December 8th, 2011 • Posted by George May • Permalink
It is among the most human of feelings to look back on something we’ve said or written and wish we could have it back. Sometimes we learn later that our words were not understood as we intended them, leaving the recipients confused. Worse still, we may learn that our words caused actual harm, even if we didn’t intend that. In the professional world, who among us hasn’t written an email that we wish we could have worded more carefully, or never sent at all? As a parent, I find myself continually reminding my sons to choose their words carefully. The knowledge that words have meaning and power is among the most important lessons we can impart in life.
If the lesson about choosing one’s words carefully carries great weight with nearly everyone, it carries even more importance for attorneys crafting complex documents connected to major business transactions. There are few circumstances in the professional world where words matter more than in high-stakes law practice. A single misplaced phrase or missing clause can cost a client millions of dollars or lead to a lost business opportunity. There are many examples of cases litigated over documents that were unclear, poorly phrased or that failed to contemplate an important circumstance. In some cases, these events could not have been foreseen. But in most cases, the kinds of mistakes that trace back to drafting errors are avoidable. For those seeking to understand the impact a few words can make, the case of Glazer vs. Pasternak stands as a cautionary tale worth hearing.
As discussed at the link offered above, the facts of the case (as originally decided by the Delaware Court of Chancery) were as follows:
In September 1995, Zapata's board created a special committee to consider the possible acquisition of Houlihan's, a company controlled by Zapata's chairman, Malcolm Glazer. After months of negotiations, the parties entered into a Merger Agreement in June 1996, pursuant to which Houlihan's would merge into a newly-formed Zapata subsidiary and Houlihan's stockholders would receive Zapata stock in exchange for their Houlihan's stock.
The Merger Agreement provided for stockholder approval by a simple majority vote. A Zapata stockholder challenged the proposed merger alleging, among other things, that the transaction was governed by Article SEVENTH of the Zapata certificate of incorporation, which requires approval by 80 percent of the stockholders for specified transactions. The parties agree that the Houlihan's merger would have triggered the supermajority vote provision if Houlihan's were merging into Zapata, the parent company. The issue is whether Article SEVENTH also applies where the merger is with a Zapata subsidiary.
The [Delaware] Court of Chancery held that the supermajority provision applies to mergers with Zapata subsidiaries. Accordingly, the trial court enjoined the proposed Houlihan's merger. Less than a week after the injunction was entered, Zapata filed this appeal. At the same time, the Zapata special committee announced that it terminated the Houlihan's Merger Agreement.
You may learn more about the legal arguments by reading further at the link provided. However, our purpose here is not to fully research the court proceeding. Instead, we must ask a few interesting questions:
• Why was this dispute any sort of disagreement at all? How were the procedures for a merger left ambiguous in the first place?
• How could the dispute (and the resulting withdrawal of the proposed merger) have been avoided?
As it turns out, the crucial issue in this matter turns on just three little words – words that were missing from the defendant’s certificate of incorporation. This passage from the critical document highlights the issue:
...the affirmative vote or consent of the holders of 80% of all stock of this corporation entitled to vote in elections of directors, considered for the purposes of this Articles SEVENTH as one class, shall be required: (i) for a merger or consolidation [of this corporation] with or into any other corporation, or (ii) for any sale or lease of all or any substantial part of the assets of this corporation to any other corporation, person or other entity, or (iii) any sale or lease to this corporation or any subsidiary thereof of any assets ... in exchange for voting securities ... of this corporation or any subsidiary by any corporation, person or entity, if as of the record date for the determination of stockholders entitled to notice thereof and to vote thereon or consent thereto such other corporation, person or entity which is party to such a transaction is the beneficial owner, directly or indirectly, of 5% or more of the outstanding shares of stock of this corporation entitled to vote in elections of directors, considered for the purpose of this Article SEVENTH as one class. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of the stock of this corporation otherwise required by law or any agreement between this corporation and any national securities exchange.
The intent of the person drafting the certificate of incorporation was likely to require approval of 80% of the shareholders for mergers with the publicly traded parent corporation, not with transactions within subsidiaries. However, as the above passage shows, the issue was left to chance due to ambiguous language. The Delaware Chancery Court decided, as it often does, to hold the defendant to the letter of their certificate of incorporation. This outcome could have been avoided with the insertion (shown in red above) of just three critical words – “of this corporation” – into the relevant portion of the paragraph above.
We can never be certain how the company who was sued in this case (or the law firm that may have worked for them) managed to omit these three crucial words. Perhaps they were never there. Perhaps a well-meaning attorney edited them out, thinking they were redundant or unnecessary. The question will remain unanswered. But what the lawyers drafting the certificate could have known, had the right technology existed, is that those three words almost always are there, in the standard version of the very same paragraph. The issue highlighted here – important instances where legal language differs from accepted conventions or market standards – will be with us as long as law is practiced, but visibility into those market standards need not remain a mystery.
We here at Exemplify are bringing our product to market to help protect our clients from the kinds of outcomes illustrated by Glazer vs. Pasternak. Fortunately, we live in a time where the right product and technology do exist to show attorneys the clear, prevailing market standards for language and terms in complex legal documents. That is exactly what Exemplify will bring to transactional legal practice.
If you would like to learn more, please get in touch with us via the contact information on this Web site. We would be pleased to show you how to avoid a fate similar to the one illustrated in this post. After all, words do matter.
