Charlie had successfully negotiated more than 50 merger and acquisition transactions in his 20-year career, and without exception each one turned out just fine for his client. The seller gladly accepted the fat check at closing beaming all the way to the bank while the buyer walked away victoriously having purchased a company that it would soon turn into a cash cow under its unquestionably superior management. But the Long Horn Saloon deal would be different.

Charlie's firm — Lasso & Saddle — had represented the two shareholders of the Long Horn Saloon — Ted Tipsy and Paulina Party — when they sold their seemingly thriving tavern and dance hall to a mega company from New York City. Ted and Paulina had relied on Charlie's advice for years, first when Long Horn Saloon was incorporated as a Nevada corporation and through the tumultuous years when the two partners admitted new members to the venture and drove out others. Through it all, Ted and Paulina stayed together with Charlie's able assistance.

With Charlie's steady hand, Long Horn grew from its one original tavern location into a small chain with multiple locations throughout Nevada, including Reno, Las Vegas, Carson City and Tahoe. Revenues expanded as well, from a half million in the mid-1990s to more than $10 million during the year of the sale. The city slickers from New York — Big Apple Consolidators Inc. — paid a handsome multiple for the company, some five times annual revenues. Ted and Paulina each walked away from the closing with millions in cash and immediately left on European vacations to enjoy their hard-earned profits.

Months later, Charlie organized a closing dinner at which he was reminded of his clients' penchant for throwing raucous parties. But the fax that was marked "URGENT" and delivered to his table, having been forwarded to the restaurant by his secretary, brought the merriment to a sudden and unpleasant end.

The fax cover page was smudged with chocolate fondue from the dessert tray, but Charlie quickly realized that the underlying letter was from Big Apple's outside law firm. Big Apple's Manhattan lawyer didn't mince words. He claimed in the first paragraph that Ted and Paulina had defrauded his client and breached many of the representations and warranties in the purchase agreement. The allegations stunned Charlie. He bolted from the dinner table, bidding a rushed farewell to Ted and Paulina, and headed straight for his office across town, drips of fondue spotting his perfectly white shirt.

As Charlie sped toward his office, he began to read the draft complaint that accompanied the letter. Big Apple alleged that Ted and Paulina failed to disclose a significant contingent liability that, since the closing, came to fruition resulting in a settlement by Big Apple for $10 million. Two former patrons of Long Horn had filed negligence lawsuits against Long Horn three months after Big Apple took ownership of the company.

The former patrons had been drinking in Long Horn Saloon's Carson City location two weeks before the acquisition closed. Apparently the two left the bar in separate cars and collided with each other in the snowy mountains leading to Lake Tahoe. Both drivers were severely injured in the crash. The police reported that each driver had a blood alcohol level well in excess of legal limits.

Each former patron sued Long Horn for damages under Nevada's Dram Shop Doctrine, claiming that the tavern was negligent in overserving them alcohol that night. Big Apple negotiated a settlement that cost it $4 million. In its draft complaint, Big Apple claimed that Ted and Paulina knew about the crash and the prospects for a claim because the plaintiffs' lawyers told Big Apple that they had called Ted two days after the crash to question him about the company's insurance policy limits and threatened suit against the Long Horn owner.

The cover letter suggests that Big Apple came to a quick settlement in the matter in exchange for an agreement by the plaintiffs not to seek criminal charges against Long Horn, which would have jeopardized its liquor and gambling licenses. Now Big Apple was on a mission to be made whole.

The draft complaint alleged that the purchase agreement made an unqualified representation that neither Ted nor Paulina were aware of any threatened litigation against Long Horn pending the sale and that Ted and Paulina breached that representation and warranty. Accordingly, under the indemnification covenant in the purchase agreement, Ted and Paulina, the complaint claimed, were obligated to make Big Apple whole for the $10 million loss.

