Months ago, I was asked by some LLC members to review and make changes to their company’s operating agreement. They also told me they were “in the process” of buying an established local company from its owner and that they might want my firm’s help on that “later”.
I did not press this last part since, as a Phoenix business lawyer, I see a lot of folks claim to be “in the process” of a lot of things. Instead, I focused on the job they had asked me to do and let them know that I would be there to assist further if they needed guidance or further representation.
Sure enough, several months later, these same clients later asked me to evaluate some stock purchase documents drafted by the seller’s lawyer. The request caught me a bit by surprise, since it had been awhile since the clients and I last spoke. Their request was also different from the customary way these M&A matters go.
Getting along with your Seller is terrific, but…
While I always would rather see a buyer/acquiror hire qualified legal representation over not having any representation, the problem with bringing your attorney into the process after the documents have been drafted is that it tends to make it more difficult to get necessary changes.
Part of this is human nature–seller thinks the deal is essentially done, while things have now gotten more real for buyer, who may also be reluctant to risk spooking or offending the seller with changes to documents.
However, to properly advocate for their buyer/acquiror client, an attorney often has to propose real changes so that the final documents both accurately reflect the deal the parties struck and also include language that is important for the client (whether it’s rights benefiting them, or obligations to be imposed on the other party, or both).
In this case, the stock purchase agreement provided for the seller’s closing deliveries to be, literally, the signed stock purchase agreement. That was it.
While I don’t believe in generating paperwork to churn bills or kill trees, there are certain documents which a buyer/acquiror should insist that their seller deliver at closing.
Most people can see what’s in their agreement, but what about what’s not in there?
For example, a non-competition agreement. Without bringing this to the client’s attention, they might have acquired the target company in a way that leaves the door open for the seller to take the purchase price, have a change of heart and later open up a competing business just down the street. Or maybe the seller gets bored in retirement and decides he wants to “consult” for the company’s competitors, possibly siphoning off important customers from the sold business, or even pilfering key employees. While it is rare for a seller to do this, I have seen it happen, and the result is usually not pretty. Which is why I wouldn’t stop at just a non-compete but would have the client strongly consider non-tampering and non-solicitation covenants, as well.
Another example: the proposed deal had the seller financing a portion of the purchase price and taking back a promissory note from my clients. The draft stock purchase documents provided for a personal guaranty of this note from not only each of the clients individually but each of their spouses, too.
Since the proposed buyer was an LLC, this was not entirely unexpected. However, bringing in an attorney earlier on in the negotiations might have led to an agreement for the personal guaranty to be required of just the LLC members individually and not each of their spouses, or perhaps an understanding that the guaranty obligations “drop off” or expire after a certain number of years after closing. It might have even been possible to insist upon no personal guaranty at all, given the other collateral involved in the deal. But without having their own counsel there as part of the initial negotiation and drafting process, the clients never had the chance to consider, let alone propose, this possibility.
The point is, if you or your partners are looking to merge with or acquire another business, I recommend bringing in your own legal counsel as early on in the process as possible.
Don’t be penny wise, pound foolish
Many clients believe that the longer they can delay bringing in the attorney the lower the legal fees will be. While this may be true in many areas of life, this just isn’t the case when it comes to legal matters and it can often be a major mistake. Taking too long to engage an attorney to represent you in your transaction risks ceding too much of the negotiation and drafting process to the seller (or, worse, the seller’s lawyer).
With no counterweight in the negotiation process, the seller’s lawyer might deliberately or unconsciously insert terms or language into the draft documents which will, at best, differ from your understanding as a buyer or, at worst, impact or actually eliminate valuable rights.
You may be thinking, “But won’t my lawyer catch them?” Perhaps she will, perhaps she won’t, but what then? Do you think it will be easier or more difficult (translation: expensive) to get the seller to agree to change or add key terms at this point or at an earlier stage, when the seller has not yet paid the legal fees to have all of the initial draft documents generated?
The earlier you bring your attorney into the process, the better
Having a competent and experienced legal advisor on your side who has been fully briefed-in on the deal can help you and your partners:
- make sure key business terms are, in fact, included in the deal documents
- identify and think through areas of ambiguity, confusion, or misunderstanding in the parties deal points
- suggest ways to document the transaction efficiently with as few revisions as possible
- highlight must have areas of protection (e.g., seller non-compete, indemnification, reps and warranties, etc.), as opposed to nice-to-haves (e.g., dispute resolution, escrow hold-backs, break-up fees, etc.).
Will you end up paying a bit more in billable time by bringing your attorney in earlier? Possibly. However, the end result will almost certainly be better and terms more equitable than if you attempt to save a few bucks by bringing her in halfway through the process.
Ben Bhandhusavee is the Managing Attorney for BHANDLAW, PLLC, a Phoenix business and technology law firm working with start-up companies, creative intellectual property, Internet and digital media matters, and complex corporate M&A and technology transactions. Ben can be reached at (602) 222-5542 or by e-mail at firstname.lastname@example.org