Walter Hutchens’ Blog

It’s always bothered me that I spent three years and more than $100,000 on a legal education (which included a required full academic year of studying contracts) yet saw my first contract only after I graduated, passed the bar and was sent to a room filled with boxes of contracts and told to “look for anything unusual.”

Reeling from that experience, I’ve always made an effort to distribute at least one sample contract to my business law students and teach them some basic things about typical contract structure.

Of course I don’t need to prepare my students—mostly undergraduate business majors—to do legal due diligence, but I think showing them at least a few sections of a sample contract accomplishes several useful things. It’s extremely helpful for them to learn how lawyers can add value to corporate transactions by providing terms that help assure risks are thoughtfully allocated and information asymmetries between buyers and sellers are reduced. It’s also good for them to understand how reps. and warranties, covenants and indemnification provisions function in a typical M&A deal. At the very least, I want them to know what is meant by “due diligence.”

In previous years I’ve used the table of contents and a sample provision or two from the ABA’s Model Stock Purchase Agreement, but today I tried something different.

Earlier this semester I had talked with the students about the Viacom v. YouTube/Google litigation, using this current (and thus far unresolved) case as a way to illustrate some basic principles of court procedures (in particular, the necessity of a court having both personal and subject matter jurisdiction and how a complaint plus the defendant’s answer constitute the pleadings that kick off litigation). More recently the case helped me underscore the significance of some IP rules.

Because virtually all the students use Google every day and most of them have watched YouTube videos on occasion, I think it’s been a vivid series of examples. Today I used another Google example to begin our discussion of contract law.

I gave each student a copy of the contract for Google’s acquisition of YouTube.

I showed them how I found it through the SEC’s EDGAR service

To set the stage, I explained what an information asymmetry is (for example, I know what’s on the test but they don’t). I explained how problems of information asymmetry are inherent in many types of business transactions including M&A deals and the public trading of securities (because insiders know more about a company than outsiders and that information is important for valuation).

I then talked about how (1) mandatory disclosure for public companies, (2) due diligence investigations by business people (and their accountants and lawyers) and (3) the terms of a stock purchase agreement are all ways to overcome these information asymmetries.

I then began to walk them through the Google-YouTube contract, explaining how the reps. and warranties section creates disclosure duties (”we’ve paid all our taxes and have no litigation except as disclosed on the attached schedule”).

Next time we’ll look at the indemnification provisions that add force to the reps. and warranties.