OK, you might consider me to be an Old Fart, having practiced business law and doing hundreds of deals since 1978, in large and small law firms and as inhouse counsel. Though my hair is white, I thrive on innovations that enhance efficiency and reduce costs to my small business clientele. But, not all changes are wonderful improvements. I want to talk here about deal practices that are new but not wonderful betterments. Then, I’ll tell you why the Ole’Rules for deals are still the best practices.
Some Background Flavor
In undergrad, I just loved the social science of Economics. However, I got turned off becoming a macroeconomist because I realized that everyone, and I do mean everyone, thinks they’re qualified to pronounce on economic issues. There is little professional respect for economists vs. other business or political pundits. So, we end up with blowhards like O’Leary and Santelli on TV, pontificating on macro concepts for which they have no clue.
Unfortunately, small business deals (mini M&A) are a bit like that: many general practitioner lawyers think deals are eazy-peazy – just get your real estate clerk to dig out those 1983 precedents and away you go! How hard can it be? What can go wrong?
As a consequence of this mentality, when I do deals with GPs in the Hinterland (ie, not Bay St.), I encounter into all kinds of annoying, costly and bonehead problems = higher costs & delay. When I do deals with Bay Street mega-firm M&A experts, all goes well. We don’t argue about stupid things. They know the law, and so do I, and we follow the appropriate protocols for a good reason – they work.
Why Use Those Ole’Rules?
The Ole’Rules are not justified as tradition. Ole’Rules are not make-work practices for attorneys. Quite the contrary – Ole’Rules reduce legal expenses, always. And, this is not a matter of opposing innovation – it’s the opposite. Productivity innovations can be embraced, while at the same time, tried and true deal protocols are followed. The Ole’Rules are dynamic
So, what are these Ole’Rules? Well, let me tell you, in an efficient point-form way:
1. Each party with a distinct interest must have their own qualified, independent lawyer:
Unless all vendors or purchasers have exactly the same legal interests, each party must have their own ILA. Each ILA counsel should be a qualified business lawyer.
2. Deals have a logical sequence:
If you skip a step, or jumble up the steps, chaos will ensue: I guarantee it. There are good reasons for the order of steps in a commercial deal under the Ole’Rules. The usual deal sequence is:
- the business people negotiate the major terms, with lawyers on sidelines, only;
- such major terms are committed to writing in a letter of intent, expressed to be binding or not binding;
- due diligence review starts, with full, direct involvement of the seller to buyer, not filtered thru any intermediary;
- purchaser’s counsel starts preparing the purchase agreement in parallel with the due diligence review, one feeds the other;
- when the due diligence review has been substantially completed, and no deal-killer points have arisen, the purchase agreement can be finalized, then signed;
- purchaser counsel should quarterback all (both buyer and seller documents) documents and actions;
- early on, the closing agenda should be prepared and discussed with the client in person and then, with the vendor counsel; this is a key deal closing piece of paper;
- when there are no major issues from the due diligence review or under the purchase agreement, then and only then, should the parties get ready for closing by doing a final review of all the paper, and if OK, signing everything into escrow (ie, the documents are not then delivered to each other); if there is any non-trivial business or legal issue, then you are not ready to close the deal;
- after all closing documents are signed, and the buyer has the money to buy the shares or assets ready for advance to the seller, then closing can be scheduled.
“Closing” means the exchange of the purchase price for the delivery of the shares or assets. All parties should then be in the same room and this event should take about half an hour, not all day like these ridiculous virtual closings by emails and phone calls. After the price is paid and shares or assets delivered, each party can take away, out of escrow, their copies of the signed closing documents.
- after closing, each side should do a post-mortem with their counsel mainly to ensure that any missing documents or actions are followed-up on by a designated party; and
- each side’s counsel should assemble the closing documents in a hard copy binder as per the closing agenda (and a pdf version on a CD, too is nice to have) and provided to each party, as well as key advisors, for posterity and reference by auditors and CRA/HST, etc. It is a brave lawyer who bills the client before the closing record is presented to the client.
