Corporate & Securities Law

The Coin Toss in Dealmaking

By Ken Adams

I recently encountered a contract that had the parties making a decision by coin toss. That prompted me to scour the SEC’s EDGAR system looking for contracts that feature a coin toss, otherwise known as a coin flip. I found contracts that used a coin toss to accomplish the following:

• To determine who goes first when striking names from a list of arbitrators. [This use accounted for the vast majority of coin-toss references.]
• To select an accounting firm.
• To determine who has seniority among two or more employees of otherwise equal seniority.
• To break a tie among two bidders for a union job.
• To determine who will take the lead in obtaining intellectual property protection for an invention if it is determined that both parties made equal contributions.
• To determine which LLC member gets to select which LLC projects get distributed to it on dissolution of the LLC if dissolution was by agreement of the members.
• To select a physician or psychiatrist responsible for determining whether an employee is disabled.
• To determine who will prepare the minutes of the first steering committee meeting.
• To select the place of arbitration.
• To determine which of two parties gets to choose first in a process whereby the parties take turns choosing territories.

One contract even went so far as to specify the procedure to be used in any coin toss. Here, in all its unedited glory, is the provision in question:

At the closing of the Unwind Procedure, the Partners will determine which of the Partners will select the first Qualified Market by the toss of a U.S. minted coin. The toss of such coin shall be governed by the following provisions:

(i) A representative of Pace at the closing of the Unwind Procedure shall be responsible for selecting the coin to be tossed and then subsequently tossing the coin.

(ii) A representative of Sony/Block shall have the opportunity to inspect the coin selected by the representative of Pace and the parties shall agree as to which side of the coin will be designated the “head” of the coin and which side will be designated as the “tail” of the coin. After these initial agreements have been reached, the representative of Pace will toss the coin in the air. While the coin is in the air, the representative of Sony/Block will call either “heads” or “tails” in a loud, audible voice. The representative of Pace who tosses the coin into the air will allow it to fall to the floor.

(iii) If the side of the coin called by the representative of Sony/Block is facing up, then Sony/Blockshall be deemed the “winner of the flip.” Otherwise, Pace shall be deemed to be the “winner of the flip.”

I see all sorts of scope for additional precision. For example, what does “toss the coin in the air” mean? (I’m joking …)

If you’ve seen colorful instances of use of a coin toss in a contract, do tell.

Full post as published by AdamsDrafting on February 21, 2009 (boomark / email).