Corporate & Securities Law

Affiliates or Subsidiaries as of When?

By Ken Adams

Reader Bob Bramson suggested to me that I have a look at GTE v. Cellexis, 341 F.3d 1 (1st Cir. 2003). So I did.

At issue was whether GTE could enforce its settlement agreement with Cellexis so as to preclude Cellexis from suing Cellco, a GTE affiliate that hadn’t been a GTE affiliate when GTE and Cellexis had entered into the settlement agreement.

The settlement agreement contained the following definition of “GTE”:

“GTE” means and includes GTE Corporation, all of its subsidiaries, joint ventures, and affiliates and every GTE entity which is licensed to provide wireless communications services, including but not limited to GTE Mobilnet Service Corporation.

The lower court granted summary judgment to Cellexis, holding that the language in the settlement agreement was “so one-sided that no reasonable person could decide” that the definition of “GTE” in the settlement agreement included Cellco.

The First Circuit Court of Appeals reversed, but from GTE’s perspective it would have been preferable not to have gotten into this squabble in the first place. So here’s the moral of this story: for purposes of any contract that governs ongoing relations and contains one or more provisions pertaining to a party’s affiliates or subsidiaries, it would probably be a good idea to specify whether any such provision applies to affiliates or subsidiaries at the time of signing or instead applies to affiliates or subsidiaries at any applicable point in the future.

How you’d accomplish this depends on the context. But let’s consider the definition of subsidiary I offered in this March 2009 post. If I wanted to make it clear that the scope of the definition is to be adjust to reflect changes in corporate structure, I’d revised the definition to read as follows (the new language is in bold italics):

?Subsidiary? means, with respect to any given Person at any given time, any corporation, partnership, limited liability company, trust, or other legal entity of which that Person or one of that Persons? Subsidiaries, in either case acting alone or with one or more of that Person?s other Subsidiaries, then owns, or has the power to vote or exercise a controlling influence with respect to, more than half of the capital stock or other ownership interest giving holders the right to do one or both of the following: (1) elect the board of directors or other governing body of that legal entity and (2) receive the net assets of that legal entity available for distribution to holders of all stock or other ownership interests upon liquidation or dissolution of that legal entity.

Bob suggested to me that it would be clearer to use at the time of determination rather than at any given time. Any thoughts?

Full post as published by AdamsDrafting on December 28, 2009 (boomark / email).