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Guide to Efficient Business Transactions: Part II

(June 24, 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 – Part II of III.  Click here for Part I. Check back soon for the third installments.

I. Precepts and Procedures.

(a) Choose an Attorney With Whom You are Comfortable. Obviously your transaction counsel must have a thorough working knowledge of the legal subject matter of your transaction, and sound work habits, so no discussion is needed  on that. Instead, I mention that you should employ only attorneys you yourself are personally comfortable with.

Efficient Business TransactionsYour comfort should be driven by your perception of the attorney’s loyalty, the sense he or she is looking out not just for the legal interests of the client entity, but for your personal interests in the context of your organization. In my experience, it is hard to protect the first without looking after the second. It should be driven by an ease of communication between you, which should explain itself. It should involve knowing you share a common understanding about  priorities in your business & his or her law practice. This is difficult to describe clearly, and can take time to develop, but comes down to trust that, in looking at any set of facts, each will know instinctively what is important to the other.

The working relationship between a business person and his or her transaction lawyer should amount to a comfortable bond. This relationship aspect is at least as important as technical skills, and without both it will be hard for either of you to work efficiently.

(b) Address Cultural Differences before you Start a Deal. This Guide is pitched to transactions where both principals are people involved in commerce in English-speaking countries. Personally I have observed a common business culture to exist in the United States, Canada, England, India and Australia, such that business people from such countries can usually interact effectively with each other. I expect the same is true in all Common-law countries. Outside those areas, however, real cultural differences exist in business practices, in addition to any language barrier. It is outside the scope of this Guide to advise about specific cultural differences. Suffice it to say that before negotiating even the first term, a prudent person contemplating a transnational deal where cultural norms vary widely needs to secure not only attorneys knowledgeable about laws in all relevant jurisdictions, but also business-level advice for  the transaction from someone experienced in the foreign culture.

(c) Start with a Letter of Intent. Go from the General to the Particular.  On occasion I have had transaction clients say, “To save money and time, we are skipping the LOI and going straight to definitive documents.” Nothing is more counter-productive. Spend the time needed to draft and sign a letter of intent before anything else. Once deal terms are nailed down in principal, it is vastly easier to reach agreement on particulars. More detail is better than less. In my view it is less important whether the LOI is binding or non-binding, as long as both parties sign it. There is real value in both parties signing an LOI, even if it isn’t legally binding. In my experience a party may walk away from a deal with a non-binding LOI, but if they do proceed with it, they find it hard to go back on the terms in the letter.

(d) Establish a Closing Timetable, but Be Reasonable. Generally one or both parties to a transaction have hard business reasons why it must be concluded by a particular date, but even if this isn’t the case, your Letter of Intent should set the expected date for closing, and possibly for intermediate steps like completion of due diligence. Overly long closing processes create outsized legal bills, but so do unrealistically short ones. An experienced transaction lawyer will know what is reasonable. Expect all dates to slip, of course, so allow some margin of time. Once document drafting and negotiation starts, it should continue until completed and the documents are signed. When lawyers halt their drafting work for over about one week, time is inevitably required to get them back up to speed.

(e) Engage All Professionals Early; Get All Their Fingerprints on the Deal. At or before the LOI stage, identify what legal and other professionals will be needed to close the transaction, and engage all of them up front, not just your transaction counsel. For instance, most M&A transactions call for advice from a tax accountant or lawyer, whom you should consult before agreeing to any transaction structure. If the transaction will involve retirement fund issues, for example, engage ERISA counsel early on. Other specialist disciplines must be handled similarly. At early stages of the transaction, each specialist needs to do only enough work to advise you on the decisions required at that point. This need not be an invitation to heavy billing. Competent specialists will know how to monitor early transaction stages with minimal expenditure of time, while alerting you to issues which affect your LOI or other early process; and they should give you clear assurances on this point before their engagement. If the transaction fails early-on, these bills should not be burdensome. The aim here is to avoid having to re-do steps in the transaction process because of issues you knew about all along but failed to address early enough. The biggest inefficiency you can avoid is the drafting and negotiation of the same document multiple times.

(f) The Other Party Should Engage his Professionals in Synch with You. Get their Fingerprints on the Deal Too. Especially in cases where there is no binding agreement until definitive documents are signed, you will be at a disadvantage if the other party to your transaction postpones hiring his professionals while you move ahead with yours. What often happens in such a case is the other side’s attorney or other professional steps into the transaction after you have spent money getting documents drafted, and reveals issues which make the terms as drafted impossible for his client. You are forced to repeat significant drafting and other steps. If the other party insists on delaying the introduction of his professionals, it is generally a sign he is uncommitted to your deal, so be warned.

(g) One Lawyer as Quarterback for All Attorneys When legal specialists are needed in a deal, they should report their advice and counsel directly to you, but their work should be scheduled and coordinated through your transaction counsel. They should keep him apprised of their progress and particularly any problems or delays they encounter; and in most cases your transaction counsel, who has full understanding of all aspects of your deal, will be able to help you evaluate a specialist’s advice, and make needed decisions based on it. 

(h) Use Courtesy and Politeness Whenever Possible. Make sure Your Team Does Likewise. While not all practitioners agree on this point, I find that a party is best served by consistent politeness and courtesy with their counterparts except in the most extreme circumstances, and cloaking their adversarial emotions as much as possible. While it can be argued that each party will use every advantage available to forward their own monetary interests in any transaction, whether or not they feel personal animus against the other, my experience is otherwise. A transaction is never entirely a zero sum game, and pleasant dealings with the opposite party usually pay off. Transaction professionals (especially younger ones) may need reminding on this point.

(i) Match yourself with a Bargaining Partner on or near your Level of Seniority.  Avoid Negotiating with a non Decision-maker. If you are the principal on your side of a transaction, and you bargain with someone lacking authority to make decisions on the other side, the conversation becomes a downward ratchet for you. You can make a concession which grants the other side a victory, finally and irrevocably, but the other side can’t. The best you can get from him or her is “I’ll go back to my Principal and see if they agree.” The absent principal isn’t psychologically involved in the concessions you are making, and seldom agrees to his side’s concession.

(j) Don’t Meet Alone with the other Side’s Professionals. By the same token, avoid placing yourself in a position to be lectured to by the other side’s attorney or other professionals, without your professionals being present. When this occurs the opposing professionals tend to describe the facts under discussion, and also the law, in ways subtly or not so subtly less favorable to you than they truly are. If your professionals are present, they will promptly object, or the other side won’t try this in the first place. Don’t let the other side play with your head in this way.

II. Final Comments:

Check back soon for Part III, and be sure to check out the rest of David Parker’s articles here.

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.

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