This is one of my favorite tidbits on working with foreign counsel. Your local counsel has all the right credentials. His English is excellent; he worked (briefly) for a Wall Street law firm after his LLM from an Ivy League school. So why do you have a funny feeling that the answers he’s giving you just don’t sound right?
More times than I care to remember, after a conversation or even email exchanges with foreign counsel, I still wonder if I have the right answer. I ask a question, foreign counsel gives me an answer. Done, right?
Not quite. Many times, we fall victim to the phenomena of “talking apples and hearing oranges.” It usually goes like this: you ask about an issue “so, how are the apples in Mexico today?” On the other end of the line, foreign counsel says reassuring things like “yes” and “OK” (thereby lulling you into a sense of complacency) and foreign counsel, thinking that you’re asking about oranges, replies “I’m afraid that can’t be done in Mexico.” The problem is that due to a myriad of influences, including, English being foreign counsel’s second or third language, cultural differences, and even bad phone lines, foreign counsel’s answer could be absolutely correct – to the question he understood was being asked, which unfortunately may not be the question you’re asking.
It’s not a pretty sight if you relayed foreign counsel’s advice to the client and later on, someone else on the deal proves that you’re wrong. If the problem is material enough, it may even be a good idea to put your carrier on notice (remember that thing about negligent selection of counsel?).
So, how do you raise the “confidence index” on foreign counsel’s advice, especially if you don’t have the luxury of getting a second opinion? Here are my basic survival tips:
1. Ask the same question several different times – and in several different ways. For non-US counsel, it never hurts, before giving the answer, to repeat the question or say something like “Let me make sure of what you’re asking…”
2. Even if foreign counsel’s English is good, don’t assume that her English is the same as your English. For example, to “table an issue” has opposite meaning depending on what side of the Atlantic you’re on. In American English, to “table” an issue is to remove it from consideration. On the other hand, to the Queen’s English speakers, to “table” an issue mean to present it for consideration. And I wouldn’t make the mistake of thinking that it’s only like that when you’re doing a deal in London. Don’t forget that the Brits’ influence, including that funny English they speak, is prevalent not only in Europe but also former colonies like Singapore, Hong Kong, and India.
If you have a particularly painful – yet in hindsight, funny – story along these lines, email me to be a guest -blogger. The next blog on this subject, I’ll talk about a related but necessarily distinct topic of not taking “no” for an answer.
After a mind-numbing viewing of Charlie’s Angels, I thought I’d spend the next few hours on the plane back from Japan to muse abit about cross-border dealmaking. This will be the first in a series of blogs on this subject.
It’s the Relationship, Stupid! As American lawyers, we’re taught to believe in the written contract as king and as such we must provide for every little contingency under the sun. Voila, the famous 100 page kitchen-sink American acquisition agreement! We also believe that once the contract is inked, the negotiation stops.
In my experience, deal docs from other countries (particularly the civil law jurisdictions) tend to be very skinny. Aside from the fact that lawyers in civil law jurisdictions always tell us that “eet’s all in zee Code,” how can you explain the difference in approach to contracts?
As I’ve learned (the hard way), it all comes down to that fact that in the US, we think the contract is “the deal.” Outside the US, the relationship is “the deal.” The non-US agreements tend to be more framework in nature with the principals comfortable in their ability to work things out as needed. To the distress of American lawyers, once the contract is signed, the real negotiations begin!
So if your client is planning to do a deal outside the US (or a US deal with a non-US company), tell them this: A good agreement cannot fix a bad relationship, but a good relationship can fix a bad agreement.
So relax and do what Asian and European dealmakers have been doing for centuries: wine, dine, and (then) sign…then wine and dine some more.
After years of rollups and mountains of debt now reduced to mere molehills, my buyout fund’s only surviving portfolio company is now a debutante who’s ready for the world. Like a proud parent, I just get misty-eyed over the thought of my little baby being sold to the highest bidder. Then again, the thought of paying cash for that 20,000 sq. foot cottage in Aspen makes my heart more than warm. How do I dress up my budding flower into an attractive acquisition prospect for all these strategic buyers who, since the recent run-up of the stock market, are hungry for growth?
