Contract & Deal Structuring Flashcards

In a construction contract, a 'guaranteed maximum price' (GMP) structure allocates cost overrun risk primarily to:

Answer: The contractor, who absorbs costs exceeding the GMP ceiling

Under a GMP contract, the contractor bears the financial risk of cost overruns beyond the agreed ceiling, incentivizing efficient project management.

A negotiator uses a 'Chinese wall' (information barrier) clause in a deal primarily to:

Answer: Restrict information sharing between conflicted teams within the same organization

Chinese wall clauses isolate deal-sensitive information from personnel within the same firm who have conflicting interests, reducing conflict-of-interest risk.

When structuring a deal across multiple jurisdictions, a 'governing law and venue' clause is critical because:

Answer: It determines which country's laws interpret the contract and where disputes will be resolved, reducing ambiguity

Pre-selecting governing law and dispute venue prevents costly arguments about jurisdiction and ensures predictable legal interpretation of the contract.

A 'step-in right' clause in a project finance agreement gives lenders the ability to:

Answer: Take over or appoint a replacement operator if the project company defaults

Step-in rights allow lenders to assume operational control or install a replacement operator to protect their security interest and keep the project generating cash flow.

In negotiating a franchise agreement, the 'system standards' provision primarily protects:

Answer: The franchisor's brand by requiring uniform quality, operations, and customer experience

System standards clauses require franchisees to follow the franchisor's operational and brand guidelines, protecting brand consistency and customer trust across all locations.

A 'drag-along' right in a shareholder agreement protects majority shareholders by:

Answer: Compelling minority shareholders to join a sale when the majority decides to sell the company

Drag-along rights allow majority shareholders to force minority shareholders to participate in a sale on the same terms, eliminating holdout problems that block a deal.

Which deal structuring technique is most effective when a target company has significant net operating loss (NOL) carryforwards that the buyer wants to preserve?

Answer: Stock purchase to maintain corporate continuity and preserve NOL tax attributes

A stock purchase preserves the target's corporate identity and tax attributes, including NOLs, subject to IRC Section 382 limitations, whereas an asset deal generally does not transfer NOLs.