When to Call it Quits and How to Survive the Break-Up -- Termination Clause Drafting Tips

Transcription

1 When to Call it Quits and How to Survive the Break-Up -- Termination Clause Drafting Tips May 19, 2015 Presented by: Sarah Kahn, DLA Piper Anne Donohue, SRA International Sanjay Beri, DLA Piper

2 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

3 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

4 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

5 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

6 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

7 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

8 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

9 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

10 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

11 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

12 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

13 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

14 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 3 rd party) associated with termination Possibly transition services (consider duration, payment) 14

15 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, winddown operations (any continuing need for trademark use for marketing purposes related to such wind-down) 15

16 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

17 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

18 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

19 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

20 Sarah Kahn Partner, Corporate Co-Chair Aerospace Defense & Government Services Transactional Practice DLA Piper LLP (US) (202) 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. 20

21 Anne Donohue Senior Vice President & General Counsel, SRA International (703) 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. 21

22 Sanjay Beri Of Counsel, Technology Sourcing & Commercial Practice DLA Piper LLP (US) (703) 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. 22