Unintended Consequences: Don’t Forget the Litigation Risks When Getting a Deal Done

Transactional attorneys play a key strategic role in drafting essential documents, such as corporate formations and contracts, on behalf of corporate clients. With a client’s current needs at the forefront—often accompanied by the excitement and pressures of getting a deal done—a drafting attorney's priority may not be on future, hypothetical litigation. And drafting decisions without an adequate eye toward litigation may inadvertently create challenges and complexities in litigation that could have been mitigated at the drafting stage.

Large (and even not-so-large) corporate deals often involve multiple entities, some of which are affiliated with other parties and nonparties to the deal; multiple owners, officers, and directors; and multiple legal documents to effectuate the deal. Often these multiple documents are compiled and circulated in a “deal book.” The attorneys sometimes even make themselves “deal toys” to commemorate the “deal” (sometimes to the envy of trial attorneys, where such toys aren’t a thing).

Behind this plethora of documents usually lie complex legal and business reasons involving tax benefits, IP ownership, investor requirements, other strategic decisions, and sometimes good old-fashioned horse trading that drive the ultimate structure of a deal. Yet the justification for these well-thought-out strategies and their corresponding effects on the documentation of the ultimate deal often disappear over time.

For example, years after an exciting deal has consummated, it sours, and disputes arise. Party A to the deal wants to sue Party B. Enter the litigator, who—after carefully considering her client’s identity and how to ensure privilege protection¹—analyzes the operative documents and develops a legal theory under one of the contracts, noting the agreement requires that Illinois law apply to any disputes arising from the contract and that the exclusive resolution venue be the Northern District or state courts of Illinois. But the litigator also discovers a viable fiduciary-duty claim against a Party A director who’s also affiliated with Party B, complicated by Party A’s certificate of incorporation requiring that all fiduciary claims against directors be brought in Delaware. So where should she file suit?

Not wanting to voluntarily enter a two-front war, she advises the client to move forward with just the fiduciary-duty claim in the Delaware Court of Chancery and hold fire on the contract claim for now. But litigation is not a game of solitaire, and one’s adversary often has a say in which battles will be fought. And—looking for leverage—the adverse party, Party B, decides it has a claim against an affiliate of Party A, under yet a third agreement in the deal book that contains a nonexclusive venue provision allowing claims to be brought in Minnesota, Party B’s home state. So, Party B files suit against A’s affiliate in Minnesota. Now our intrepid counsel, who represents Party A and now A’s affiliate, is effectively fighting a two-front war while reserving A’s unfiled contract claim against B, which must be filed in Illinois.

Even assuming that, as a legal matter, all parties have diligently maintained and respected the corporate distinctions among the various entities and no basis exists for piercing the client-privilege barrier, as a practical matter, two sides clearly exist: those aligned with Party A and those aligned with Party B—regardless of which individuals or affiliates are named in the various lawsuits. And no settlement will get done without a global resolution of all the disputes between Party A and Party B and all their respective affiliates. But a global resolution often does not happen immediately. Usually, a certain amount of motion practice and discovery must happen before both parties are ready to come to the table at all—let alone be willing to come to a deal. 

In the meantime, litigation is costly. And litigating on multiple fronts is even worse. Depending on whether the case is in federal or state court, a court might consider transferring venue so the cases can be either consolidated or, at least, coordinated. But transfer may not be possible when issues of personal jurisdiction or exclusive jurisdiction render one of the venues inappropriate. It also may not be an option if one or more cases are in state court, without the ability to remove to federal court where there might be more venue-transfer mechanisms. And a judge may deny a motion to stay when parties, though aligned, are not identical with those of the other matter. Even with the means to make such motions, you are fighting about where to have a fight—and, even if you win this battle, you still must win the actual war.

For unavoidable multiple-front wars, it usually makes sense to assign one lead counsel to oversee all matters, but there will likely be a need to hire local counsel in one or more jurisdictions. The alternative is to hire separate counsel for each matter, but it will require close coordination to ensure counsel takes consistent positions. Coordination will also result in higher fees.

Likewise, discovery is often the most expensive part of litigation, and undertaking it and paying for it twice or more is not an efficient use of anyone’s capital. Further, the ability to coordinate discovery could be limited if the cases come before different judges with different timelines. In addition to direct costs, your officers and employees may have to sit for multiple depositions, further taking time away from running the actual business. And since some of the factual issues will likely overlap, inconsistent rulings and findings from the courts become a risk, as well.

Looking back, was there a strategy behind the venue decision? Or was it just a remnant from an earlier version used as a template or thrown in without much thought? Perhaps there was a reason for this decision. But if the drafting parties and counsel cannot identify strategic rationale for varying venue and jurisdiction provisions, then they should think twice and consider making them consistent. Otherwise, all the other benefits they so carefully structured could be undermined by the unnecessary cost of a multifront conflict. While the war may not be avoidable, with some advance forethought and planning, you can contain the theater in which you fight it.