DealLawyers.com Blog

This article from Prof. Lawrence Cunningham makes a point that most M&A lawyers probably would agree with – there are often very important parts of a business deal that can’t be completely reduced to reps, warranties & covenants. Instead, fulfillment of these obligations depends on a party’s own sense of what integrity requires.

Cunningham contrasts the outcomes of non-binding commitments made by Warren Buffett to Benjamin Moore’s independent distributors with detailed contractual provisions governing Pittsburgh’s status as the post-deal home of Heinz after its acquisition by 3G.  While Buffett’s non-binding commitment has been honored for the past 17 years, the more formal commitment provided by 3G has proven to be less than iron-clad.  Here’s an excerpt:

In Heinz, the merger agreement devoted an entire section to the company’s cultural connection to Pittsburgh. It declared “that after the Closing, the Company’s current headquarters in Pittsburgh, Pennsylvania will be the Surviving Corporation’s headquarters.” A covenant, which survives the closing and is made by the acquisition vehicle Berkshire-3G jointly owned (called the “Parent”), promises: “after the Closing, Parent shall cause the Surviving Corporation to preserve the Company’s heritage and continue to support philanthropic and charitable causes in Pittsburgh.” The contract required the parties to reference these commitments in their press releases about the deal.

But within a year of the Heinz deal, the company, led by managers appointed by 3G, cut 300 jobs at Pittsburgh headquarters. A further Pittsburgh dilution occurred soon thereafter, when Heinz merged with Chicago-based Kraft to form The Kraft Heinz Company. While the company adopted dual headquarters and asserted it was keeping its Pittsburgh covenants, locals perceived a hollowing out and migration to Chicago. Then two years after that, last Friday, Kraft Heinz made an unsolicited bid for Unilever, the global giant dual-headquartered in Amsterdam and London!

Cunningham concedes that 3G’s actions may not have violated its covenants, but ruefully observes the contrast between the two transactions – in the Benjamin Moore deal, an informal promise has been “honored with spirited punctiliousness” while the Heinz deal’s highly formalized one has been “more technically managed.”

Of course, it should be noted Buffett’s Berkshire Hathaway partnered with 3G for the Heinz deal – and in another article, Cunningham suggests that given their contrasting approaches to deal-making, they’re a very odd couple indeed.

– John Jenkins