Enforceability

DEFINITION

Enforceability means whether a court can require a party to abide by what it agreed to do or not do.

ENFORCEMENT PROCEDURES

If an agreement is binding (which in corporate law is synonymous with enforceable) and a party breaches its terms, the non-breaching party could decide to seek to be made whole by bringing a claim against the breaching party in: (i) a lawsuit filed in court, if the underlying agreement allows for recourse via the courts; or (ii) an arbitration proceeding, if the underlying agreement provides for resolution via binding arbitration.

Even if arbitration is stipulated for dispute resolution, the non-breaching party may eventually need to go to court anyway. That is because arbitration proceedings produce binding decisions, which are a form of binding agreement. If the breaching party refuses to voluntarily honor an arbitral award against it, the non-breaching party would need to ask a court to enforce the award. Only courts can force enforcement.

Parties can always decide to settle disputes privately, usually in settlement discussions resulting in settlement agreements (which may include amendments to the breached terms).

REMEDIES

In mergers and acquisitions, there are three types of remedies frequently encountered when seeking recourse for breach of contract:

• LEGAL DAMAGES

Also known as cash payment. The non-breaching party asks the court or other arbiter to order the breaching party to pay a dollar amount that will make the non-breaching party whole. This is the most common type of remedy in mergers and acquisitions.

• INJUNCTIVE RELIEF

A type of equitable remedy where the non-breaching party asks the court or other arbiter to order the breaching party to stop doing something.

For example, if a party is breaching a restrictive covenant like a non-competition, non-solicitation, or confidentiality agreement, the non-breaching party would seek injunctive relief ordering the breaching party to stop competing, soliciting, or disclosing.

• SPECIFIC PERFORMANCE

A type of equitable remedy where the non-breaching party asks the court or other arbiter to order the breaching party to do something.

In mergers and acquisitions, specific performance often arises in staggered sign/close transactions, which have closing conditions. Once all the closing conditions are satisfied, the transaction is typically required to be completed. If a party refuses to close, the other party might choose to sue to force the closing.

PITFALLS

Contract law is not form over substance; terms are not enforceable simply because they may look like a contract or a party believes it has a contract.

For terms to be binding, they must satisfy the requirements for contract formation.

In mergers and acquisitions, common pitfalls to creating binding commitments include:

• OFFER INCAPABLE OF ACCEPTANCE

Some offers become incapable of being accepted, whether because (among other things) the offer has a clear deadline or conduct invalidates them.

For example, a buyer makes an initial proposal. A seller sends a counterproposal—but immediately regrets doing so. The seller then signs the buyer’s first offer and transmits the signed acceptance to the buyer.

The seller’s purported acceptance is likely invalid. A counteroffer is an automatic rejection of an initial offer, making the initial offer incapable of acceptance.

While a qualified lawyer can help resolve the confusion, proceeding with the deal is not as simple as the seller merely signing the buyer’s initial offer.

• NO MIRROR IMAGE

The accepted offer must match the initial offer exactly.

For example, a buyer makes an offer that includes a binding exclusivity period and provides for disputes to be resolved in New York courts. A seller countersigns the offer, but makes one handwritten change to its terms: crossing out “New York” and replacing it with “Los Angeles,” where the target is based.

Without corrective measures, the acceptance is likely invalid. Any change to a proposal acts as a (i) rejection of the entire offer and (ii) subsequent counteroffer.

• CONSIDERATION ALREADY EXCHANGED

Contract formation requires parties to exchange something of value, e.g., services, money, other property, or even the assumption of liabilities. Value already exchanged cannot be used to form a contract.

For example, in a transaction with a long interim period, a buyer and seller want to ensure that the target company’s key employees do not leave before closing and remain for a period of time after. Retention agreements providing for bonuses payable at certain milestones are drawn up. The consideration cited in the agreements references only the past services provided by each recipient.

The agreements may be invalid. Because the employees already provided the services referenced in the agreements, there is no valuable consideration exchanged by them.

The agreements should be revised to reflect they are being entered into in consideration for, among other things, the valuable transaction and other support services to be provided by the key employees during the period covered by the retention agreements.

• ILLEGALITY

A contract’s subject matter cannot be illegal.

In mergers and acquisitions, illegality most commonly arises in restrictive covenants like non-competition and non-solicitation agreements.

Whether a restrictive covenant is permissible depends heavily on governing law. In the United States, state law typically applies in this context. Enforceability also depends on whether the restrictive covenant is sought on a standalone basis or as part of a larger transaction.

Generally, standalone restrictive covenants—like an employer asking employees to agree to not solicit customers if employment is terminated—are less likely to be enforceable.

However, even in states like California and New York that have significant public policies against restrictive covenants, non-competition and non-solicitation agreements are usually permitted in significant transactions like buyouts and majority investments.

Whenever a party desires a restrictive covenant, it is essential to speak with a qualified lawyer to confirm whether the arrangement will be permissible and, if so, how to design it.