CHAPTER 22 LETTER OF INTENT AND PRE-CONTRACTUAL LIABILITY ISSUES UNDER CROSS-BORDER M&A TRANSACTIONS1
| Jurisdiction | United States |
(Apr 2015)
LETTER OF INTENT AND PRE-CONTRACTUAL LIABILITY ISSUES UNDER CROSS-BORDER M&A TRANSACTIONS1
Law Professor
Author, Transferencia del control accionario. Claves para su negociación contractual
Buenos Aires
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RODOLFO G. PAPA is licensed to practice law in the city of Buenos Aires, Argentina. He received his law degree from the Universidad de Buenos Aires (Diploma de Honor), and his LLM in International Economic Law, from the University of Warwick, in England. He performed an internship as a foreign lawyer/stagiaire in a London-based international law firm. Following full-time practice as a corporate lawyer, he developed an international academic career. He has addressed conferences, seminars, and courses in Perú, Colombia, México, and Panama, and has drafted over 150 papers, articles, and comments in the most important domestic law journals as well as abroad. He has authored several books: Due Diligence para abogados y contadores (co-author) (2011); Transferencia del Control Accionario. Claves para su negotiation contractual (2012); and Fideicomiso para abogados y contadores. Aspectos jurídicos, contractuales, regulatorios, contables y tributarios (2014).
Paper presented to the Rocky Mountain Mineral Law Foundation Special Institute on International Mining and Oil & Gas Law, Development, and Investment.
Cartagena de Indias, Colombia
April 2015
1. Abstract:
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This paper aims to develop a comparative approach concerning the recognition of pre-contractual liability and the effects in executing a letter of intent, under both US and Argentine Law.
Certain material distinctions currently exists between both legal systems concerning the scope and enforceability of such subject matters, mainly when its interaction takes place, as a result of structuring a cross border transaction including parties incorporated in such jurisdictions, governed by Argentine Law.
It should be preliminary anticipated that the recognition of a pre-contractual liability event arising out of the sudden termination of negotiations that could cause a frustration over one of the parties's reasonable belief to reach a binding agreement, as well as the compliance with an statutory and implied duty of good faith conduct within such stage, shows a conflicting view between the Laws of such countries.
Such opposed approach pursuant to which underlies the regulation of these matters, ranging from a more flexible standard found in the Common Law, against a strict pre-contractual liability enforceability, as developed by Civil Law jurisdictions, should be born in mind when a US based company would decide to doing business with an Argentine target or a domestic counterparty, including another form of business association (e.g. joint venture) in the mining and/or oil & gas rising sectors.
The second half of our survey is devoted to describe the latest generation framework introduced by the new Argentine Civil and Commercial Code, that among other sophisticated legal issues, expressly governs pre-contractual negotiations matters, that despite dedicating the freedom to its parties to freely start up and walk away from negotiations, aiming a future contract formation or the closing of a deal, it faces certain substantive limitations, such as the statutory duty to comply with both good faith and confidentiality (regarding the disclosure and use of the information exchanged) standards, as well as not to frustrate the other party's belief to form a contract, without a reasonable cause.
From a corporate law practice standpoint, it suggests the establishment of certain meaures of care and diligence that Common Law parties that wish to structure a cross border transaction, governed by Argentine Law should take into consideration, when its new unified Civil and Commercial Code provisions will be in full force and effect, and might be further adopted in order to prevent such entities from being exposed to certain litigation scenarios (i.e. how to anticipate "bad faith" events during preliminary stages of a negotiation process).
2. US-Argentine Law conflicting views regarding the enforcement of pre-contractual liabilities issues and the mandatory application of the good faith principle:
The start up of preliminary negotiations under a cross border M&A deal, often involves a high negree of complexity, on the basis it is unlikely that a binding offer or an agreement would already exist, since the early stages of the transaction, based upon the circumstance that the target company's financial, legal, tax and accounting information would not be effectively known by the potential buyer until its due diligence investigation is closed.
