2015

Question 1

“direct” (or “general”) damages includes

Answer 1

the natural and probable consequence of the breach.” “damages that would follow any breach of similar character in the usual course of events.”

Question 2

Cost of R&W insurance indemnity for unknown breaches?

Answer 2

3% of policy coverage

Question 3

Cost of tax insurance indemnity for adverse tax ruling on treatment of transaction or issue?

Answer 3

3-6%

Question 4

Litigation insurance indemnity for catastrophic loss from an existing or likely litigation?

Answer 4

7-10%

Question 5

Buy-side benefit of R and W insurance in auction?

Answer 5

Shut down auction early and either (i) accept RWs as is or (ii) offer safety in accepting RW edits.

Question 6

How long to get R and W policy?

Answer 6

12 days

Question 7

Can’t make an indemnity claims for what four things (other than types of damages)? – Need to draft these in.

Answer 7

1. losses covered by insurance,
2. losses that could have been mitigated,
3. losses recoverable from a third party,
4. losses for which there is a corresponding tax benefit

Question 8

Are consequential and special damages the same thing?

Answer 8

Yes.

Question 9

Definition of special or consequential damages?

Answer 9

“damages that result naturally, but not necessarily, from the defendant’s wrongful acts,” and “damages which arise from special circumstances that make them probable, although they would be unusual apart from such circumstances.”

Question 10

What are the three categories of contract damages?

Answer 10

• direct (or general) damages – “naturally and necessarily flow from a wrongful act”
• incidental damages – “incurred in an attempt to avoid or mitigate damages after a breach”
• consequential (or special) damages

Question 11

Keystone case for special/consequential damages?

Answer 11

Hadley v. Baxendale (lost profit from broken crankshaft for mill)

Question 12

Hadley Rule is the plaintiff may recover only those losses… (2 things)

Answer 12

1. DIRECT losses that would arise normally and naturally as the result a breach of any similar contract; and
2. SPECIAL losses arising from SPECIAL CIRCUMSTANCES that were “within the contemplation” AT THE TIME OF CONTRACT

Question 13

Pro-seller drafting on consequential damages (Sidley)

Answer 13

“consequential damages (however plead)”

Question 14

Seller-acceptable version of indemnity for consequential damages, lost profits, and diminution in value?

Answer 14

Carve them out from damages/recovery “other than those that are the natural, probable and reasonably foreseeable result of the event that gave rise thereto”

Question 15

% of deals that exclude consequential damages from recovery?

Answer 15

over 50%, but not supermajority

Question 16

Damages to exclude from “losses” as seller?

Answer 16

punitive, incidental, consequential, special or indirect damages (including loss of revenue, lost future profits, lost business, diminution in value and any damages based on any type of multiple)

Question 17

_____ includes only the narrowest category of losses?

Answer 17

out-of-pocket

Question 18

How does post-closing PP adjustment affect indemnity rights?

Answer 18

PP adjustment should affect indemnity. Seller should insist buyers not double dip.

Question 19

Holding of Hexion Specialty Chemicals, Inc. v. Huntsman Corp. (Del. Ch. 2008)?

Answer 19

MAC must be “measured in years rather than months.”

Question 20

Has a DE court ever found a MAC?

Answer 20

No.

Question 21

Holding of In re IBP Shareholders Litigation v. Tyson Foods (Del. Ch. 2001)

Answer 21

MAC must “substantially threaten the overall earnings potential of the target” and must impair future earnings in a manner that is “durationally-significant”

Question 22

Holding of Frontier Oil Corp. v. Holly Corp. (Del. Ch. 2005) (ELR litigation arose post-signing)

Answer 22

A MAC must be CERTAIN. While potential exposure in the litigation was high, the probability of an adverse outcome in litigation was unknown and could not provide the basis for a MAC.

Question 23

Holding of Genesco, Inc. v. Finish Line, Inc. (Tenn. Ch. 2007) (Tenn law)

Answer 23

The court found that while the decline could constitute a MAC if there were no exceptions in the definition of MAC, the exception for general economic conditions meant that underperformance did not qualify as a MAC given the macroeconomic context.

Question 24

Who bears burden of demonstrating MAC/absence of MAC?

Answer 24

Buyer, unless you shift burden to seller.

Question 25

Can known/potentially expected events that Buyer knows of qualify as a MAC?

Answer 25

No.

Question 26

How to provide more specificity to MAC definition?

Answer 26

Parties can define: 1. relevant industry; 2. what’s durationally significant, or 3. financial performance that would qualify as a MAC.

Question 27

Do courts differentiate b/t efforts standards?

Answer 27

Not really, but when two different Efforts Clauses are used together in the same contract, they are held to represent different standards.

Question 28

Do courts enforce disclaimers of reliance provisions to preclude claims of fraud for extra-contractual misrepresentation?

Answer 28

Yes.

Question 29

Who wants to define fraud?

Answer 29

Seller. Buyer wants it lower case “f”, which gives you broad latitude.

Question 30

For a DE agreement that’s silent on sandbagging, do you need to prove reliance to recover?

Answer 30

Delaware courts have not required the buyer to prove reliance on the underlying representation and have allowed buyers with pre-closing knowledge of a breach of a representation and warranty to bring post-closing claims for indemnification even when the purchase agreement is silent regarding sandbagging

Question 31

For a DE agreement that’s silent on sandbagging, can you recover for known breaches of R&Ws?

Answer 31

Yes.

Question 32

Where a NY agreement is silent on sandbagging, can Buyer make indemnity claim for breach of R&W it knew of pre-signing?

Answer 32

Only if buyer learned of the breach through its own due diligence. If seller called it out, you’re screwed. You also need to show reliance on the R&W.

Question 33

Under NY law, where agreement is silent on sandbagging, do you need to show reliance on R&Ws?

Answer 33

Yes.

Question 34

What % of earnouts are based on Revenue, Earnings/EBITDA, and other metrics?

Answer 34

67% revenue
20% earnings/EBITDA
27% Other (e.g., unit sales, product launches)

Question 35

Average length of earnout?

Answer 35

1-3 years.

Question 36

Can buyer offset indemnity claims against future earnout payments? % Express yes, % Express no, % silent?

Answer 36

80% express YES
13% express NO
7% silent

Question 37

% earnouts with covenant to run business in accordance w/ past practice?

Answer 37

13%

Question 38

% earnouts with covenant to run business to maximize earn-out payments?

Answer 38

20%

Question 39

% earnouts where buyer disclaims fiduciary relationship?

Answer 39

13%

Question 40

What % of MAE definitions have “prospects” included?

Answer 40

11%, according to SRS 2013

Question 41

What % of MAE definitions have forward-looking language?

Answer 41

94% had forward-looking language (e.g., would have, could reasonably be expected to have, etc.)

Question 42

% of deals with actual knowledge vs. constructive knowledge?

Answer 42

13% actual knowledge
84% constructive
(3% not defined)

Question 43

Within constructive knowledge, breakdown between “reasonable or due inquiry” vs. “reasonable or due inquiry of knowledgeable persons” vs. “role-based constructive knowledge”?

Answer 43

“reasonable or due inquiry” = 83%
“reasonable or due inquiry of knowledgeable persons” = 37%
“role-based constructive knowledge” = 24%