Undefined Terms are words or phrases which are capitalized but not defined, not including proper names, dates, and commonly capitalized phrases such as “Board of Directors”.
Unfortunately, the number of terms that are normally capitalized is huge and constantly changing. It’s not feasible to recognize every human name, every legislative act, and every street name in the world. So, a few false positives can be expected when using CrossCheck 365 or any other automated tool. However, omitting a definition can be a critical error. Reviewing the Undefined Terms list created by CrossCheck 365 is a very effective way to identify such omissions.
For example, from the DraftKings / DEAC Merger Agreement dated December 22, 2019:
(A) to the extent that the aggregate amount of such Losses (other than in connection with the SBT Sellers Fundamental Representations, the SBT Fundamental Representations and Seller Taxes) exceeds $70,000,000 (the “Cap”) (and each SBT Seller or holder of SBT Cashed-Out Options shall not be liable beyond his Cash Transaction Percentage in such amount, if any), and (B) to the extent that the aggregate amount of such Losses with respect to a breach of any SBT Sellers Fundamental Representations and/or SBT Fundamental Representations and/or with respect to Seller Taxes exceeds the value of the SBT Consideration at the Closing…
“SBT Cashed-Out Options” is not defined in the document. There is a definition for “Cashed-Out SBT Options,” however, and CrossCheck 365 points this out as the most similar item.
Undefined Term checking can also reveal simple typos:
(iii) “DK Earnout Shares” means 2,280,000 shares of New DK Class A Common Stock out of the DK/SBT Earnout Shares, as such number may be adjusted for any stock split, reverse stock split, recapitalization, reclassification, reorganization, exchange, subdivision or combination, to which the members of the DK Earnout Gorup may be entitled pursuant to this Section 1.8 on a Pro Rata Basis.
The defined term is “DK Earnout Group”, not “DK Earnout Gorup”. That mistake should have been flagged by a spell-checker, but that’s not always the case.
Not all mistakes are so trivial. Once more, from Section 1.8(a) of the DraftKings agreement:
the remainder of such Former Founder Shares (i.e., the DK Earnout Shares) together with the SBT Earnout Shares, as such shares may be adjusted for any stock split, reverse stock split, recapitalization, reclassification, reorganization, exchange, subdivision or combination, shall be allocated as follows: (x) the SBT Earnout Shares shall be allocated on a Pro Rata Basis among the SBT Sellers (the “SBT Earnout Group”), and (y) the DK Escrowed Earnout Shares shall be allocated on a Pro Rata Basis among the DK Stockholders and holders of Exchanged DK Options …
“DK Escrowed Earnout Shares” is not defined. The index of defined terms indicates that “DK/SBT Escrowed Earnout Shares” is defined in Section 1.8(a), but even if you squint and read that as “DK Escrowed Earnout Shares and/or SBT Escrowed Earnout Shares,” that is not the case. None of those terms are defined. CrossCheck 365 notes that definitions exist for “DEAC Earnout Shares”, “DK Earnout Shares” and “SBT Earnout Shares”, but it isn’t clear that any of those can be substituted.