when to call it quits and how to survive the break-up ... · when to call it quits and how to...
TRANSCRIPT
When to Call it Quits and How to
Survive the Break-Up --
Termination Clause Drafting Tips
Presented by:
Sarah Kahn, DLA Piper
Anne Donohue, SRA
International
Sanjay Beri, DLA Piper
May 19, 2015
Moderator and Panelists
Sarah Kahn, Moderator
Partner, Corporate, DLA Piper LLP (US)
Co-Chair Aerospace Defense & Government Services
Transactional Practice
Anne Donohue, Panelist
Senior Vice President and General Counsel, SRA International
Sanjay Beri, Panelist
Of Counsel, DLA Piper LLP (US)
Technology Sourcing & Commercial Practice
2
Overview
Factors to Consider When Crafting Termination
Clauses:
Type of Transaction?
Who has Right to Terminate and When?
What Obligations Survive Termination?
What Rights, Obligations, and Risk Allocations are
Triggered/Affected by Termination?
Should there be a Sunset on Post-Termination Remedies?
3
Termination Discussion Road Map
Present the drafting issue/risk that a clause is intended to
address
Provide a sample clause
Discuss what factors affect negotiation posture for the
issue/risk
Discuss the sample clause and desired negotiation outcome
with respect to such clause depending on each position of the
parties
4
Type of Transaction
Not “One Size Fits All”
Considerations regarding termination vary
significantly depending upon the type of
transaction, such as:
financings
commercial contracts/transactions
joint ventures
M&A
We will focus primarily on commercial transactions
and joint ventures.
5
Who has the Right to Terminate, and
When?
What is the relative position of the parties in
the transaction?
Licensor vs Licensee
Majority vs Minority Partner
Acquirer vs Target
When should a termination right arise? Breach
For Convenience/Without Reason
Insolvency/Bankruptcy
Milestone Failure
Specified Date(s)
6
Termination for Breach-Sample Clause
Issues with the following clause?
Either Party may, at its option, terminate this Agreement in the
event of a material breach by the other Party. Such termination
may be effected only through a written notice to the breaching
Party, specifically identifying the breach or breaches on which
such notice of termination is based. The breaching Party will
have a right to cure such breach or breaches within [__] days of
receipt of such notice, and this Agreement will terminate in the
event that such cure is not made within such [__]-day period.
7
Termination for Breach-Sample Clause
“Either Party may , at its option, by written notice, terminate this
Agreement in the event of a material breach by the other Party;
provided that the terminating Party is not also in material breach
Such termination may be effected only through a written notice to
the breaching Party, specifically identifying the breach or breaches
on which such notice of termination is based. ; and provided
further, tThat the breaching Party will shall have a right to cure any
such breach, or breaches if curable, within [__] days of receipt of
such notice. , and tThis Agreement will terminate in the event that
such cure is not made within such [__]-day period upon the
breaching Party’s receipt of such notice, if any such breach is not
curable, and upon the expiration of the [__]-day cure period if such
breach is curable but has not been cured on or before such
expiration. Any notice pursuant to this Section [__] shall specify the
breach(es) on which such termination is based.”
8
Termination for Convenience-
Sample Clause
“Either Party may terminate this Agreement for convenience by
providing [__] days advance written notice to the other Party.”
Often a starting point but termination for convenience can
dramatically alter the value of the transaction to a company,
even if certain termination costs are covered
Software as a service transactions (costs are up-front)
Services engagements (replacement requirements)
Distribution arrangements (sunk costs to establish markets)
Opportunity costs (M&A in particular)
9
Termination Upon Bankruptcy
or Insolvency – Sample Clause
What verbiage below helps protect against misuse of a
bankruptcy termination clause by counterparty?
“Either Party may, at its option, terminate this Agreement
immediately upon written notice to the other Party, in the event
(i) the other Party becomes insolvent or unable to pay its debts
when due; (ii) the other Party files a petition in bankruptcy,
reorganization or similar proceeding, or, if filed against, such
petition is not removed within ninety (90) days after such filing;
(iii) the other Party discontinues it business; or (iv) a receiver is
appointed or there is an assignment for the benefit of such other
Party’s creditors.”
10
Termination Upon Bankruptcy
or Insolvency – Sample Clause
Ability to Remove
“Either Party may, at its option, terminate this Agreement
immediately upon written notice to the other Party, in the event
(i) the other Party becomes insolvent or unable to pay its debts
when due; (ii) the other Party files a petition in bankruptcy,
reorganization or similar proceeding, or, if filed against, such
petition is not removed within ninety (90) days after such filing;
(iii) the other Party discontinues it business; or (iv) a receiver is
appointed or there is an assignment for the benefit of such other
Party’s creditors.”
11
What Rights, Obligations, and Risk
Allocations Survive Termination?
Rights
Accrued payments Success/finder fee
Distributions Trademarks/Service marks
Licenses Received Deliverables
Obligations
Confidentiality Licenses
Non-competition/non-solicitation/non-disparagement
Return of Data
Risk Allocations
Warranties Limitations of Liability
Disclaimers Indemnities
12
What Rights and Obligations Survive
Termination? (cont.) – Sample Clauses
Which is preferable?
“Anything herein to the contrary notwithstanding, the provisions of
the Agreement relating to confidentiality and any other provisions
which by their nature should survive termination or expiration of this
Agreement, shall so survive.”
or
“The provisions of Sections [__] (Negative Covenants), [__]
(Ownership), [__] (Confidentiality), [__] (Disclaimers),
[__](Limitations of Liability), [__](Effect of Termination), [__]
(Survival) and [__] (Miscellaneous) will survive the termination of
this Agreement.”
The first sample clause increases the risk of dispute
upon termination.
