On October 22, 2013, the First Department issued a decision in Warburg Opportunistic Trading Fund, L.P. v. GeoResources, Inc., 2013 N.Y. Slip Op. 06826, holding that a “notwithstanding” clause trumps all other clauses in a contract, even when that clause would effectively read another clause out of the agreement.
The appeal arose out of seemingly inconsistent anti-dilution provisions in warrants issued by the defendant that gave the holder the right to purchase certain number of shares of defendant’s common stock at an exercise price of $32.43 per share. The anti-dilution provisions of the warrants contained formulae for adjustments of the exercise price, but also stated: “Notwithstanding any other provisions of Section 8(f) to the contrary, no adjustment provided for in Section 8(f) shall result in a reduction of the Exercise Price to an amount less than $32.43 per Warrant Share (as appropriately adjusted for the occurrence of any events listed in [other anti-dilution clauses of Section 8]).” This in effect read Section 8(f) out of the agreement. As the First Department noted:
Here, the “notwithstanding” provision in Section 8(h) clearly overrides any conflicting provisions in Section 8(f). To the extent that Section 8(h) sets the floor price of purchasable warrant shares at $32.43 — the initial exercise price listed in the warrant — it renders the adjustment formula in Section 8(f) impotent. To be sure, one is compelled to wonder how Section 8(f)’s formula could have any effect whatsoever if 8(h)’s “notwithstanding” clause prevents the reduction of the initial exercise price of $32.43 to a lower amount. Nonetheless, the “notwithstanding” clause governs the contract, despite the presence of conflicting provisions. Plaintiffs are sophisticated institutional investors, and they could have appreciated the effect of Section 8(h)’s trumping language.
The bottom line is that, absent sufficiently pled allegations of fraudulent inducement or mistake, the Commercial Division and First Department will hold sophisticated parties to their contracts, even a “notwithstanding” clause that reads an entire provision out of a contract.