BUSINESS DIVORCES:  Drafting the Resolution Agreement — When Will Closing Occur?

Drafting the Resolution Agreement - Some Typical Provisions posted last week briefly discusses three kinds of provisions typically found in most business divorce resolution agreements.  (The single essential term in every divorce agreement — Mutual Releases — is addressed in Drafting the Resolution Agreement - The Single Essential Provision.)

I had planned to use this week’s post to write about some additional typical provisions that usually belong in a business divorce agreement.

As I began writing, however, I realized that it might be helpful to discuss simultaneous closing agreements and deferred closing agreements. Some clients don’t understand the difference; some clients don’t comprehend why an attorney prefers to choose one over the other.  Whether the closing is deferred or not also affects whether many provisions need to be included in the contract. 

First, some Elementary Negotiation Theory

Whenever two persons negotiate the terms for a possible transaction between them, at least two sets of negotiation are happening.

When they discuss the actions each will take and the promises each will make to the other, those persons are negotiating about the subject matter of the negotiation.  That set of negotiations is overt:  they speak words to one another and they exchange written drafts of a potential agreement.   This set of negotiations is important, of course.

At the same time, a more important set of negotiations is ongoing.  That set is the negotiation about the procedure of the negotiation, or negotiation about the negotiation.  The negotiation about the negotiation is often silent although real.  That negotiation expresses itself through various manners: words not spoken, language not included in drafts, scheduling of meeting places and times, and many other ways.

Next, the Topic Defined: Simultaneous or Deferred Closing

Like an asset or stock purchase agreement, a business divorce agreement may contemplate a simultaneous or a deferred closing.  If the actions take place when the agreement is signed, the closing is said to be “simultaneous” because the contract and the transactions it contemplates occur at the same moment, legally speaking.  When those transactions will occur after the date of the agreement’s signing, there is a “deferred” closing.

A common example of a deferred closing agreement that everyone is familiar with is the residential purchase contract for buying a home.  In contrast, a contract to purchase a car is commonly a simultaneous closing agreement.

How Negotiation Theory and the Choice between Simultaneous or Deferred Closing Converge

Our post Drafting the Resolution Agreement — Initial Choices  describes the different ways that parties in a business divorce can document their discussions and agreements.  Even when negotiations progress to the point where the owners can enter into a definitive agreement,   they may nevertheless disagree over a simultaneous versus a deferred closing.

Where the actions to complete the divorce are few and uncomplicated, and also not dependent upon conditions beyond the parties’ control, a simultaneous closing agreement appears to be the better choice.  In contrast, when the completion of the divorce depends upon a condition that the parties to the agreement cannot effect (like a lender’s release of collateral or the approval of a governmental authority), a deferred closing agreement will be necessary.

Between those two clearly opposite situations, however, the choice between a simultaneous or a deferred closing agreement can become gray.  That is one of the regions where the “negotiation about the negotiation” that has been underway from the commencement of negotiations can determine whether the owners enter into a simultaneous closing or a deferred closing agreement.

An Illustration

Imagine a business divorce where there are no third party approvals necessary for the divorce to occur and no other obstacles to closing that are beyond the owners’ control.  Accordingly, there is no compelling reason for the owners to select a deferred closing agreement instead of a simultaneous agreement.

Imagine too that the first owner is unwilling to sign anything until everything is agreed upon in writing to the minutest detail.  That includes the execution form for every one of the separate ancillary documents, which may consist of an amendment to the company’s governing documents, an assignment of ownership interest, a noncompetition or consulting agreement, asset assignment instruments (including deeds), and so on.  

The second owner is different: eager to get everyone legally committed to an enforceable contract as quickly as possible, he wants to sign as soon as the material terms have been agreed upon although specifics remain to be finalized before closing.  The second owner is willing to leave the drafting of the separate ancillary documents to the post-signing, pre-closing period.  He believes that the first owner and her attorney may take days or even weeks to agree on the final forms of all of the ancillary documents.  Also, he suspects that the first owner and her attorney may try to take advantage of the ancillary document drafting process to further negotiate some of the substantive terms of the business divorce agreement.

If the first owner prevails, there will be no written contract (and he will not be bound) until the agreement and all ancillary documents are absolutely final.  However, while he protects himself from becoming bound until every i and t have been dotted and crossed to his satisfaction, the second owner may so improve his BATNA (see The Importance of BATNA) that he elects NOT to sign the agreement.

If the second owner prevails, he will have bound the first owner to go forward with the divorce on “legally sufficient” but possibly bare-bone terms.  However, the second owner may come to rue his haste, since he will be as legally bound to the divorce actions as the first owner.  What does the second owner do if the parties stalemate over the drafting of the ancillary documents?

The Conclusion

Here are two opposing examples of inertia.  The first owner prefers to stand still until she becomes convinced that the path forward will be free of obstacles.  The second owner prefers to create the momentum that he feels is necessary to consummate the divorce.

The owner who prevails in this contest will likely be the owner who, from the beginning, has acted more consciously and deliberately to win the “negotiation about the negotiation.”

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