Buyout King Just Trying to Put Food on the Table
********
Dear Buyout King,
We know it’s hard for a proud parent to think this way but your little baby needs SOX appeal. Yes, even though you’ve been running a private company, you’re finally going to have to pay attention to all those SOX client alerts that has been clogging your in-box from every law firm that can spell C-A-S-H-C-O-W.
As you know, the CEOs and CFOs of those potential deep pocket strategic (that’s read: public) buyers have to sign those pesky 302 and 906 certifications that, under SOX, subject them to personal liability and jail time for the accuracy of their public companies’ financials. The prospect of target’s sketchy financials getting morphed into the buyer’s essentially means that CEOs and CFOs may be taking personal responsibility for target’s financial statements and results of operation. It’s no wonder that public company buyers are turning up the due diligence heat on private targets.
For example, if a target’s officer is to become an officer of the public buyer, then buyer wants due diligence on any loans currently in place for that officer (remember, SOX prohibits loans to executives and directors). This is a particular problem for fund-back companies because the buyout guys always want management to have significant skin-in-the-game, which many times means company loans to officers to buy stock. A public buyer must now deal with these loans as it structures comp arrangements for target managers that will stay on.
We could drone on about the SOX parade of horrors but we’ll leave that to others. Just remember that SOX doesn’t have any grace periods for a private target’s un-SOXy things when being acquired by a public company (except the one about 302 certifications not applying to target’s financials filed in an 8-K relating to an acquisition).
So, it may turn out that the most attractive private company acquisition prospects are those who have the their financial and corporate governance house in order so that it can seamlessly fold into SOX compliant public buyers. If you don’t care about silly things like exits (sale or IPO), liquidity (publicly registered debt) or you simply feel “too SOXy for your shirt”, feel free to run your private company like your own little fiefdom with no regard to SOX compliance. On the other hand, if you want to eventually sell or do an IPO, you may have unwittingly whacked your debutante with a big ugly-stick.
(Comments? Gripes? Pls feel free to email us: wilson.chu@haynesboone.com or lglasgow@gardere.com )
Byron Egan, that plain talkin’ Texan (resident in the Dallas office of JacksonWalker), gave a taaallllkkk (said with the best Texas drawl you can muster) yesterday addressing the IRS’s new tax shelter disclosure rules.
As Byron noted, the topic of his presentation could well have been titled “The Law of Unintended Consequences.” If you read further you’ll see why. If you just want the “magic language” it’s towards the end of this blog. Be advised though, we are told by responsible sources that the IRS has declined to bless this or any other language attempts to accommodate the IRS rules. If there are any IRS staffers out there you might let us know if we’re getting close. Gulp, I hope that revelation (and subsequent very tiny bit of levity) doesn’t get me flagged for an audit. Hey, it was Wilson’s idea to put that in! That’s spelled W I L S O N C H U.
Here’s the text of Byron’s materials provided at yesterday’s presentation. I checked with Byron and even though he has a copyright on this material (and what good lawyer wouldn’t) he is ok with you using the “magic language”):
****
DRAFTING CONFIDENTIALITY AGREEMENTS AFTER
IRS REPORTABLE TRANSACTION REGULATIONS
By
Byron F. Egan, Dallas, TX*
On February 28, 2003, the Internal Revenue Service (“IRS”) issued final regulations relating to the disclosure of certain reportable transactions, the registration of certain tax shelters and tax shelter list maintenance requirements. T.D. 9046, 2003-12 I.R.B. 614 (February 28, 2003). These regulations impose a special reporting requirement that could require the reporting of ordinary commercial transactions to the IRS as tax shelters IF they contain typical confidentiality provisions. These new IRS regulations are leading many people to revise their confidentiality agreements to exclude from confidentiality matters relating to tax treatment or tax structure of transactions.
