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Guide to Efficient Business Transactions: Part I

(June 18, 2012):  How a business person can manage attorneys and other professionals in the legal process of his business transactions, to minimize cost and risk and maximize efficiency? Let’s look at a few these issues below.

I. Goal of this Guide; Goals of Your Business Transactions.

Making Business Transactions Happen

This Guide is written for those handling important business transactions, who will need to engage and direct one or more attorneys and other professionals in the process. It will also be useful for a junior person in a business who expects to have responsibilities in legal transactions. The goal of course in any legal transaction is to get the deal closed at minimum cost, not just in money and time, but also in psychic energy, goodwill and risk.

The desire to save money and time are obvious; but a business person needs to focus his or her mental energy (a very finite resource) on many tasks and problems, and so should also manage business transactions to avoid over-sized drains on themselves.

Additionally, businesses depend on the goodwill of many constituents. In a transaction, they need principally the goodwill of the other transaction party. But they need the goodwill also of any banker or finance source, landlord and government regulator too. Customers’ and employees’ goodwill are always critical. Business transactions have potential to alienate any or all of these key players in your business life, and need to be handled with a view to avoiding unnecessary stress and inconvenience on them.

Attorneys and other business transaction professionals charge by the hour, so managing your deal so it can close in less time is the obvious way to save money. But if attorneys’ work can be done in an orderly sequence employing some simple rules, they will inevitably be more thorough in their work, communicate their advice to you better, strengthen your bargaining position with the other parties, and avoid your having to accept adverse deal terms. The result is that you and your business bear less risk from the transaction, meaning there is a reduced probability that you or your business will lose money after the deal closes.

Management of an orderly and predictable legal process in a closing also reduces the irritation inflicted on others involved. It will head-off conflicts with the other transaction party, with whom in many cases you will be having business dealings for a substantial time to come. It also lets you obtain the cooperation needed from other players with minimum fuss and bother.

This Guide sets out a few key considerations, and some simple steps to take (or avoid), in managing the legal closing process of a transaction to achieve these goals. We will also try to demystify the closing process of business transactions as well.

II. Introduction to Business Transactions.

(a) Parts of the Deal Document and their Function. Most business transactions of significant size are governed by a set of transaction or “deal” documents consisting of multiple documents which each perform a narrow function, plus an “umbrella” agreement which governs the entire transaction and ties the other documents together. In an acquisition, for instance, the umbrella document will be the Asset Purchase Agreement, Stock Purchase Agreement or maybe Agreement and Plan of Merger. In a bank loan it is usually a Loan Agreement. Normally 50% or more of the legal costs of a closing are spent on drafting and negotiating this “umbrella” agreement, so most of this Guide should be understood as How to Negotiate, Draft and Consummate Umbrella Agreements Efficiently.

Umbrella agreements necessarily address the same matters, and so tend to be organized in a predictable pattern, including:

Recitals. Umbrella agreements normally begin with recitals or Whereas clauses, which explain the background and circumstances of the business transaction, and say Who we are and how we’ve come to be signing this document. On a 30,000 foot level they should explain what each party hopes to get out of the deal. While the rest of the agreement is written for the parties, recitals are addressed to a stranger coming onto the transaction cold. Any lawyer who has found himself in court trying to explain to a judge and jury why some particular wording in a contract was a vital part of his client’s bargain can attest to the importance of recitals. Nuances and circumstances that are obvious during a business transaction are often very unobvious years later when an agreement gets enforced. Without a clear understanding of these things, however, a trier of fact will inevitably misunderstand the significance of many terms even in a simple deal. Recitals are the normal way to address this.

Definitions. One section contains definitions of words used repeatedly in the agreement. Often a word or term will become a shorthand expression for a complex process or concept, and can therefore control major deal terms. Definitions are always the focus of some negotiations.

Description of the Transaction Itself. The heart of the agreement describes the actual deal, such as exactly what is being bought and sold, or what moneys are being loaned or invested, and exactly what the money-provider is giving for it, and when. Some of this may require listing in attachments or “schedules” to prevent the document from getting too long.

What each Party says to be True. These are the representations and warranties each party makes to the other. Many facts will be un-knowable or difficult to discern to the party to whom they are important. So the other party, if he has a clearer view of the subject, will state what the facts are and agree that the first party can rely on them. The seller, the borrower or the securities issuer in a transaction (whichever is involved), will generally make more of these statements than the money-providing party because of the former’s greater knowledge of the business in question.

What has to Happen First. In most cases certain steps must be taken as preparation before business transactions can close, such as governmental or other third-party consents. Often, both parties have their own list of Conditions Precedent which are written as tasks the other side (or less often, themselves) need to complete before the party is bound to go forward with the deal.

Things the Parties agree to Do or Avoid Before, During & After the Closing. These covenants may address things as diverse as operation of the subject business, tax filings to be made, or handling of an important side-matter.

Risk-transferring. Each party normally agrees to take on himself certain risks that circumstances otherwise place on the other side, meaning “If X bad event occurs, I will  pay for it.”  This Indemnity section is the most technical writing in the document.  In most cases, there are dollar or other limits on how much the indemnifer can be asked to pay, and time limits after which he cannot be asked. Most significantly, this is the teeth to the representations and warranties; and like reps and warranties, this section is more likely to be useful to the money-providing party than to the seller, borrower or securities issuer.

Other Things. The rest of the umbrella agreement is supporting text to the above, such as  descriptions of where and how the closing will be conducted, and agreement on what jurisdiction’s laws and/or courts will govern if there is a dispute.

III. History of Business Transaction Documents:

It is an open secret that business transactions lawyers spend their lives plagiarizing from each other, and few if any transaction documents are ever drafted from scratch. All of us maintain sets of document templates and copies from prior deals, which we mine in our drafting work. The document bank of my own law firm is intricately divided into myriad subjects for easy reference, and runs to over a thousand documents. An experience that all business transactions lawyers share is reading a document drafted by another firm, seeing text that makes one say “Hey, that’s good language”, and then grafting the improved text into one or more of your own model documents.

There is a powerful reason for these practices, and our clients are the beneficiaries of them. You see, 99% of the substantive terms in business transaction documents were initially drafted, whether recently or in some predecessor agreement in the dim mists of history, to address an event that caused a lawyer’s client to lose money. My own documents contain many provisions I added or rephrased over the years after seeing business deals go sour.

Check back soon for Parts II and III.

Healthcare LawyerDavid Parker is the managing member of Liles Parker in our Washington, D.C. office. David handles corporate finance, structuring and negotiating secured debt and loans, corporate governance and compliance, and business transactions. If you are interested in buying or selling a business, or raising or lending capital, call David for a free consultation today at 1-800-475-1906

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