Charlie's heart beat faster as he reached for the closing bible marked "Long Horn Saloon/Big Apple Consolidators Inc." and the signed copy of the definitive purchase agreement contained behind tab five. Charlie didn't even have to look at the language in the purchase agreement about the term of the indemnification covenant; he recalled from memory that its scope was unlimited, because, as he remembered, Big Apple's lawyers insisted on unqualified indemnification. Charlie quickly skimmed the last article of the agreement — the boilerplate — for information regarding choice of law, venue, arbitration and jury trial.

His eyes rolled through those sections quickly, and he became frantic, not understanding what they meant in these circumstances. He sprang from his chair and walked hurriedly down the hall in search of his close friend and litigation colleague, Tom Throttler. Tom was still in the office, burning the midnight oil.

"Tom," do you have a minute?" asked Charlie.

"For you, Charlie, always, but I am preparing for a huge trial that begins next week in Vegas." Charlie handed Tom a copy of the letter and draft complaint. Trottler skimmed the documents in less than five minutes. The fingers of one hand ran back and forth over his lips in an anxious movement while his other hand jotted notes quickly in the margin of the complaint.

"Charlie, did you research and carefully consider how all of the provisions of the purchase agreement would affect our clients before the document was signed?"

Charlie's heart sank further and he was barely able to squeak out "no."

"I see," responded Tom. "The agreement poses some problems, Charlie. I have to be honest with you."

Charlie's vision began to blur as thoughts of his client's fate swirled through his head and the financial devastation a bad litigation result would surely mean for them.

"Look, Charlie," continued Tom, "let's walk through the issues one at a time and discuss what it means in the context of Big Apple's threatened litigation."

"Tom" interrupted Charlie, "I have used the boilerplate at the back of the purchase agreement for years and didn't think twice about the actual effect of those provisions. I've never had a deal go bad, so that language at the back didn't seem very meaningful to me at the time."

"Charlie, you really should have analyzed these provisions with Ted and Paulina before closing this deal. As you will see, provisions concerning venue, arbitration, attorneys' fees, and choice-of-law provisions are very important when the ugly head of litigation is raised."

"Article V, paragraph A, says that any dispute over the transaction or the purchase agreement shall be litigated in the Circuit Court of Franklin County, New York. The parties consented to the jurisdiction in rural New York. This will promote a strange result, Charlie. You will have a New York court deciding Ted and Paulina's fate in this matter. Why didn't you negotiate venue in the Nevada courts, Charlie?"

"Well," responded Charlie, "I guess I figured that the New York courts were sophisticated and it was reasonable for the buyer to insist that its home state courts handle any dispute because it was shelling out more than $50 million in consideration. Frankly, I didn't even mark up that section of the document to show my clients' preference for the Nevada courts."

"This could be a huge problem, Charlie," commented Tom. "Let me tell you why venue matters. In a case like this, Big Apple's lawyers will demand a trial by jury and our clients will have no basis to object and get a judge to decide the case." "Even worse," Throttler continued, "Big Apple's lawyers will be able to select a jury that is biased in its favor. As you know, Big Apple regularly invests in properties in this Adirondack Mountain vacation spot and is well liked."

Charlie countered, "but can't we strike jurors who are biased in favor of one side and ensure a fair trial?" "In theory, yes," Throttler sighed. "But in practice, it is extremely difficult to ensure that all of the jurors will be fair to out-of-towners like Ted and Paulina." "Moreover, because the jury's objectivity will be uncertain, Big Apple will use potential bias against our clients as a basis to demand more to settle the dispute."

In addition, because Big Apple's lawyers are in nearby Manhattan, it will have greater access to the resources necessary to try this case, while we would be operating thousands of miles from our home base. Finally, Ted and Paulina would have to hire local counsel in New York and incur additional expense. "So you see, Charlie," continued Tom, "it was really very important to set venue in Nevada where the business is located. Few purchasers would object to that logical selection."

"I also notice that there is a short provision addressing arbitration," commented Throttler. "Article V, paragraph B, says that if the parties end up in a dispute over indemnification after the transaction closes, the buyer may opt for arbitration to resolve it. That is a pretty meaningless provision from Ted's and Paulina's perspective, Charlie. It gives the buyer the best of both worlds. Big Apple can choose to go to arbitration or can choose to litigate. Ted and Paulina have no choice in the matter. Big Apple, of course, has chosen to go straight to litigation, bypassing arbitration, which would have been a more cost-effective forum for Ted and Paulina."

