Unintended Consequences: Don’t Forget The Litigation Risks When Getting A Deal Done – Contracts and Commercial Law

Transactional attorneys play a key strategic role in drafting
essential documents, such as corporate formations and contracts, on
behalf of corporate clients. With a client’s current needs at
the forefront—often accompanied by the excitement and
pressures of getting a deal done—a drafting attorney’s
priority may not be on future, hypothetical litigation. And
drafting decisions without an adequate eye toward litigation may
inadvertently create challenges and complexities in litigation that
could have been mitigated at the drafting stage.

Large (and even not-so-large) corporate deals often involve
multiple entities, some of which are affiliated with other parties
and nonparties to the deal; multiple owners, officers, and
directors; and multiple legal documents to effectuate the deal.
Often these multiple documents are compiled and circulated in a
“deal book.” The attorneys sometimes even make themselves
“deal toys” to commemorate the “deal”
(sometimes to the envy of trial attorneys, where such toys
aren’t a thing).

Behind this plethora of documents usually lie complex legal and
business reasons involving tax benefits, IP ownership, investor
requirements, other strategic decisions, and sometimes good
old-fashioned horse trading that drive the ultimate structure of a
deal. Yet the justification for these well-thought-out strategies
and their corresponding effects on the documentation of the
ultimate deal often disappear over time.

For example, years after an exciting deal has consummated, it
sours, and disputes arise. Party A to the deal wants to sue Party
B. Enter the litigator, who—after carefully considering her
client’s identity and how to ensure privilege
protection—analyzes the operative documents and develops a
legal theory under one of the contracts, noting the agreement
requires that Illinois law apply to any disputes arising from the
contract and that the exclusive resolution venue be the Northern
District or state courts of Illinois. But the litigator also
discovers a viable fiduciary-duty claim against a Party A director
who’s also affiliated with Party B, complicated by Party
A’s certificate of incorporation requiring that all fiduciary
claims against directors be brought in Delaware. So where should
she file suit?

Not wanting to voluntarily enter a two-front war, she advises
the client to move forward with just the fiduciary-duty claim in
the Delaware Court of Chancery and hold fire on the contract claim
for now. But litigation is not a game of solitaire, and one’s
adversary often has a say in which battles will be fought.
And—looking for leverage—the adverse party, Party B,
decides it has a claim against an affiliate of Party A, under yet a
third agreement in the deal book that contains a nonexclusive venue
provision allowing claims to be brought in Minnesota, Party B’s
home state. So, Party B files suit against A’s affiliate in
Minnesota. Now our intrepid counsel, who represents Party A and now
A’s affiliate, is effectively fighting a two-front war while
reserving A’s unfiled contract claim against B, which must be
filed in Illinois.

Even assuming that, as a legal matter, all parties have
diligently maintained and respected the corporate distinctions
among the various entities and no basis exists for piercing the
client-privilege barrier, as a practical matter, two sides clearly
exist: those aligned with Party A and those aligned with Party
B—regardless of which individuals or affiliates are named in
the various lawsuits. And no settlement will get done without a
global resolution of all the disputes between Party A and Party B
and all their respective affiliates. But a global resolution often
does not happen immediately. Usually, a certain amount of motion
practice and discovery must happen before both parties are ready to
come to the table at all—let alone be willing to come to a
deal.

In the meantime, litigation is costly. And litigating on
multiple fronts is even worse. Depending on whether the case is in
federal or state court, a court might consider transferring venue
so the cases can be either consolidated or, at least, coordinated.
But transfer may not be possible when issues of personal
jurisdiction or exclusive jurisdiction render one of the venues
inappropriate. It also may not be an option if one or more cases
are in state court, without the ability to remove to federal court
where there might be more venue-transfer mechanisms. And a judge
may deny a motion to stay when parties, though aligned, are not
identical with those of the other matter. Even with the means to
make such motions, you are fighting about where to have a
fight—and, even if you win this battle, you still must win
the actual war.

For unavoidable multiple-front wars, it usually makes sense to
assign one lead counsel to oversee all matters, but there will
likely be a need to hire local counsel in one or more
jurisdictions. The alternative is to hire separate counsel for each
matter, but it will require close coordination to ensure counsel
takes consistent positions. Coordination will also result in higher
fees.

Likewise, discovery is often the most expensive part of
litigation, and undertaking it and paying for it twice or more is
not an efficient use of anyone’s capital. Further, the ability
to coordinate discovery could be limited if the cases come before
different judges with different timelines. In addition to direct
costs, your officers and employees may have to sit for multiple
depositions, further taking time away from running the actual
business. And since some of the factual issues will likely overlap,
inconsistent rulings and findings from the courts become a risk, as
well.

Looking back, was there a strategy behind the venue decision?
Was it just a remnant from an earlier version used as a template or
thrown in without much thought? Or was it kept the same as the
choice-of-law provision? (Remember, a company may want to have
different law to apply to different agreements for valid strategic
reasons. But the venue and jurisdiction need not be the same as the
choice-of-law provision.) If the drafting parties and counsel
cannot identify a strategic rationale for varying venue and
jurisdiction provisions in contracts from the same deal, then they
should think twice and consider making them consistent. Otherwise,
all the other benefits they so carefully structured could be
undermined by the unnecessary cost of a multifront conflict. While
the war may not be avoidable, with some advance forethought and
planning, you can contain the theater in which you fight it.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.