[Edit: The original version of this comment offered an idea that, as Mauricio flagged below, could be inconsistent with U.S. antitrust law. Thanks, Mauricio, for flagging my mistake. I retract the comment.]
Will Greenman
Karma: 14
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!
Thank you for taking on this analysis! Two related issues occurred to me while reading this post. Both fit in your second category of possible “legal sleight-of-hand” by the Developer that could sidestep or dampen the effect of the Clause:
(1) Remedies for breach: What remedies would be enforceable in each jurisdiction for an intentional breach of the Windfall Clause? Assuming courts award compensatory damages instead of ordering specific performance, might they calculate damages based on the expected value of the contract to the Counterparty as of the time of contract formation, rather than the expected value of specific performance as of the time of breach? (If so, breaching the Agreement upon the triggering event and paying compensatory damages would likely be the Developer’s profit-maximizing strategy. Given the amount of value at stake, it seems likely that shareholders would force the Developer to breach the Agreement in this situation, for example by replacing the board of directors.)
(2) Treatment of transactions with shareholders: How would each jurisdiction treat transactions in which a Developer with excess profits agrees to purchase assets from its shareholders at inflated prices? Would the Counterparty have a right of action to block such transactions? (If such transactions are permissible, the Developer could use them to distribute revenue that would otherwise trigger the Clause to shareholders, in lieu of dividends.)
I wonder whether the exception for organized labor might apply in this context?
Conspiring to suppress wages is clearly off-limits. But because the intention is to raise wages to a uniform base that makes all high-impact work similarly attractive, rather than to suppress wages, I’d be interested to explore whether workers could pursue the strategy above by forming a union and bargaining collectively with employers for a consistent contract.
(I feel very uncertain of the feasibility of this idea—Before pursuing this idea any further, I think it would be important learn more about constraints on collective bargaining with multiple employers for similar contracts, as well as any limits on funders’ ability to encourage grantees to hire members of a union.)