The knot in Charlie's stomach tightened. "I identified the issue you just mentioned, Tom, when Big Apple produced the first draft of the purchase agreement. I discussed the arbitration provision with Ted and Paulina, and I explained that it was a one-sided clause. They didn't think it was a big deal because, of course, they didn't expect any disputes after closing. Maybe I should have probed a little harder about threatened claims before passing on these arbitration provisions. I might have been able to deal with this Dram Shop case before we closed and avoided this mess!"

Throttler continued:

"Article V, Paragraph C, is in bold letters and all the text is capitalized. It says that the party who prevails in the event of a dispute is entitled to receive from the other party their attorneys' fees and costs. There are two very substantial reasons that sellers like Ted and Paulina are disadvantaged by such a provision. First, as the sellers, they are far less likely to successfully maintain a claim against the buyer for which they would be entitled to receive their attorneys' fees and costs. As you know, it is the buyer who is far more likely to succeed on claims against the seller because the seller has far greater access to information concerning the subject of the sale."

"Second, as drafted, without any limitations, the specter of having to pay a Manhattan lawyer's attorney's fees places enormous additional pressure on Ted and Paulina to avoid the risks associated with a trial." Charlie gasped, but recovered, stating that "well, the prevailing party attorney fee provision is available to either side, so Big Apple faces the same risks and pressure that Ted and Paulina do related to this dispute and the requirement to pay a prevailing party's fees." Throttler quickly countered, "but having to try this matter in Big Apple's backyard where it is a well-liked and well-known entity significantly shifts the effect of this provision against our clients and in favor of Big Apple."

"The purchase agreement also says in Article V, paragraph D, that the agreement shall be construed and interpreted according to the laws of the state of New York. Like venue, it is perfectly reasonable to expect the governing law to be Nevada where the assets were located and Ted and Paulina live. Why on Earth, Charlie, did you agree to allowing New York law apply?"

"Truthfully, Tom," responded Charlie, "I didn't think it made any difference. Aren't all states' laws pretty much the same?"

"Let me explain the problem of failing to carefully consider the effect of governing law on your client in a case like this, Charlie," Throttler scolded.

"In cases involving an unhappy buyer in which there is an allegation of seller's failure to disclose, the buyer will typically bring suit under common law fraud. The buyer will attempt to prove that the seller had a duty to disclose all material facts fully and completely, and the seller's failure to disclose some negative information (of which the buyer was unaware) induced the buyer to take action he otherwise would not have if all the facts were known."

"I know, I know," Charlie groaned. "Every state allows a buyer to sue if he thinks he's been sold a pig in a poke. So, Big Apple will bring a suit against us for fraud. We'd face that no matter which state's law applies, right?"

"Yes," said Throttler. "Except the buyer of a company's stock will also likely bring suit under the state's applicable corporate and securities laws. These vary by state. In some states, the penalties are exclusively civil, and the buyer can seek rescission (cancellation of the bargain) or damages. But in others, penalties can be criminal."

"Criminal penalties?!?" Charlie shouted.

"Yes. In New York, the Martin Act allows felony criminal penalties to punish instances of securities fraud above $250, and requires no showing of an intent to defraud, nor proof of a willful and knowing violation of the law."

Charlie, visibly shaken, put his head in his hands. "Please tell me, Tom, that I haven't risked making Ted and Paulina felons."

Putting his hand on Charlie's shoulder, Throttler concluded by saying, "Charlie, our clients are behind the 8 ball by virtue of these boilerplate provisions." "I think we better closely examine the merits of Big Apple's claims and advise our clients to be prepared to settle this matter rather than incur the substantial risks that we've been discussing."

Charlie sighed, "Wow, I could never have dreamed that these provisions would have such an effect on our clients' potential liability. I'll call them in the morning. No one could sleep after getting this kind of bad news."