Tuesday, May 29, 2007
I was flipping through the Alltel merger agreement this morning, when the following clause caught my eye:
Section 8.4. Governing Law. This Agreement, and all claims or causes of action (whether at Law, in contract or in tort) that may be based upon, arise out of or relate to this Agreement or the negotiation, execution or performance hereof, shall be governed by and construed in accordance with the Laws of the State of Delaware, without giving effect to any choice or conflict of Law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the Laws of any jurisdiction other than the State of Delaware.
I am not sure whether the above clause was from the Cleary or Weil merger form (both are representing the buying consortium), but the underlined text is problematical. This language crept into choice of law provisions at some point and has stubbornly remained there in various forms despite the best efforts of knowledgeable lawyers to eradicate it because of their potential for absurdity. Former Shearman & Sterling partner Michael Gruson aptly explained why this clause is unnecessary and possibly harmful text in his article, Governing Law Clauses Excluding Principles of Conflict of Laws, 37 INT'L LAW. 1023 (2003). Here, Gruson highlighted the resulting absurdities if the language of this clause were strictly applied. For example, depending upon the conflicts of laws wording exclusion, the language may technically requires a court to also exclude the very conflict of laws rules that permit the parties to select a law to govern their agreement as well as to ignore the internal affairs doctrine. Both would be unwanted results. While Gruson's analysis speaks to New York law it is transferable to Delaware law. Accordingly, to avoid such issues, the better practice would have been for Weil and/or Cleary to draft their clause simply as follows:
Section 8.4 Governing Law. This Agreement, and all claims or causes of action (whether at Law, in contract or in tort) that may be based upon, arise out of or relate to this Agreement or the negotiation, execution or performance hereof, shall be governed by and construed in accordance with the Laws of the State of Delaware.
So much easier, and as Gruson notes an equivalent, clearer result. And for those who follow such things, the Alltel merger agreement has a $625 million break-up fee, a provision for reimbursement to the acquirers of up to $35 million in expenses, a no solicit and a rather tight material adverse change clause.