In corporate mergers and acquisitions, parties make many agreements, which are often recorded in transaction documentation. The drafter of these documents has the clean task of working out the contents of the agreements in such a way that there is as little room for discussion afterwards as possible.
Differences of explanation
All due care in drafting the agreements notwithstanding, parties may afterwards differ on the interpretation of the contractual clause in which they recorded their agreements.
For the outcome of this discussion, in addition to the text of the provision and its linguistic interpretation, the intention of the parties is also relevant. All circumstances are relevant here, but in each case it is relevant what meaning the parties mutually could reasonably attribute to the provisions and on what they could reasonably expect from each other in this regard.
A mouthful, where the outcome of the discussion is difficult to estimate in advance. All the more reason to write down agreements clearly, as the following statement shows.
Recent ruling
A recently published ruling by the Central Netherlands District Court involved the interpretation of transaction documentation in the context of a share transfer.
In the transaction documentation, it was agreed that if the buyer (the defendant in these proceedings) would (re)sell the shares or the company within a certain period of time, he had to pay 50% of the "realized surplus proceeds" to the seller (the plaintiff in these proceedings) as a subsequent payment on the purchase price. An accompanying calculation example, however, only referred to the 'additional proceeds' and the 'sale proceeds'.
You guessed it: at some point, the defendant sells the business for a handsome purchase price. Discussion then arises about the amount the defendant should pay the plaintiff as an after-payment on the purchase price. Should the copayment be calculated on the gross purchase price, as agreed upon between defendant and the new buyer, or on the net purchase price (purchase price less expenses and corporate taxes) actually received by defendant?
The court considers that the text "realized surplus proceeds" cannot be interpreted linguistically other than that it refers to the amount actually received (because realized) and that the amount received must exceed the amount paid to the defendant up to that point (because surplus proceeds). The example calculation and the text and terms included in it do not lead to a different conclusion, because there too - the court considers - it refers to "sales proceeds.
Furthermore, the court considers that also later statements and conduct show that the aforementioned explanation must be assumed and that a different explanation would lead to a result that is not very obvious. Under any other explanation, the after-payment from defendant to plaintiff would be so high that defendant would suffer a book loss on its investment and hardly anything would be left from the second transaction.
Accordingly, the court ruled that the back payment should be calculated on the net purchase price (purchase price less expenses and corporate income tax) actually received by the defendant.
All in all, a logical-looking judgment by the court, but it took a long, time-consuming and costly procedure to get there. In addition, the plaintiff comes out cheated. Indeed, plaintiff had a different view of the agreement and receives less back pay than hoped for.
In conclusion
When drafting transaction documentation, care must be taken to ensure that the agreements are worked out correctly. It is also important to leave as little room as possible for discussion about the interpretation of the provision. Such discussion can lead to long and costly proceedings and disappointed parties. This can be a hard lesson for everyone, and one that is easy to avoid.
