Monday, June 29, 2015

M&A and the Wisdom of Seinfeld

George Costanza: "Jerry, just remember, it's not a lie if you believe it.

Today I'm starting a new feature on this blog called "M&A and the Wisdom of Seinfeld." We'll explore some of my favorite quotes from the greatest sitcom of all time, Seinfeld, and how those quotes provide (perhaps unexpected) insights for lawyers and other professionals involved in merger and acquisition transactions.

George Costanza's advice to Jerry Seinfeld (quoted above) which guides Jerry in attempting to fool a lie detector test is a great example of knowledge qualifiers and how they can be used in an M&A agreement.

Among the most negotiated portion of any M&A transaction agreement is the representations and warranties section. The buyer typically asks the seller to provide a laundry list of promises (i.e., to represent and warrant) that certain facts are true about the seller's company.  For example, the buyer might ask the seller to promise that the seller's company has complied with all applicable environmental laws.  The seller might strike that representation from the initial draft of the M&A agreement arguing: "I'm pretty sure I haven't violated any environmental laws, but what if it turns out that I have - I don't want the buyer to be able to sue me or to walk from the deal if the buyer's due diligence activities identify an environmental issue that I never even knew about."  The buyer might be sympathetic to the seller's concerns, but the buyer wants the seller to disclose any environmental issues known to the seller.  Thus, the parties might compromise by changing the representation to read something like: "To the best of seller's knowledge, the company has complied with all environmental laws."

Notice how George's maxim "It's not a lie if you believe it" comes into play here.  If the seller truly believes that the seller's company has complied with all environmental laws, even if as a matter of fact the seller's company has violated dozens of environmental laws, the seller will not be liable under the knowledge qualified representation at the end of the previous paragraph.

Of course, just because the parties have agreed to include a knowledge qualifier doesn't mean the matter is completely resolved.  The buyer might insist that "knowledge" of the seller should include a duty to reasonably investigate the truth of the underlying representation before the seller can rely upon the knowledge qualifier.  On the other hand, the seller might argue that "knowledge" of the seller should mean only the seller's "actual knowledge," without any duty to investigate. The parties might also argue who's "knowledge" should be deemed to be included in the definition of seller's knowledge.  For example, what if a low level employee of the seller's company knew the company had violated environmental laws, but that employee never reported the violation to the seller's company's officers and/or directors - should the seller be deemed to know about anything any of the seller's company's employees knew or only a handful of the seller's company's most senior executives?

As you can see, there are many issued to be considered and resolved regarding knowledge qualifiers before one can accurately state that "It's not a lie if you believe it."

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