Corporate & Securities Law

When Adding ?Material? to a Representation, Which Noun Should You Modify?

By Ken Adams

Over the years I’ve written about materiality a number of times. The discussion in MSCD represents my most recent take, but I’m revisiting the subject for purposes of my forthcoming booklet on the structure of M&A contracts. While finalizing the booklet?a task that has taken me away from blogging?I’ve found myself considering an issue that I haven’t previously addressed head-on. Below is the current draft of the analysis of that issue that I propose adding to the booklet. It’s in the section discussing use of the defined term Material, defined so as to eliminate the ambiguity that otherwise afflicts material. I address elsewhere in the booklet factors to consider when deciding whether to modify a given representation using Material on its own or as part of the phrase material adverse change.

***

A representation might contain only one noun that could be modified by Material, as in [1].

[1]     Schedule 4.8 lists each Material contract to which the Seller is party.

But often a representation contains two such nouns, raising the question whether, for purposes of adding a materiality qualification to the representation, you should modify one or the other noun, as in [2] and [2a], or both, as in [2b]. It would make the most sense to modify the noun that represents the focus of the representation. The focus of [2] and its variations is contract defaults, not the contracts themselves, so it would make the most sense to have Material modify default, as in [2].

[2]     The Seller is not in Material default under any contract to which it is party.

[2a]   The Seller is not in default under any Material contract to which it is party.

[2b]   The Seller is not in Material default under any Material contract to which it is party.

By contrast, [2a] would seem both overinclusive and underinclusive?it would be rendered inaccurate by any default under any of the contracts in question, no matter how trivial, but wouldn?t be rendered inaccurate by default under a contract that doesn?t meet the high level of significance inherent in Material, no matter how serious the consequences of that default. And [2b] would be underinclusive?it would seem illogical to exclude from the scope of the representation, just because they involve contracts other than Material contracts, defaults that would otherwise fall within the definition of Material.

Full post as published by AdamsDrafting on June 27, 2010 (boomark / email).