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The Ins and Outs of Contractual Performance in Todays Economy May 19, 2009.

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Presentation on theme: "The Ins and Outs of Contractual Performance in Todays Economy May 19, 2009."— Presentation transcript:

1 The Ins and Outs of Contractual Performance in Todays Economy May 19, 2009

2 2 Panelists Oliver J. Armas Partner, Chadbourne & Parke LLP Thomas J. Hall Partner, Chadbourne & Parke LLP Alex San Miguel General Counsel, GLG Partners, Inc. Prof. Jack F. Williams Managing Director, BDO Consulting (BDO Seidman, LLP)

3 3 Topics Force Majeure Changed Circumstances / MAC Clauses Drafting Tips Q&A

4 Force Majeure

5 5 Example: Tsunami natural disaster such as but not limited to violent storm, cyclone, typhoon, hurricane, tornado, blizzard, earthquake, volcanic activity, landslide, tidal wave, tsunami, flood, damage or destruction by lightning, drought. ICC Force Majeure clause, Section 3 (e)

6 6 The Financial Crisis: A Tsunami?

7 7 We are in the midst of a once-in-a century credit tsunami. Central banks and governments are being required to take unprecedented measures. Alan Greenspan, October 23, 2008

8 8 And thus Force Majeure? Based on the limited information before the court, this years credit tsunami appears to have been the primary reason that Ambacs credit rating fell. Hoosier Energy Rural Elec. Coop., Inc. v. John Hancock Life Ins. Co., No. 1:08-cv-01560-DFH-DML (S.D. Ind. Nov. 25, 2008) citing Alan Greenspan

9 9 Hypo 1: Rock Meets Steel 2004: 30 Rock Bank/Resolution Steel $500m financing construction of steel plant outstanding debt due June 2009 no force majeure or MAC clause 2009: financial crisis demand/prices for steel plummet earnings well below expected level insufficient funds to cover balance outstanding banks demand guaranty from corporate parent and delay of next phase of construction ResolutionSteel/Ronald Remington sue 30 Rock Bank: force majeure

10 10 Specialty Tyres of America v. CIT Group/Equipment Financing 82 F.Supp. 2d 434 (W.D.Pa. 2000) A court cannot improve matters by intervention after the fact. It can only destabilize the institution of contract, increase risk and make parties worse off.

11 11 Force Majeure – NY Common Law Event Destruction of means of performance Foreseeability If foreseeable, risk allocated in contract Impossibility Financial disadvantage not enough

12 12 Hypo 2: The Trump Card (i) acts of declared or undeclared war by a foreign enemy or terrorist acts; (ii) riots, civil commotion, or insurrection; (iii) casualty or condemnation; (iv) fire, floods, hurricane, or other casualty; (v) earthquakes; … (xi) any other event or circumstance not within the reasonable control of Resolution Steel or any Trade Contractor....

13 13 Application of Impossibility and Hardship Outside Of the U.S. Force Majeure – Impossibility Remedy = suspension or termination Changed Circumstances – Hardship Remedy = reformation

14 14 Force Majeure – International Contracts Contract language Applicable law of the Contract typical elements unforseeable unavoidable external renders performance impossible (at all or for certain time) UN Convention on Contracts for the International Sale of Goods (CISG, Vienna Convention) worldwide acceptance – 70+ states (not: UK, Brazil, India) applies to international sale of goods info:

15 15 Force Majeure – CISG (Article 79) Party not liable for failure to perform if due to an impediment beyond his control that he could not have reasonably foreseen or that he could have avoided or overcome Remedy = exemption for period while impediment exists

16 16 Changed Circumstances – Hardship Does CISG address hardship? How will a court or arbitral tribunal fill the gap? Applicable law of the contract lex mercatoria International Institute for the Unification of Private Law (UNIDROIT) Principles of International Commercial Contracts (2004)

17 17 Hardship – Unidroit Principles Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship. Article 6.2.1 (Contract to be observed)

18 18 Hardship – Unidroit Principles Hardship alters equilibrium of the contract because cost has increased; or because value has diminished and events occur after conclusion of contract, were not reasonably foreseeable, beyond control of disadvantaged party, and risk was not assumed. Article 6.2.2 (Definition of hardship)

19 19 Hardship – Unidroit Principles In case of hardship, disadvantaged party entitled to request renegotiations but cannot withhold performance If no agreement within reasonable time, either party may resort to court If the court finds hardship it may, if reasonable, terminate contract, or adapt contract with a view to restoring equilibrium Article 6.2.3 (Effects of hardship )

20 MAC Clauses

21 21 Hypo 3: Heavy Metals – Amalgamated? Resolution Steel, Quality Copper agree to merge Material Adverse Change … in the condition (financial or otherwise), business, assets, liabilities or results of operations … taken as a whole…. After signing: production costs, demand historic earnings 64% projected earnings 33% news: inexpensive synthetic copper Resolution Steel refuses to close transaction Quality Copper files suit seeking specific performance

22 22 IBP v. Tyson Foods 789 A.2d 14 (Del. Ch. 2001) Party seeking to terminate agreement has burden of proving that MAC has occurred MAC closing condition protects acquirer from unknown events that substantially threaten targets overall earning potential in durationally significant manner See also Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008)

23 23 Drafting Tips

24 24 Practical Guidance

25 25 CLE Certificate Your Code: 051909

26 26 Drafting Force Majeure Clauses Two common forms: open and closed Open clause: general terms Closed clause: specifies exactly what incidents constitute a force majeure event International Chamber of Commerce (ICC) Force Majeure Clause (2003)

27 27 Drafting Force Majeure Clauses Tasks foresee the unforeseeable predict the unpredictable define purpose of contract (frustration) Deal Points Neither party shall be liable… …including but not limited to…

28 28 Traditional MAC (T-MAC) Clause Material adverse change means any material adverse change in the business, results of operations, assets, liabilities, or financial results of operations of the Seller and its subsidiaries.

