Advanced Contracts: When Financial Contracts Blow Up

Basic courses on contracts tend to assume that provisions among sophisticated commercial parties are rationally and perfectly designed, except maybe for a few contingencies that were so remote that they were not anticipated at the start. In the real world, things aren’t quite so perfect. This course exposes students to a set of those situations where contract provisions risked blowing up a deal (or actually did) and shows them how sophisticated practitioners worked to solve the problems. Indeed, sometimes, the practitioners even turned the potential blowups into solutions. Using a series of case studies from both M&A and Capital Markets deals, the course aims to show students how practitioners navigate what are sometimes imperfect, incomplete and even incomprehensible contracts that no one really understands. Among the techniques that are used is what we call contract paleontology, where lawyers try to gain an understanding of what on its face looks to be incomprehensible by working backwards through the contract fossil record. At the end of the course, students should leave with an understanding of how, when and if they face these situations in the future, they might approach them. Some illustrative scenarios are: • Do shareholders have a damages claim if a buyer breaches its obligation to buy a public company? You might think so, but the deal documents sometimes restrict claims of third party beneficiaries, which shareholders arguably are. What happens here? • Assume a merger contract says that the parties agree that a permissible remedy for a breach is specific performance, an equitable remedy to be given at the judge’s discretion. But what if, the contract, as an alternative to specific performance, also specifies a termination fee? Does the fact of the termination fee negate the implicit factual basis for a request for specific performance? • A debt contract limits damages to $X million in the event of a breach, unless the breach was willful. But what is "willful" in a contractual sense? What happens when lawyers use terms that they do not themselves fully understand? • A bond issue promises investors payments on a flexible rate basis tied to a market index. Standard flex rate bonds use caps on how much is to be paid in the event of default. But this bond omits that cap, resulting in the default rate skyrocketing to over 100%. What happens here?