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Still on the Hook: Forward-Looking Releases Reel-in Potential Risks in Mergers and Acquisitions

By Mark T. Wilhelm & Madison Fitzgerald. Full Text.

A recent study that analyzed more than 2,100 private-target acquisitions found that 65% of those transactions were structured with a separate signing and closing. While the number of days between signing and closing inevitably varies on a deal-by-deal basis, a prolonged executory period only intensifies concerns that the deal may never cross the finish line and allows for events that were unanticipated and are undesired by the parties to that transaction to occur. One such mechanism parties use to address these issues is to grant a release, which can be incorporated into definitive transaction documentation to give both the buyer and the seller peace of mind. However, it is not entirely clear that the customary method of drafting releases truly serves as a catch-all prohibition on all claims, as two Delaware opinions have notably come to the conclusion that a release does not cover future claims.

Examining specific examples in New York and Delaware law, this article examines the use of customary releases in purchase agreements and explains how practitioners are, generally speaking, using them incorrectly and in a way that makes them unenforceable. The essay then suggests that a more conservative approach can and should be implemented to ensure that clients are sufficiently protected in connection with M&A transactions.