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The commencement of pre-contractual dealings regarding this corporate business model is exposed to different sources of legal conflicts, despite a definitive contract would not be reached.
As a general rule, pre-contractual liability refers to a compensation claim brought to cover all the expenses incurred during a negotiation process aiming to form a contract, and it arises as a result of a frustration of one party's reasonable expectation that a binding agreement would be formed, caused by the other party's wrongful conduct.
There are several grounds to claim compensation damages by an aggrieved party under pre-contractual negotiation stages, mainly sustained in its sudden and abusive break-off wihout a reasonable cause, or throughout a breach of an implied duty to conduct preliminary negotiations in good faith, or an abusive withdrawal of a binding offer.
It is important to recall that a conflicting approach between Common Law and Civil Law concerning the recognition of pre-contractual liability appears as evident.
In fact, as a key section of the information set out by this paper, this opposed view concerning compensation claim rights arising from an unlawful termination of pre-contractual negotiation exists, in the interaction of US and Argentine legal systems.
Under Argentine Law,3 pre-contractual liability has not been expressly recognized by its Civil Code, in force since January 1st 1871, whose provisions will be replaced by the new Civil and Commercial Code, dated August 1st 2015.
However, a set of both Civil and Commercial Case Law and the favourable opinion of the majority of specialized doctrine have admitted the enforceability of pre-contractual liability claims sustained in certain private law principles that implicitly impact on the parties's conduct, such as, an abusive exercise of rights,4 the duty to act in good faith that not only applies to the execution of contractual obligations, but also is in effect since the early steps of its formation, and the obligation not to infringe damages to third parties.5
On the contrary, under US Law, a Common Law jurisdiction, as a general rule, it has not granted recognition to pre-contractual liability claims, due to a broad right granted to the parties freedom either to enter into or abandon preliminary negotiations, on the basis that the application of the good faith and fair dealing standards, only applies to contractual obligations6 (i.e. once the offer/acceptance process has been settled), excluding pre-contractual negotiation steps.
Based upon such comparative approach, in pre-contractual subject-matters, a key issue should be borne in mind by all such US multinational companies that wish to structure a M&A deal involving an Argentine-incorporated target corporation, on the basis the former shall be bound to observe a mandatory duty to negotiate in good faith (as it has been expressly recognized by the new Argentine Civil and Commercial Code), and thus, being exposed to litigation and/or liability risk as a result of an unlawful breaking off negotiation event.
Whereas Argentine Case Law has traditionally uphold the enforceability of pre-contractual liability claims arising out of a sudden and arbitrarily termination of preliminary negotiations caused by one parties' wrongful conduct that did frustrate the other parties' reasonable belief to conclude a definitive agreement, US Case Law has
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adopted a more flexible response by granting the parties the freedom to abandon informal negotiations and/or mutually agree to include standard release of liability clauses, as valid and enforceable measures.
In fact, pursuant to a recent Delaware Case Law, in Raa Management LLC v. Savage Sports Holding,7 the Delaware Supreme Court, applying New York Law, dismissed a claim brought by the plaintiff, seeking due diligence and negotiations costs that the former incurred while following the purchase of the target, prior to learning late in the due diligence of certain material liabilities that the defendant had failed to disclose earlier. The dismissal of the claim was upheld based on the non-disclosure agreement between the parties that included standard non-reliance and waiver clauses.
The non-disclosure agreement stated that defendant was not making any representation or warranty, express or implied, as to the accuracy or completeness of any information it provided to the plaintiff during due diligence. Additionally, the non-disclosure agreement stated that only those representations or warranties that are made in the sale agreement when, as and if it is executed, and subject to such limitations and restrictions as may be specified in such a sale agreement, shall have any legal effect.8
The underlying ratio of that Delaware Supreme Court ruling strenghtens the theory pursuant to which there are very isolated grounds to sustain a pre-contractual liability case arising from sudden termination of either informal negotiations or even these dealings covered by a confidentiality agreement, that would include irresponsibility clauses (i.e. non-reliance and waiver covenants), on the grounds of a broad...
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