Drafting For An Exit That May Fail

DRAFTING FOR AN EXIT THAT MAY FAIL¹

“The explicit terms of a contract are always the final word with regards to the intention of the parties.”²

INTRODUCTION

An exit clause may look complete because it specifies a date, a return and a payment formula. It may nevertheless be unworkable if, when performance falls due, the proposed exit cannot lawfully be implemented or a third-party approval halts such exit that the documents do not adequately address. The problem is not confined to any particular instrument, way of drafting or transaction structure. Unless the documents identify and allocate those constraints when the exit is negotiated, structured investments, deferred consideration, earn-outs, put and call arrangements, third-party dependent exits and consent-dependent distributions can turn a promised commercial outcome into a performance dispute.