What better way to end my summer hiatus from blogging than to improve the blog’s most-read post? Back in March 2012 I hit “publish” on Battle of the Forms Explained (Using a Few Short Words). It’s a brief primer on section 2-207 of the Uniform Commercial Code–one of the more complicated areas of contract law–and it’s received about three times the traffic of my next most-popular post.
I included in the post an attractive flowchart illustrating the law and was recently informed by the chart’s creator, Todd Feldman, that he’d created a new and improved chart. I’ve incorporated the new chart into my original post and you can also find Todd’s handiwork on his website at picjur.com. Just click on the chart on his site to get a full-sized version.
A company’s key contracts represent a valuable business asset. Thus, it’s crucial that the contracts remain in force as a business changes hands from the seller to the buyer when the business is sold.
Asset sales and equity sales
Although deal lawyers generally describe their practice as involving “mergers and acquisitions,” the sale of a small or medium-sized business is usually structured as either an equity sale or an asset sale. In an equity sale, the buyer buys the equity from the owner(s) of the target company — stock in the case of a corporation and membership interests in the case of a limited liability company. The business is transferred to the new owners, corporate or limited liability company entity and all, and the target becomes a wholly-owned subsidiary of the buyer. There is no change in the status of the target entity itself, and its contracts, assets, and liabilities remain with the entity.
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Imagine a world where continuous improvement is the norm. Where ideas are tested and only the best ones adopted. Where inferior practices are discarded in favor of better methods.
This is Ken Adams’s vision of the world of contract drafting.
Ken is the author of The Structure of M&A Contracts as well as numerous contract-drafting articles that have been published in prominent legal journals and magazines. He also publishes the popular blog Adams on Contract Drafting (previously published as The Koncise Drafter, which I reviewed in The Reading List). Plus, he lectures at Penn Law School, conducts seminars around the world, testifies as an expert witness, and is the founder and president of Koncision Contract Automation, which I reviewed in Koncision: One Giant Leap. Readers of this blog know that I’m a big fan.
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The Missouri Court of Appeals recently upheld the denial of the Kansas City Chief’s motion to compel its former employee to arbitrate an age discrimination claim. The purported arbitration agreement at issue was not binding because it was not supported by consideration.
The employee had signed an arbitration agreement on her first day of work. However, the Chiefs didn’t present the agreement to her until her first day of work — after she had accepted employment. In Missouri, continued employment on an at-will basis isn’t sufficient consideration to support an arbitration agreement, so the agreement failed for lack of consideration.
The appellate court rejected the Chiefs’ argument that the Chiefs’ mutual agreement to arbitrate constituted consideration because the agreement bound only the former employee, not the Chiefs. Here’s a link to the case, if you’d like to know more.
I just downloaded Edraw Mind Map freeware and was surprised to see that the end user license agreement was so short. Without commenting on the quality of the document (other than to applaud the use of the Oxford comma), I’ll say that I’m grateful that my morning wasn’t wasted slogging through a EULA of Apple-like proportions. Plus, I know that I’m not selling my soul because I actually read the thing.
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Last week I posted a sample contract and asked for feedback. I’ve made a few changes, most of which are in response to reader comments. You can see the changes in this redline, and here’s a quick recap:
1. Simplified price clause. Section 1 provided that “the Buyer shall pay any manufacturer’s tax, retailer’s occupation tax, use tax, sales tax, excise tax, value-added tax, duty, customs agent or broker fees, inspection or testing fees, freight costs, insurance, or any other tax, fee, or charge of any nature imposed on, in connection with, or measured by the transaction contemplated by this agreement in addition to the prices set forth on Exhibit A.” It bothered me to include such a list in simplified “Minimum Effective Legal Protection” contract. Ultimately, I decided that the list covered three areas: taxes, export expenses, and third-party expenses. Since the form is only meant for domestic transactions, export expenses don’t apply. I revised the sentence to read: “the Buyer shall pay all taxes and third-party expenses imposed on, in connection with, or measured by the transaction contemplated by this agreement in addition to the prices set forth on Exhibit A.” It doubtless needs more work, but I think it’s an improvement. [click to continue…]
I’ve downloaded a couple of precedent contracts over the past few months from the crowd-sourced contract application Docracy for use in my legal practice. When I needed a simple contract for the sale of goods today, I checked in to see what was available. Finding no such agreement, I decided to finally make a contribution. You can see my handiwork here.
Several weeks ago I explored the idea of minimum effective legal protection in my post Considering a Contract’s Legal-Battle Rating. The gist is that in any given situation there’s a minimum level of legal protection that a contract — or a clause — should provide. Falling below that level leaves a party overly exposed to business and legal risks. When I drafted the sample I contributed to Docracy, I sought to achieve a seller-friendly MELP version of a simple business-to-business contract for the sale of goods to be used when there’s no special reason to think that the agreement will be litigated.
I’ve inserted the sample agreement below. What do you think? Would the document provide effective protection for a low-stakes run-of-the-mill B2B sale of goods, or have I omitted a clause that would leave my sale-side client unduly exposed? Is there any dead weight I could throw overboard?
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Loreen Olson brought an action alleging breach of contract and related claims, in which she asserted that the Dean of the College of Arts and Sciences had offered her the job as chair of the Communications Department at a meeting, and she had accepted. The dean then sent Olson two offer letters, one for a three-year contract period and the other for the preceding two-month period. When Olson emailed the dean about other terms of employment — which she claimed had been discussed at the meeting — the dean instructed his assistant to email Olson to inform her that the dean would be contacting the faculty to select another chair due to irreconcilable differences. The Missouri Court of Appeals, Western District reversed the trial court’s grant of partial summary judgment in favor the university and remanded the case to the trial court, because the undisputed facts didn’t negate Olson’s contention that a contract had been formed during her meeting with the dean.
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In my recent piece about properly signing contracts, I gave a plug for a video called “How to Research a Company on the Interwebs” on Katie Lane’s Work Made for Hire blog. The video takes you step-by-step through basic due diligence, including searching the Secretary of State’s records.
Yesterday, Paula Brillson, a New York lawyer based in California, posted another practical piece, A Street-Smart Guide to Investigating Your Business Partners. It’s worth checking out.
I wrote about this case, which involves backdating contracts, in Backdating Contracts Is Tricky Business. In addition to the loan I discussed in that post, the appellate court considered FH Partners’ ownership of another loan and held that FH Partners had a partial ownership interest in the loan, reversing the trial court.
On review of the trial court’s granting of summary judgment in favor of Frontenac Bank, the Missouri Court of Appeals, Eastern District found that there were genuine issues of material fact as to whether the bank breached several promissory notes, based on an improper declaration of insecurity and a breach of the bank’s duty of good faith and fair dealing, when it called the notes based on an insecurity provision.
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