July 14, 2009
The Government is Played for a Sucker by Bank of America
The Bank of America and the Treasury had agreed to a "term sheet" that had BofA paying a sizable fee for a "back-stop" guarantee on the value of Merril Lynch toxic assets so that BofA would purchase the failing brokerage company, The back-stop guarantee kept the price of BofA stock up a bit after the deal was announced. Now BofA refused to pay the fee, arguing that it had not signed the term sheet. Term sheets are not formal written contracts; they never have been. Term sheets are the critical deal terms that will be included in the formal contract to follow that is signed by both parties. What are terms sheets then? Moral contracts? Agreements in principle? Agreements to agree? Or enforceable contracts on the included terms? Usually the term sheet itself, written by careful lawyers, will specify it's legal status. The Treasury term sheet did not. So BofA has schooled the government lawyers on the effect of an incomplete term sheet -- a threat of noncompliance reopens negotiation on the fee. The government has the option of a lawsuit -- arguing that 1) it was a contract (or a ratified contract) and 2), if not, that BofA's acceptance of the benefits of the term sheet supports a restitution claim. The government has the upper hand in pressuring parties to do what is wants ex ante, but ex post, after the dust settles, the government must rely on the paper and the quality of its attorneys or the private section sharpies will eat its lunch.
July 14, 2009 | Permalink
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Term sheets are the prelude to definitive documentation. They move the ball so the business people get closer to a deal without having to negotiate the full set of documents. But, when the drafting of definitive documentation starts, while the term sheet certainly does not cover every detail, the parties generally hold each other to the major deal points that they agreed to in the term sheet. Re-trading of course happens, but it is generally frowned upon.
Presumably the fnial government guaranty was not based on a term sheet but on definitive deal documents? If definitive docs were executed and did not include the fee, the gov't is probably (and should be) out of luck. If the guaranty was provided based on the term sheet, meaning that BofA is expecting the gov't to perform the guaranty based on the term sheet, then the gov't should have an argument. And, BofA looks pretty disingenuous. They didn't sign the term sheet? Fine, then the government is no longer going to provide the guaranty. I suppose BofA argues reliance on the gov't signature (assuming there was one), but doesn't that work both ways? Like Prof. Whaley used to say, "I'd rather have the equities than the law on my side." Not that that would carry the day here.
If there were definitive docs not specifying the fee, then poor perfomance by the gov't.
If there's only a term sheet, then poor business manners by BofA.
Posted by: Steve | Jul 14, 2009 8:27:25 AM
Q: What are terms sheets then?
(a) Moral contracts?
(b) Agreements in principle?
(c) Agreements to agree?
(d) [E]nforceable contracts on the included terms?
(e) None of the above ?
A: E - None of the above. Term sheets are tools to facilitate negotiation and once completed, they act to facilitate drafting of the binding contract document. The one possible exception (or supplemental answer) is in the few occasions that the statute of frauds does not apply, the term sheets could be utilized as evidence of what the parties did or did not verbally agree upon (but not as evidence that a verbal agreement actually was entered into.)
Of course, my simplistic opinion was formed years ago before the adoption of the 28th Amendment to the Constitution which imposed Obamalaw allowing for empathy to trump written contracts. (Imagine the future generations of attorneys flipping through the pages of "Restatement of Empathy 2nd".)
Posted by: Steve Scott | Jul 14, 2009 11:02:12 AM
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Posted by: Page Taylor | Jul 14, 2009 8:35:27 PM