June 22, 2017

Private Deals: Rethinking “No 3rd Party Beneficiaries”

This recent blog from Weil Gotshal’s Glenn West takes issue with the idea that the standard “no 3rd party beneficiaries” boilerplate is the right approach for private company M&A. This excerpt explains that, in many private deals, a blanket disclaimer of intent to benefit non-parties is inappropriate:

The fact is that many merger or purchase and sale agreements do contain obligations that are intended to benefit persons who are not named parties. For example, it is not uncommon for a private company acquisition agreement to state that the seller’s indemnification obligations are in favor not only of the named buying entity, but also in favor of its affiliates, who may actually suffer the losses being indemnified.

Similarly, the nonrecourse provision that private equity buyers include to limit exposure beyond the specific named parties to the agreement is clearly intended to benefit (and be enforceable by) persons (affiliates) who, by definition, are not the named parties. But the provisions relating to continued employment for target company employees are specifically not intended to be enforceable by those employees, who are otherwise strangers to the contract.

Without careful drafting to identify which provisions are and are not intended to be excepted from the “no third-party beneficiary” clause, a conflict can be created that threatens the bargained-for benefits for nonparty affiliates (a sinking of a friendly ship if you will). After all, “where a provision in a contract expressly negates enforcement by third parties, that provision is controlling.”

Buyers & sellers need to carefully determine which contractual provisions are intended to benefit 3rd parties and add appropriate language carving those provisions out of the standard “no 3rd party beneficiaries” boilerplate.

John Jenkins