February 9, 2023

M&A Agreements: Making Sure Clients Understand Them is a Big Part of the Job

Andrew Abramowitz recently blogged about a really critical part of the deal process that lawyers overlook at their peril – making sure that clients understand the terms they’re agreeing to before they sign on the bottom line. Andy points out that it isn’t really the use of legalese that’s the problem, but many clients’ lack of experience with these agreements:

When people think of legalese, they primarily are concerned with arcane words such as “heretofore” or whatever. But a more significant factor in client incomprehension, I think, is that they don’t have the background knowledge with these agreements to know the purpose of various provisions and how they all interact. For example, in a typical agreement for acquisition of a business, there are provisions relating to the seller’s potential liability to buyer after the closing, including various defined terms such as Fundamental Representations, Cap, Basket and Survival Period.

These concepts are, needless to say, not experienced by the average person in their lifetime, even if it’s a well-educated lifetime. But the idea behind all of it is not terribly complex and is very important to the parties in an M&A deal: The buyer should be compensated for damage that occurs after closing if the seller misrepresents facts about the business being purchased when the agreement is signed, but assuming this misrepresentation is not intentional/fraudulent, there should be reasonable limits placed on the amount of compensation and the length of time after closing during which the buyer can bring this up.

So, while it’s unrealistic to expect clients to start using all of the contractual lingo in ordinary conversation, it is important for the lawyer to impress upon the client the importance of, to take the above example, ensuring that representations in the agreement are correct to avoid post-closing liability.

He suggests that lawyers remember how clueless they were about the intricacies of M&A agreements when they were law students or junior associates, and keep the need to ensure client comprehension of key deal terms in mind. Sure, this may not be terribly relevant if you’re working with a private equity fund that has half a dozen reformed deal lawyers on your deal team, but there are a lot of clients who don’t fit that mold – particularly on the sell side.

John Jenkins