29 29 MOD-MAC Example Material Adverse Effect means, with respect to the Company, an effect, event, development or change that is materially adverse to the business, results of operations or financial condition of the Company and the Company Subsidiaries, taken as a whole; provided, however, that in no event shall any of the following, alone or in combination, be deemed to constitute, nor shall any of the following be taken into account in determining whether there has been, a Material Adverse Effect: (a) a decrease in the market price or trading volume of Company Common Shares (but not any effect, event, development or change underlying such decrease to the extent that such effect, event, development or change would otherwise constitute a Material Adverse Effect); (b) (i) changes in conditions in the U.S. or global economy or capital or financial markets generally, including changes in interest or exchange rates; (ii) changes in applicable Law or general legal, tax, regulatory or political conditions of a type and scope that, as of the date of this Agreement, could reasonably be expected to occur, based on information that is generally available to the public or has been Previously Disclosed; or (iii) changes generally affecting the industry in which the Company and the Company Subsidiaries operate; provided, in the case of clause (i), (ii) or (iii), that such changes do not disproportionately affect the Company and the Company Subsidiaries as compared to other companies operating in the industry in which the Company and the Company Subsidiaries operate; (c) changes in GAAP; (d) the negotiation, execution, announcement or pendency of this Agreement or the transactions contemplated hereby or the consummation of the transactions contemplated by this Agreement, including the impact thereof on relationships, contractual or otherwise, with customers, suppliers, vendors, lenders, mortgage brokers, investors, venture partners or employees; (e) earthquakes, hurricanes, floods, or other natural disasters; (f) any affirmative action knowingly taken by Parent or Purchaser that could reasonably be expected to give rise to a Material Adverse Effect (without giving effect to this clause (f) in the definition thereof); (g) any action taken by the Company at the request or with the express consent of any of the Buyer Parties; (h) failure by the Company or the Company Subsidiaries to meet any projections, estimates or budgets for any period prior to, on or after the dates of this Agreement (but not any effect, event, development or change underlying such failure to the extent such effect, event, development or change would otherwise constitute a Material Adverse Effect); (i) any deterioration in the business, results of operations, financial condition, liquidity, stockholders equity and/or prospects of the Company and/or the Company Subsidiaries substantially resulting from circumstances or conditions existing as of the date of this Agreement that were generally publicly known as of the date of this Agreement or that were Previously Disclosed; (j) any litigation or regulatory proceeding set forth in Section 5.09 of the Company Disclosure Schedule (but only to the extent of the specific claims and allegations comprising such litigation or regulatory proceeding existing as of the date of this Agreement; and (k) any action, claim, audit, arbitration, mediation, investigation, proceeding or other legal proceeding (in each case whether threatened, pending or otherwise), or any penalties, sanctions, fines, injunctive relief, remediation or any other civil or criminal sanction solely resulting from, relating to or arising out of the failure by either the Company or the Reporting Subsidiary to file in a timely manner its Annual Report on Form 10-K for the fiscal year ended December 31, 2006, its Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, and/or the Quarterly Report on Form 10-Q for the second and third quarters of 2007.

30 30 Traditional MAC (T-MAC) Clause: Points of Contention Instead of would have: would reasonably likely to have would be reasonably expected to have could reasonably be expected to have insofar as can reasonably be foreseen, is likely to result in Instead of material adverse change: material adverse effect Change perspective to a reasonable person in the Purchasers position

31 31 Empirical Research Results – MAC Exceptions Approx. 821 randomly selected M&A agreements (2007-2008) – Changes not constituting a MAC: 84% - economy or business in general 76% - conditions of specific industry 74% - announcement of the transaction 65% - GAAP 64% - law 58% - securities market 41% - political environment 40% - trading volume/price of target stock

32 32 Empirical Research Results – MAC Elements Approx. 821 randomly selected M&A agreements (2007-2008) 100% had a MAC clause 98% defined key terms 95% referenced business, operations, or financial condition of the target 88% defined material 77% tied MAC to perspective of purchaser 55% referenced sellers ability to close transaction 28% referenced buyers ability to close transaction 6% used specific dollar thresholds to determine materiality of losses during interim period

33 33 Modern MAC (Mod-MAC) Clause Intensely negotiated Rule-based system, very detailed Used in litigation more as excuse for non-performance and less as leveraging tool to re-trade the deal

34 34 Thank you. Questions?

35 35 Contact J. Allen Miller(212) 408-5454 Oliver J. Armas(212) 408-5399 Thomas J. Hall(212) 409-5487 Alex San Miguel (212) 224-7242 Prof. Jack F. Williams(404) 979-7161

36 36 Download For a copy of this presentation, please go to Disclaimer These materials may constitute Attorney Advertising in some jurisdictions. Prior results do not guarantee a similar outcome. This information has been provided for general information purposes only. It does not constitute the legal advice of Chadbourne & Parke LLP or BDO Consulting/BDO Seidman, LLP and it is not a substitute for fact specific legal counsel.

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