There's a common misconception that a deal ain't a deal until everyone signs on the dotted line. This thinking is not only wrong, but also dangerous. A handshake or oral agreement is the obvious exception. But did you know that an exchange of letters or even a simple promise can legally bind you? The Pennzoil Co. v. Texaco Inc. case is the most celebrated example-and one that every dealmaker should study.
On December 28, 1983, Pennzoil offered to buy Getty Oil. Five days later, a "memorandum of agreement" was signed by Pennzoil and Getty, but Getty's board hadn't voted on it yet. Regardless, on January 4, Getty issued a press release announcing the merger, subject to the signing of a formal agreement. However, sometime between the 3rd and the 5th, Getty apparently also started talking to Texaco, because on January 6, Texaco announced that it had just bought Getty!
Sometimes called a "deal letter" or an "agreement in principle" (or a "letter of intent," which is a less binding variation), a memorandum of agreement is a tidy rest stop between mere negotiations and the signing of long, formal documents. It's quick. It nails down agreed-upon points to avoid rehashing them. It encourages people to work together. But is it a deal? Is it a deal if it leaves out an important point or states that the parties will continue negotiating until more formal papers are signed? Is it a deal if only one party signs?
Pennzoil sure thought it had a deal. It sued Texaco for interfering and won ... $10.6 billion (later settled for $3 billion)! Please, appreciate the humor in the sharpest of the sharp and the cleverest of the clever ending up in court arguing about the most basic thing of all: Did they or did they not have a deal?
Here's the problem in a nutshell: In that windstorm of phone calls, faxes, letters, meetings (and today, e-mail) that accompanies most deals, you never know when a judge or jury will say you've crossed the line from courtship to commitment. And it's not just about who signed on the dotted line. Courts look at everything: what's said; what's written; whether anyone acts as if they have a deal; whether the parties are so sophisticated that one would expect them to wait until formal papers are signed; whether they issue press releases or throw parties; and so on.
If you don't want to get roped into a deal prematurely, make sure you say so loudly, clearly, frequently and in writing-and don't let anyone involved act as if they've got a deal.
Of course, when you're trying to make a deal, that advice can chill negotiations. But you don't want to bind yourself by mistake. If it happened to Getty Oil, it could happen to you.
A speaker and attorney in Los Angeles, Marc Diener is the author of Deal Power: 6 Foolproof Steps to Making Deals of Any Size(Owl Books/Henry Holt). You can reach him at MarcDiener@aol.com.
Spell It Out
How to avoid confusion about whether a deal is official
Do tell the other side in writing that there's no deal until you sign on the dotted line.
Do repeat the above step in every piece of written correspondence.
Do place a disclaimer on every document you circulate that reads: "Draft-for discussion purposes only-not intended to be a legally binding document."
Do insert contingencies, conditions, approvals, etc. into your negotiations.
Do refer to "proposed" deals using the future tense and the conditional mood: "The agreement we might enter into would .. "
Don't make any statement inconsistent with the above.
Don't agree to any important point without specifically making it contingent on every other point in your agreement, whether major or minor.
Don't throw big parties, make announcements or take any public action that would make others think you've struck a deal.
Don't perform your side of the bargain.
Don't let the other side perform their side of the bargain; let them know in writing that they do so at their own risk.