Contractual Potholes on the Road to M&A

Ambiguity, not clarity, can emerge from the complex documentation prepared in an M&A deal. A Delaware case, LSVC Holdings, LLC v. Vestcom Parent Holdings, Inc. made this clear. As a first step, a Delaware court will look only to the four corners of the contract to establish the parties’ intent. If the meaning of a provision is not susceptible to more than one reasonable interpretation, the court ends its inquiry. If there is ambiguity, it may look to extrinsic evidence to divine the intent of the parties.

In the LSVC case, the court sought to resolve the ambiguity by digging into extrinsic evidence. In its decision, it cited oral negotiations, drafts of the letter of intent, interim drafts of the agreement and issues lists. Often, there is an additional layer for a court to consider, an “interpretive” section to the agreement that lays down guidelines for interpreting a contract. An example is the statement that a contract should be read as though it were mutually drafted by the parties.

Contracts are read by courts as a whole in order to understand meaning. When meaning is unclear, a court will look to the facts and context surrounding the deal terms. Deviations from common law standards of contractual interpretation imposed pursuant to interpretive provisions need to be thoughtfully considered in light of the specific deal, not merely accepted as hand-me-downs from precedent of a prior era.