13
What Rights and Obligations are
Triggered by Termination?
Destruction/return of confidential information (N.B.
customized software solutions that rely on that data going
forward?)
Return of equipment
Removal of personnel from shared site
Payment of amounts owed
Termination/breakup fee
Obligations to uninstall software (licenses)
Costs (include 3rd party) associated with termination
Possibly transition services (consider duration, payment)
14
What Rights and Obligations are
Triggered by Termination? (cont.)
Rights to payment for continuing use of
trademarks/obligations to remove and destroy
any materials containing trademarked items
In services engagements, obligations to provide
work-in-process (Should payment terms attach to
such delivery, e.g. where milestones not yet
met?)
Rights to sell through existing inventory, wind-
down operations (any continuing need for
trademark use for marketing purposes related to
such wind-down)
15
Effect of Termination – Sample
Clauses
“Upon any termination of this Agreement, (i) Customer shall (A)
immediately discontinue all use of the Application Service, the
Application Documentation, and any Company Confidential
Information, and (B) promptly pay to Company all amounts due
and payable to Company hereunder; and (ii) both Parties shall
(A) delete any of the other Party’s Confidential Information from
their respective computer storage or any other media including,
but not limited to, online and off-line libraries; and (B) return to
the other Party or, at the other Party’s option, destroy, all copies
of the Application Documentation and any Confidential
Information then in the other Party’s possession. Customer shall
be entitled to access Customer data within Company’s
Application Service for a period of thirty (30) days following
expiration or termination of this Agreement.”
16
Sunset for Post-Termination Remedies?
Effect of governing law and applicable statute of limitations;
Inclusion of terms to bar claims after a particular period that
varies from the statute of limitations.
Example:
“All claims, including accrued claims to receive payment, will expire
on the second anniversary of the Contract’s expiration or
termination, after which each Party hereby irrevocably releases and
waives claims other than any claims arising from the other Party’s
infringement of its intellectual property rights or misappropriation of
its Proprietary Information.”
17
Termination Clauses – Key Takeaways
Contract expiration dates or exit ramps for termination should
be should be drafted such that the dates are expressed with
certain dates and hours certain rather than as anniversaries
that may fall on bank holidays or weekends
Consider establishing set rates for future costs with prescribed
escalation for out-years
Set firm-fixed price for costs associated with return of materials
to avoid charges associated with downloading and transfer of
historical data
Ensure legal costs associated with and required support for
service of process will be “reasonable”
Ensure licenses, if transferred, will cover successors in
interest, assignees, merged entities, spin-offs etc.
18
FAR-Based vs. Commercial
Terminations for default or convenience have standard implications
depending on contract type; FAR is based on equitable principles
Entitlement to payments more clear
Default could result in charge for re-procurement costs and
payment for performance costs that exceed value of the current
contract (often defaults negotiated into no-cost convenience
terminations)
Unilateral termination by government for convenience typically
allows for recovery of reasonable wind-up costs and payment for
work performed prior to termination dependent on contract type
and quality of documentation in termination settlement proposal
Commercial Terminations
Uniform Commercial Code provides some protections
Drafting language is more critical to recovery and rights surviving
19
Sarah Kahn
Sarah Kahn is a corporate partner at DLA Piper and Co-
Chair of the firm’s Aerospace, Defense and Government
Services Transactional practice. Her practice focuses on
mergers and acquisitions of both private and public
companies, including manufacturers, technology
developers and service providers, with special experience
in mergers and acquisitions for clients in international
aerospace, defense and government services.
She also counsels clients in connection with their
commercial contracts and joint ventures and on matters of
national security, including the structuring of foreign
ownership, control or influence (FOCI) mitigation
arrangements under applicable national industrial security
regulations and Exon-Florio reviews before the Committee
on Foreign Investment in the United States (CFIUS).
Sarah holds a B.A. from the University of North Carolina—
Chapel Hill and a J.D. from Georgetown.
Partner, Corporate
Co-Chair Aerospace
Defense & Government
Services Transactional
Practice
DLA Piper LLP (US)
(202) 799-4210
20
Anne Donohue
As General Counsel, Anne Donohue manages all corporate
transactions along with business, employment and contract
law activities. Donohue joined SRA in 1990 as Corporate
Security Manager and served in successive roles as Director
of Security, Deputy Director of Asset Management, Director of
Contracts and Procurement and Corporate Counsel.
Before joining SRA, Anne worked for the Institute for Defense
Analyses and prior to that, for ADS, a technology company
specializing in artificial intelligence. Anne is admitted to
practice law in the Commonwealth of Virginia and the District
of Columbia. As a member of several bar associations, she is
active in the public contract law section of the American Bar
Association.
Anne holds a bachelor's degree in political science from the
University of Michigan and a juris doctorate degree from The
Catholic University of America.
Senior Vice President &
General Counsel,
SRA International
(703) 227-7062
21
Sanjay Beri
Sanjay Beri's practice focuses primarily on technology
licensing, information technology procurement and complex
commercial transactions. Sanjay has particular experience in
counseling clients on the monetization of their intellectual
property assets. He has represented clients in a broad
spectrum of industries, including software, medical device,
satellite, mobile, health care, payments and online
advertising, regarding the structuring and negotiation of their
technology-related deals and distribution arrangements.
He has drafted and negotiated a wide range of agreements,
including enterprise software licensing agreements,
application service provider agreements, distribution/reseller
agreements, services agreements, development agreements,
consulting agreements, IT procurement and content licensing
and hosting contracts.
Sanjay holds a B.A. from the University of Washington and a
J.D. and LLM from Cornell University.
Of Counsel, Technology
Sourcing & Commercial
Practice
DLA Piper LLP (US)
(703) 773-4066
22