Thanks so much for the thoughtful reply. On (1), that’s great—I agree that the Hadley rule supports the desired result when a Developer commits a breach for which its Counterparty can readily prove its damages (e.g., when a Developer fails to pay after recognizing windfall profits).
Reflecting on this point a bit more, I’d be interested to understand how different jurisdictions would handle a situation in which a Developer manages to breach in a more subtle way, before its Counterparty suffers such obvious damages.
For example, suppose that a sophisticated shareholder in Developer A believes that one of A’s business units has a meaningful chance (say, 30%) of developing a product that will trigger the Clause in the near term, but that belief is not widely shared or known. That shareholder might try to force A to sell that business unit to a second corporation, B (which does not have a Windfall Clause) in exchange for stock in B, with the stock in B distributed to A’s shareholders on a pro rata basis as a dividend.
Developer A’s Counterparty could argue that this sale is a fraudulent transfer and a breach of the Clause. However, to recover damages for that breach, the Counterparty might have the burden of proving (i) the value of the business unit as of the time of the transfer, and (ii) that the value was high enough to implicate the Clause. A court might be reluctant to credit an argument that a single business unit will soon be worth >1% of GDP, limiting the Counterparty’s recovery.
(If enforceable, a liquidated damages provision might help mitigate this concern, but the Counterparty would likely still prefer specific performance.)
Thanks again for taking this on. I’m excited to follow the sequence!
Hi John,
Thanks so much for the thoughtful reply. On (1), that’s great—I agree that the Hadley rule supports the desired result when a Developer commits a breach for which its Counterparty can readily prove its damages (e.g., when a Developer fails to pay after recognizing windfall profits).
Reflecting on this point a bit more, I’d be interested to understand how different jurisdictions would handle a situation in which a Developer manages to breach in a more subtle way, before its Counterparty suffers such obvious damages.
For example, suppose that a sophisticated shareholder in Developer A believes that one of A’s business units has a meaningful chance (say, 30%) of developing a product that will trigger the Clause in the near term, but that belief is not widely shared or known. That shareholder might try to force A to sell that business unit to a second corporation, B (which does not have a Windfall Clause) in exchange for stock in B, with the stock in B distributed to A’s shareholders on a pro rata basis as a dividend.
Developer A’s Counterparty could argue that this sale is a fraudulent transfer and a breach of the Clause. However, to recover damages for that breach, the Counterparty might have the burden of proving (i) the value of the business unit as of the time of the transfer, and (ii) that the value was high enough to implicate the Clause. A court might be reluctant to credit an argument that a single business unit will soon be worth >1% of GDP, limiting the Counterparty’s recovery.
(If enforceable, a liquidated damages provision might help mitigate this concern, but the Counterparty would likely still prefer specific performance.)
Thanks again for taking this on. I’m excited to follow the sequence!