While the purpose of these regulations is to require taxpayers to report tax shelter transactions, the regulations were drafted so broadly that they could apply to certain commercial transactions that do not involve a tax shelter. One of the provisions of the new regulations requires reporting to the IRS of transactions subject to conditions of confidentiality with respect to the tax treatment or tax structure of the transaction (as those terms are broadly defined in the regulations), including certain acquisition agreements, settlement agreements, employment agreements and private placement memoranda. There are limited exceptions (i) where the restrictions on disclosure of tax treatment or tax structure are necessary to comply with applicable securities laws or (ii) for a taxable or tax free acquisition of (x) historic assets of a corporation that constitute an active trade or business or (y) more than 50% of the stock of a corporation, provided that the parties must be permitted to disclose the tax treatment and tax structure of the acquisition transaction no later than the earlier of: (A) the date of the public announcement of discussions relating to the transaction, (B) the date of the public announcement of the transaction, or (C) the date of the execution of an agreement to enter into the transaction. The regulations further grant a presumption of nonconfidentiality if there is a written disclosure authorization in the form provided by the regulations that excludes from confidentiality matters relating to the tax treatment or tax structure of the transaction. See Overview of Reportable Transaction Regulations by William H. Hornberger (July 24, 2003), which can be found at http://www.jw.com/site/jsp/featureinfo.jsp?id=10.
Set forth below is a form of disclosure authorization intended to conform to these IRS regulations:
(c) Certain Tax Information. Notwithstanding anything herein to the contrary and except as reasonably necessary to comply with applicable securities laws, any of Buyer, Seller or any Shareholder (and each employee, representative or agent of any of Buyer, Seller or any Shareholder) may disclose to any and all Persons, without limitation of any kind, the U.S. federal income tax treatment (as defined in Treas. Reg. § 1.6011-4) and U.S. federal income tax structure (as defined in Treas. Reg. § 1.6011-4) of the transactions contemplated by this Agreement and all materials of any kind (including opinions or other tax analyses) that are or have been provided to any of Buyer, Seller or any Shareholder relating to such tax treatment or tax structure.
The author wishes to acknowledge the contributions of the following in preparing this paper: William H. Hornberger of Jackson Walker L.L.P. in Dallas, Texas.
****
Welcome my friends to another slippery slope.
Comments? Gripes? Pls feel free to email us: wilson.chu@haynesboone.com or lglasgow@gardere.com )
This is my first attempt at a WSJ’s Mossberg Solutions-like product/service review. This one’s on risk management due diligence.
Let’s imagine that you’re representing a buyer of a business. How good would you look in your client’s eye if you’re able to get a nationally-recognized risk management group to conduct due diligence on target’s insurance and other risk management matters – FOR FREE?
For years, my college tennis buddy, Dave Lukens (dlukens@lockton,com) of insurance brokers Lockton Companies (www.lockton.com), told me about his M&A Group based in NYC that – for no charge – analyzes target’s insurance policies and other risk management programs (including matters like coverages, claims, retentions, reserves, etc…) and produces a report to the buyer on Lockton’s findings and recommendations. (Of course, these guys are doing it to get their foot in the door but there’s no obligation to buy). They mainly offer this service to support Lockton’s buyout fund customers.
On a recent deal, the moons lined up (i.e., I finally remembered what Dave was telling me), and I recommended Lockton to perform the risk management due diligence on target. On (very) short notice, these guys dove into the data room, jumped on conference calls with us, and otherwise served as the client’s risk management department . On this deal, environmental liabilities was a particular concern and the Lockton guys were able to get their environmental specialists involved at a moment’s notice. In all, we got the expert analysis that we needed, got it fast, and got it for free.
Even if your client has a full-blown risk management dept, wouldn’t it be helpful to benefit from another expert’s investigation, analysis, and judgment – without cost to the client?
I wouldn’t be surprised if other insurance brokers offered this service but I’m certainly going to remember this for future deals.
To avoid being labeled by Larry and Broc as a blogless-wonder-for-life, I thought I’d incoherently spew about a pet peeve of transcendental proportions in M&A negotiations: “Does anyone really know what’s “market” or “standard?”