3. Talking Heads: Lawyers talk to Lawyers, Clients Talk to Clients:
Your attorney should not talk directly to the other client without their attorney being present, and vice versa. Otherwise, stuff gets screwed up. If you understand why you need to have a lawyer protect your interests in the first place, why would you talk to the other client’s lawyer without such protection?
Similarly, emails should flow lawyer to lawyer, and each lawyer can decide who and when a party is to be copied. Not everything must be copied to everyone on a deal, instantly, because if it is, the clients stop reading the emails. So, it is appropriate to show some discretion in copying everyone with deal communications.
4. Don’t Touch MY Paper!
Digital word processing and emails facilitate the blood sport of Dueling Drafts – that’s when the lawyers from both sides attempt to take over the drafting of deal documents. Lawyers tend to be control freaks, and unlike physicians who respect each other’s expertise, lawyers generally assume that they can do a better job of anything than the other lawyer. So, at the first opportunity, the lawyer receiving a draft instrument or document from the other lawyer will try to get control of the draft.
Plus, you are in a better position to get your way if you are defending your draft than if you must make submissions for changes to the other lawyer. So it’s gamesmanship.
In the ole’ days, we wrote our comments in a letter, or we had a meeting or phone call to raise our comments, questions and proposed changes to the other lawyer’s draft document. Not now. Now, the receiving lawyer will take over the draft, change it to their liking and then send it back to the originally drafting lawyer. This sounds fine, but it is not.
With multiple parties, their counsel and advisors all chiming in on the draft, the master agreement is destroyed, and it’s practically impossible to sort out who did what to whom. No, it’s my view that only one party should carry the draft, and all others can provide their comments, proposed changes, and questions separately.
5. Effective Date vs. Closing Date: Yikes!
This topic is worthy of a standalone article on its own. The Effective Date is the legally important date that marks the date and time upon which the buyer owns (and hence has all revenue & profit and all expenses & liabilities) the shares or assets, and the seller does no longer owns or enjoys any rights or interests in such property.
The Closing Date marks the date upon which the parties and their attorneys actually exchanged signed documents and payment was received.
There is nothing ethically wrong or problematic about having the Effective Date before the Closing Date, so long as both parties understand the consequences and all documents are consistent with that fact. So, I can agree to buy assets as at January 1, 2016, but for some reason, closing occurs on January 23, for example. In that case, I must insure my ownership as of January 1, and I get all benefits and incur all liabilities arising from the ownership on that date. Any sworn documents must reflect the actual date sworn, but the operative commercial documents can reflect the “as of’ date agreed to by the parties.
I find that on smaller transactions, the parties and opposing counsel struggle with this concept and so most often, Effective Date = Closing Date.
6. It’s NOT a Battle, it’s a Deal.
I said above that when I do deals with experienced M&A counsel, they know the law and I know the law, so even when there are crucial issues between us, we generally resolve them quickly. Not so when I do deals with GPs, especially those who litigate. In my experience, some litigators are used to following instructions that are ridiculous in law, facts or fairness, and will fight you down to the wire on every one.
Generally, I find M&A counsel don’t do that: once we have sorted out the legal and business arguments, both sides know that one or both clients need to compromise to resolve the issue, so they do. I do commercial deal work because I believe it is socially and economically useful, unlike most litigation which is a waste of resources, in my view.
And another major point here is a nice way to wrap up: part of the Ole’Rules is that experienced, expert deal counsel has a duty to their own client, as well as to the other party and its counsel, to advise on the reasonable, customary and valid course of action. This means saying to your client, occasionally, “Hey, I have to tell you that they are right on this issue, you should do what they ask because that is the way these deals are done…” Some lawyers, it seems, just will never, ever say that to their client and that is a professional failure. Clients hire us to do that in some circumstances.
I’m not talking about capitulation just to move things ahead. I’m talking about demonstrating professional, independent judgment to protect your own client in their best interests.
And that, patient readers, is what the Ole’Rules are all about. Thanks for reading!
© Grant Buchan-Terrell 2016 @OntBizAttorney