I have spent over 20 years as a corporate lawyer working on private company mergers and acquisitions (M&A) across Europe, Africa and the Middle East. I also spent 3 years as a general manager leading transactions, which provided some useful insights from a client’s perspective.
Despite transformative changes in most industry sectors, corporate transactions tend to follow the same formula they have followed since well before I started as a lawyer. This is understandable, there is usually a lot at stake, and the buyers and the sellers want to make sure that they secure reasonable terms and a fair share of the risks. There is usually a great deal of complexity to deal with, and some surprises when the spotlight is turned on to the target company’s operations.
The established formula can be stressful for both parties and their advisers but tends to be less so for large organizations with extensive experience of transactions and deep resources. The management teams of SME’s looking to sell are often newcomers to the game, and do not have anything like the resources of the buyers. This imbalance can also exist where they are the buyers and attempting their first acquisitions.
One of the most important aspects of my role advising SME’s is to help them to manage their expectations of the process and to avoid some of the recurring pitfalls. It is also to shape the process and reduce the stress.
First hurdle – the offer letter
Things can go awry very early on. The approach to the offer letter is a delicate balancing act, it is never going to be definitive, but if something is vague or unclear it can come back to bite later on. Sometimes an impatient seller will agree to terms in an offer letter without considering the potential consequences. When there is a contentious point in the negotiation of the Share Purchase agreement (SPA), both sets of lawyers will pore over the contents of the offer letter and one of the parties can find that they are stuck with something they really don’t like. It can be very difficult to row back from this type of position. So, my advice is to pay good attention to the offer letter because it sets the tone for the deal.
There is always going to be some time pressure to get transactions done, sometimes because of real deadlines concerning accounting dates or anticipated tax changes, but too often deadlines are arbitrary and unrealistic. A lot of weekends and nights can be ruined by unrealistic deadlines, and deal fatigue can set in early as a result. Tight deadlines can be particularly troublesome when there is a slow start to the process. On a recent transaction, I was working for the seller to a 4-week deadline but didn’t receive the first draft of the SPA until the end of the second week, inevitably at 7.00pm on a Friday. This set a bad precedent that had to be addressed with the buyer’s lawyers. We managed to have a constructive discussion and to start building some rapport which turned out to be very important later in the process, when timing became critically tight.
This can be a “black hole” for legal and management resources. The focus should be on the target company’s operations, legal, financial, tax and corporate governance, but too often it drifts into an impossible exercise with no sense of what is material. This is often because this part of the process is delegated to junior team members, and they may not have the mandate or the confidence to judge what is material. This comes back to the point of building a rapport with your opposite number, you will probably need their help to deal with blockages caused by their team (or by your own). If you’re a seller, it can pay to get ahead of the game by doing your own (sellers) due diligence as Charlie mentions here in his post about preparing your business for sale.
These are almost always drafted by the buyer’s lawyers and almost always very heavily weighted in the buyer’s favour. There will then be intensive negotiations and between 5 and 10 turns of the document, before it is finally agreed. It is not uncommon for final agreement to be reached a matter of minutes before the completion deadline. Sometimes this is unavoidable if there are complex issues to deal with but often it is simply attritional, and the outcome will be based on patience and stamina. It doesn’t have to be like this and with good pragmatic legal support, a more commercially minded, cost-efficient and less stressful approach is possible.
The Disclosure Letter
Generally, because of the hundreds of warranties and indemnities in the SPA, a seller will try to disclose absolutely everything in their Disclosure Letter. Too much time is often spent on the “deemed disclosure” part, which will eventually be watered down to almost nothing by an experienced buyer. The same applies with attempts to “ringfence” warranties, this will rarely be successful. The actual disclosures required are often fairly straightforward, but the challenge here is to have a good understanding of what is material and persuade the other party to be pragmatic.
The Tax Deed
This is a highly specialized part of a transaction, and always best dealt with by experienced tax lawyers and accountants. Unfortunately, this part is often dealt with in isolation from the rest of the transaction and can get out of synch. Last minute surprises are often tax related and sometimes terminal. The best way to avoid these is to integrate the tax specialists as much as possible into the transaction as a whole. Many of them appreciate this, but some need a bit of encouragement.
Room for improvement?
There is definitely room for improvement. We take the more pragmatic approach at My Inhouse Lawyer and support our clients so that they feel empowered to focus on the material issues rather than be submerged in negotiating non-material issues. We also spend time building an understanding with the other party’s lawyers and trying to use our time and theirs sensibly and thoughtfully. With some trust and rapport, it is possible to have reasonable deadlines and cut through unnecessary rounds of negotiating one-sided documents.
The ultimate aim in a transaction is to achieve fair terms and sharing of the risks so that neither party feels hard done by. Failure to do this can leave a very toxic atmosphere for the buyer as they set about trying to integrate the seller’s staff and this can undermine the potential benefits of the transaction. It is important to understand this, particularly when deal fatigue starts to set in. This is where we really add value, providing a sense of perspective to our clients throughout the transaction. In the scramble to complete a transaction, relations can become very strained, it is down to us to support our clients by staying calm and focused.
Written by Chris Groves
Principal at My Inhouse Lawyer
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