We’ve all heard – and even said – superficially deep statements like: “Well, a 10% liability cap is market” to “I’ve never seen a deal without ‘prospects’ in the MAE definition.” And yes, the most famous line ever to be uttered by the pre-puberty second year lawyer: “Oh, that’s standard in every deal I’ve seen” (Pretty persuasive stuff, huh?)
Does it ever make you wonder if the person using the “that’s standard or “that’s market” statement is truly arrogant enough to believe that that he’s the know-it-all of all deals terms under the sun? (Sometimes, it makes you wonder if the person is that smart – or that stupid.) Can this guy really detect a ripple in the Force?
To me, a “market term” depends on what part of the elephant that you, the blindfolded M&A lawyer, is touching. On one hand, you could think all merger agreements have “big trunk” terms or, on the other end (literally) of the elephant, you could think that all 10b-5 reps stink (and therefore aren’t “market.”).
Isn’t a “market term” just another negotiation tactic? Who really, really knows what’s market in the deal you’re negotiating? Don’t know but there are plenty of folks out there, however, that will be glad to tell you what they’re seeing (or think they’re seeing), with the hopes of convincing you that they’re in-the-know and you’re not.
As mentioned in some of Larry’s earlier blogs, Larry and I are in our third year of a study of deal points in publicly-disclosed middle market M&A deals. While I can tell you that purchase price caps show up about 22% of the time, I can’t tell you that a purchase price cap or any other cap level is “market.”
Is knowing “what’s market” more important than knowing why a particular term should be included or not – or worded a particular way? Whether you’re armed with statistical data from studies like ours or you possess a wealth of anecdotal evidence, I think “the why” is much more important than “the standard.” Of course, a combination of stats, deep anecdoctal evidence, AND “the why” probably works the best.
Which goes to prove – once again – that doing deals is more art than science.
(Comments? Gripes? Pls feel free to email us: wilson.chu@haynesboone.com or lglasgow@gardere.com )
MATERIALITY RELATED BLOG GENERATES STIR IN BLOGGING COMMUNITY.
O.K., not really, but it sounds good, doesn’t it? Anyway, for those readers who might not have access to “bring down condition” language that eliminates, at least in the walk right arena, the problem of double materiality, we thought we would take the liberty of posting an example, as follows:
“ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects, in each case on the date hereof and at the Effective Time (unless the representations and warranties address matters as of a particular date, in which case they shall remain true and correct in all material respects as of such date); provided, however, if any such representation or warranty shall be subject of a qualification as to “materiality,” such qualified representation and warranty shall be true and correct in all respects, in each case on the date hereof and at the Effective Time (unless the representations and warranties address matters as of a particular date, in which case they shall remain true and correct in all respects as of such date).”
If you think is fun (and who wouldn’t) just wait until we drop in an MAE condition!
(Comments? Gripes? Pls feel free to email us: wilson.chu@haynesboone.com or lglasgow@gardere.com )
EXACTLY HOW DO YOU QUANTIFY DOUBLE MATERIALITY (A/K/A THE METAPHYSICAL ASPECT OF M&A)?
Why would you want to, you ask? Isn’t materiality already something where reasonable minds might differ without doubling up on the concept, you ask?
Well, ponder this …. fully 35% of the transactions we reviewed (see parameters below) applied a test of materiality in individual seller reps and warranties and then again in the condition usually entitled “Accuracy of Representations and Warranties” (i.e., the “bring down” walk right). How wrong can a seller be when “double materiality” is applied to a rep in the context of a walk right? Some might say “completely!!”
Parameters: In our recent Deal Points Study we reviewed acquisition agreements relating to public company acquisitions of private companies with transaction values of between $25M and $150M (pulled from the LiveEDGAR M&A Database).
(Comments? Gripes? Pls feel free to email us: wilson.chu@haynesboone.com or lglasgow@gardere.com )
Ocassionally, we’ll be posting mesages from Bloggees and as musings from “Guest Bloggers.”
Here’s an observation from Ben Orlanski to our “We Don’t Need no Stinkin’ Signatures” posting.
Of course, Larry and I reserve the right post Bloggee messages that we deem appropriate (i.e., that are practical, show keen insight and sophistication… and otherwise make us look good)