment in good condition. The Seller shall maintain the equipment in good condition, ordinary wear and tear excepted. The Seller shall maintain the equipment in accordance with industry standards.

49 Covenants A covenant is a promise to do or not to do something. Covenants are another kind of risk allocation mechanism. They establish a standard of liability. That standard can change by changing the degree of obligation. The Seller shall maintain the equipment in good condition. The Seller shall maintain the equipment in good condition, ordinary wear and tear excepted. The Seller shall maintain the equipment in accordance with industry standards.

50 Covenants Active versus passive The Borrower shall pay interest to the Lender The interest shall be paid by the Borrower to the Lender Increases number of words Focuses reader s attention on interest rather than who has to pay it, so it de-emphasises the responsibility of the actor What s wrong with this? Advertisements shall be inserted into monthly circulars.

51 Covenants (cont) Purpose? Performance based obviously but can be an effective monitor in a financial sense of the creditworthiness of a business Covenants, if set appropriately and monitored regularly, can be an effective tool in highlighting early warning signs of increasing risk Covenants are designed to provide triggers that highlight potential problems well before the issues get to the point where they cannot be resolved and the business is left with little or no alternatives. Such as interest cover, debt service cover and asset/liability ratios

52 Covenants (cont) Remedies for breach of a covenant: Contract termination - Damages Equity Possibly specific performance Equity injunction

53 Summary of Australian approach to classification 3 types of term: 1. Condition (party wouldn t have entered contract without it) 2. Intermediate 3. Warranty In case of breach: 1. Condition = terminate and sue for damages 2. Intermediate (Major) = terminate and sue for damages 3. Intermediate (Minor) = sue for damages 4. Warranty = sue for damages

54 Rights A contract right flows from another party's duty to perform. It thus flows from a covenant The person to whom the performance is owed has a "right" to that performance. Therefore, when there is a duty, there is a correlative right Although there are often business and legal reasons to express a provision as a duty, the provision can be expressed as a right. For example: If the Seller paints the bedroom, the Seller is entitled to an increase in purchase price of $1000. (drafted as the Seller's right) If the Seller paints the bedroom, the Buyer shall pay an additional $1000 in purchase price. (drafted as the Buyer's duty) In both examples, the Seller is paid an additional $1000 upon the painting of the bedroom. The difference is the focus: the Seller's right to payment versus the Buyer's duty to pay.

55 Rights Is this a right or a duty? If the buyer fails to pay the purchase price for the aircraft the seller is entitled to keep the deposit In this instance the correlative duty would be the buyers obligation not to seek return of the deposit?

56 Conditions Precedent There are three types of conditions precedent: (1) A condition precedent is a state of facts that must exist before a party has an obligation to perform; for example, a condition precedent to the closing of an acquisition agreement or a drawdown notice under a loan for the bank to advance funds.

57 Conditions Precedent (2) A condition precedent is a state of facts that must exist before a party has a right. A contract right flows from another party's obligation to perform. The person to whom the performance is owed has a "right" to that performance. Therefore, when there is an obligation to perform, there is a correlative right. Each is the flip side of the other. Although there may be business and legal reasons to express a provision as an obligation, the provision can be expressed as a right If the Seller paints the bedroom, the Seller is entitled to an increase in purchase price of $1000. If the Seller paints the bedroom, the Buyer shall pay an additional $1000 in purchase price.

58 Conditions precedent (cont)_ The correct drafting is to ensure that the then statement encumpases an obligation to perform: If [condition satisfied or not] then [obligation is to do something] If the seller delivers to the aircraft the buyer must purchase.[correct] If the seller does not deliver the aircraft the buyer is not obliged to purchase.[wrong] The above formulation clarifies who has the obligation to do something and the conditions under which the obligation or duty is triggered

59 Conditions precedent (cont)_ Sometimes a condition can be used to trigger a right. We know this makes sense because a right is the opposite of a duty or an obligation to do something. If the seller delivers the aircraft with fresh paint, the buyer shall pay an additional $300 If the seller delivers the aircraft with fresh paint, the seller is entitled to an additional $300 Whether the language in the first or second versions is used the result is the same. As mentioned already, better is to state the condition to the obligation rather than the right

60 Conditions precedent (cont)_ (3) A condition precedent is a state of facts that must exist before a party may exercise discretion. A common example is that a borrower's default must exist under a credit agreement before a bank may exercise its remedies. Stated differently, once there is a default, a bank has the discretionary authority to exercise its remedies. It may choose not to. It may instead decide to waive the default. But the bank may not exercise any of its discretionary authority unless there has first been a default See Events of default next class in the Module on Lending where a lender may on the occurrence of certain events (conditions) accelerate the loan or call the amounts due under it due and payable.

61 Conditions Precedent There is actually one more Condition subsequent They are not really conditions at all but rather obligations to do some after a period of time has elapsed (hence they are not condition, as with the effluxion of time, the time will come) Registering security interests PPSR Delivering documents Registering documents with ASIC

62 Conditions precedent (cont)_ Whenever there is a condition precedent, it must be paired with an obligation (the covenant), a right, or discretionary authority. A condition precedent to an obligation and the obligation. A condition precedent to a right and the right. A condition precedent to discretionary authority and the discretionary authority.

