As a lawyer it’s not uncommon to be confronted with unwarranted accusations of creating complexities out of simple situations — some Mr Know-it-All will corner you at a dinner and hold forth on how lawyers and accountants make a big “deal” of M&A activities, that they tend to sideline all other considerations except what they receive. Even though such barbs deserve to be ignored, it sent me thinking on the lawyer’s role in M&A.
At which point of time does the external counsel gets involved in the M&A process? Usually the first stage of the process is one of conceptualisation — the raison d’etre for expansion, whether to achieve the same organically by an acquisition. The desk-top analysis involves assessment of viability of the investment, consideration of various entry strategies and identification of potential targets. In this process, historically lawyers were not involved, but with increasing blurring of areas of legal lawyers are more proactively engaging in identifying, deals. But the lawyer is not usually the team leader, at least at this stage.
Though he may participate in the kick-off meeting, the lawyer assumes the navigator’s mantle when the due diligence (DD) information from all sources is collated and evaluated. The DD process is integral to a successful transaction, not just from the legal, but the entire business perspective. The tentative acquisition price indicated by the Investment Banker assumes a realistic character once the DD findings are factored in. The legal counsel makes an evaluation of the demands and claims of the target company, as also an assessment of inherent risks and liabilities. DD process has to be integrated between the financial, commercial, technical, environmental and legal teams. Based on the identification of risks, the representations and warranties required from the seller are determined, the areas requiring indemnification are demarcated and all these factors emerge as the key negotiation issues. And this is the stage where the lawyer’s role is most critical i.e. in the ensuing negotiation.
Negotiations can take place at various levels between parties — their key personnel, lawyers and other advisors. Negotiation starts with information exchanges and getting a feel of the opposite party, and very often involves the lawyer to engage with regulators, agencies and funders and bankers, as part of the same deal process.
Once the basic understanding is achieved and reduced in writing, by way of MoU or a letter of intent which signals the parties’ stated but not necessarily binding intent to move forward, the tough bargaining starts.
The aggressive negotiator is one who uses combative tactics such as fault finding, intimidation and starting off and holding on to extreme demands and miserly on concessions. This can work well when the opposite party is weak or ill-prepared. On the other hand, this could prove frustrating for the client and result in unwarranted deadlock on trivial issues. The cooperative negotiator is the good guy who tries to be fair, understand the concerns of the opposite party, and take an objective position and aims at avoiding conflicts. While this sounds goody two shoes, it often does not work to the clients’ advantage with undue concessions being conceded without reciprocation and results in client dissatisfaction. Its best to have a team which has different members, playing good cop and bad cop.
The transaction structure provides the basis of the definitive documentation — the Share Purchase Agreement (SPA) is integral, but depending on the complexities of the transaction, there could be others: A shareholders’ agreement if the buyout is phased and the Buyer requires the Seller to stay on and participate in management for the sake of continuity. Would the buy out be an option or an inevitability? Should this item be provided for in the SPA or in a separate document. An escrow agreement is required if some part of the price is withheld, subject to post closing obligations. The SPA should have an identified set of conditions precedents to be fulfilled by the Seller for closing the deal – and clothe them with deal breaker status, wherever necessary. Preparing and incorporating a meticulous pre-closing, closing and post closing agenda is critical, as is, making sure that all provisions are enforceable and justiceable.
Finally success of the lawyer’s negotiation and drafting capabilities lies if he can clinch his client’s choice for governing law and jurisdiction. If not, make sure that a midway bargain is struck. Ultimately the test of a perfect document is in the Courts of law and the rest of the transaction success depends on those who run the business.
Kumkum Sen is a Partner at Rajinder Narain & Co.,and can be reached at kumkumsen@rnclegal.com