Pub. 7 2018 Issue 2

February/March 2018 19 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s VENDOR AGREEMENTS LOOK FOR THE FINE PRINT Banks re l y on th i rd-par t y vendor s for a variety of products and services. Engaging v e n d o r s r e q u i r e s n e g o t i a t i o n , d u e di l igence, and a cont ract that accurate l y ref l ect s the agreement between the two par t i es . The cont ract wi l l def i ne many factor s i n the re l at ionsh ip between the bank and the th i rd-par t y vendor and may a l so i nc l ude a number of h idden pi t fa l l s that can go undetected wi thout proper due di l igence. Banks are s t rongl y encouraged to have cont ract s rev i ewed by l ega l counse l . The fol lowi ng ar t i c l e f rom The Capi ta l Corporat ion i l l us t rates the impor tance of these rev i ews . — Bobby, Young, KBCS Staff Attorney R ECENTLY, OUR CLIENT – THE SELLER – WAS within a few hours of signing the definitive agreement and making an announcement to the employees about the sale of their bank. Overall the process had been relatively smooth. No due diligence issues were noted and the contract negotiation was fairly typical. However, at the last minute an issue with a vendor contract surfaced that caught everyone by surprise. Creating a significant issue at the last minute was the fact that the contract did not contain a termination provision or penalty. Let us explain how a simple vendor contract that caused such a significant issue was not discovered until the last minute. When a buyer and a seller reach the due diligence phase, one of the typical due diligence request is a copy of all contracts with a certain level of annual expense – say $50,000. Normally the request includes a copy of all contracts that contain a termination penalty. About a year earlier, our client had entered into an Incentive Agreement wherein a debit and credit card provider (“Provider A”) would pay the bank to offer Provider A’s cards exclusively for 10 years. Because the Bank was receiving the money in this case, it did not show up in the due diligence scan for contracts exceeding a certain level of annual expense. There was also not a termination penalty in the contract, so again it was under the due diligence radar. Definitive agreements typically have confidential disclosure schedules. A typical representation and warranty would be … “Except as disclosed on Confidential Disclosure Schedule X.XX the bank has no contracts or agreements with a term in excess of one year.” As the disclosure schedules were being prepared, the bank included the Provider A contract. Upon a closer review of the Provider A contract, a couple of key items jumped out. First, it was a 10 year contract. Second, and very surprisingly, it did not contain a paragraph on termination. Most vendor contracts, such as your core processing contract or technology contracts have a termination provision with a liquidated damages amount. It is not uncommon in a core processing contract for there to be a termination penalty equal to a percentage of the remaining payments due under the contract. These are very common due diligence items and often negotiated items in a definitive agreement. By Bob Wray, The Capital Corporation