63 Conditions precedent (cont)_ The proper way to draft a condition precedent to an obligation to perform is by using the verb "must." This rule is not universally applied. Instead, most drafters use the false imperative. All covenants must have been performed. All covenants shall have been performed.

64 Conditions precedent (cont)_ There is no one right way to draft a condition precedent to discretionary authority. If the condition precedent is couched as an if clause, it should be drafted in the present tense: If the Borrower fails to pay interest when due, the Bank may foreclose upon its security.

65 Discretionary Authority Discretionary authority gives its holder a choice. In the following example, a party may decide when to terminate the agreement. Discretionary authority is often used in this way. Either party may terminate this Agreement at any time by sending written notice to the other party. Discretionary authority is sometimes couched as permission to do something, often appearing as an exception to a prohibition The Borrower shall not invest in any Person, except the Borrower may invest in any wholly-owned subsidiary of the Borrower.

66 Discretionary Authority (cont) The exercise of discretion is often subject to a condition precedent having occurred. A classic example of the interplay between a condition precedent and discretionary authority occurs in a loan agreement. Imagine that Bob has taken out a mortgage to finance a house that he is buying. In one of the later clauses of his loan agreement with the bank, that agreement sets forth the remedies to which the bank is entitled upon an event of default: If there is an Event of Default, the Bank may accelerate the Loan and enforce its security upon its security [Bob's house]... Here, the Bank has no authority to accelerate the Loan and to enforce security unless there has been an Event of Default. Once that exists, the Bank must decide whether it wishes to accelerate the Loan and to enforce its security. The Bank is not required to do so. It has discretion. Alternatively, it could waive the default or grant Bob extra time to comply with the loan covenant.

67 Discretionary Authority (cont) Regardless of how a party exercises its discretionary authority, its exercise does not create a correlative duty in the other party. Other duties may flow from the exercise of discretionary authority, such as an obligation to pay penalty interest, but there is no duty that is the flip side of the discretionary authority. A person who has discretionary authority is sometimes said to have a privilege.

68 Declarations A declaration is a statement of fact to which the parties agree. The purchase price is $21 million (the "Purchase Price"). The parties agree on the fact but not necessarily on how it is going to be used. Some declarations have no substantive effect, except in conjunction with another provision; some have a substantive legal effect on their own. A party cannot sue on a declaration. There are no remedies associated with it.

69 Declarations The interest rate is 6% (the Interest Rate"). The example is a declarative sentence, in essence a definition. Standing by itself, the definition of Interest Rate has no substantive ramifications within the contract. Nobody is doing anything with or to it. It cannot be breached because neither party has any rights or duties with respect to a mere definition. Instead, the statement of Interest Rate must be kicked into action by its inclusion in another provision. For example: On each Interest Payment Date, the Borrower shall pay the Lender an amount equal to the Interest Rate multiplied by the Amount Outstanding. Only by being kicked into action does the Borrower have a duty to pay on each Interest Payment Date, and the Lender have the right to declare a breach upon the Borrower s failure to pay.

70 Declarations (cont) The governing law provision is a paradigmatic example of a declaration that has legal effect on its own. It is a statement of policy. It states what state's law will govern the contract Unlike definitions that must be kicked into action to serve a purpose within the contract, the governing law provision has a substantive effect by its mere inclusion in the contract. As with any other declaration, there are no remedies associated with it. The laws of New South Wales cover all matters arising under or relating to this Agreement.

71 Declarations (cont) Declarations should be drafted in the present tense because, when read, a contract provision should always apply to the current situation. To test whether a statement of fact is a declaration, ask two questions: Is one party making the statement of fact to the other party and is the other relying on it? If the answer is yes, then the statement is a representation and warranty. If the answer is no, then the statement of fact is probably a declaration. Does one party want to be able to sue the other party for damages based on the statement of fact? If the answer is yes, then the provision cannot be a declaration. It must be either a representation and warranty or a covenant. Those are the only contract concepts for which a party may sue for damages.

72 Exercise

73 Exercise Now attempt Exercise 1

74 Adding value to the transaction

75 Adding value to the transaction There are many ways that a transactional lawyer can create or add value to a transaction. When we talk about adding value to a transaction, think of the term value as being additional to the documentation, negotiation and final execution of the transaction. In a sense value is the intangible commodity that draws your client back to instruct you again and again. As Professor Ronald Gilson noted in Keynote Discussion: Just What Exactly Does a Transactional Lawyer Do? : I can state the thesis of the Value Creation piece in two sentences. Business lawyers have to be able to create value. If the transaction or the organization for whom we are working isn't worth more as a result of our participation, then we're going to lose the work, and we're not going to have very much fun.

76 Adding value to the transaction Ronald J. Gilson concludes that the business lawyer as a "transaction cost engineer" adds value to the transaction, and when the role is performed well, "the courts, and formal law generally, shrink dramatically in importance In summary, the authors are of the view that transactional lawyers add value: by reducing the cost of transactions acting as reputational intermediaries anticipating and advising clients about risk and outcome identifying the value in different parties to a transaction, and creating economies of scope.

77 Adding value to the transaction Steven L Schwarcz makes it clear in additional reading Explaining the Value of Transactional Lawyering that unless transactional lawyers add significant value in their capacity as lawyers, their utility would be questionable if not fungible