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By Anker Sorensen[1], Partner, De Gaulle Fleurance, Avocats et Notaires
Among Henry Ford’s[2] numerous citations, there is supposedly one about his expectations when dealing with his legal advisers: “I don’t need lawyers to tell me what I cannot do, but to tell me how to achieve what I want”. This citation encapsulates an obvious caricature of lawyers. It suggests that lawyers tend to state the terms of the law that stand in the way of a project, without simultaneously suggesting alternative ways to make the project possible. It is the latter skill that requires most hindsight and analysis, and thus time.
A hundred years later, savvy businessmen do not think differently to Henry Ford. Most of their advisers, including their lawyers, strive to be proactive and pragmatic, which is a criterion high on their priority list in today’s very competitive environment.
What follows are a few examples of where pragmatism has become the norm for advisers in the different stages of M&A transactions.
Need for and drafting of a Letter of Intent (“LOI”)
The LOI is a necessary and important first step in an M&A process. As its name suggests, and today this is a matter of usage and a pragmatic approach, it should reflect only the parties’ intentions and remain a non-binding agreement for most of its provisions until a formal and definitive SPA is executed. Sellers’ or buyers’ advisers may nevertheless be tempted to obtain some binding commitments on key provisions from their counterpart, hence the need for precise and appropriate wording. Increased attention from common law lawyers is recommended if they negotiate an LOI subject to the law of a civil law country, where the code may state that[3] “a sale is deemed perfect and ownership is acquired by the buyer from the seller as soon as the parties have agreed on the item and the price (“la chose et le prix”), even if the item has not yet been delivered and the price paid. In this regard, depending on the wording of the LOI, specifying that the provisions in relation to the parties’ intent to buy and sell are not binding, may not suffice to avoid with certainty that they have not reached an agreement on the item and the price and sealed a perfect sale in the LOI.
In most jurisdictions, common clauses of an LOI are addressed to the parties’ intention to sell and buy assets or shares, the buyer’s indicative price (and not a firm and final price for the reasons mentioned above in civil law countries), a temporary exclusivity period, a commitment to set up a full and complete data room, the due diligence process and duration, the conditions to close, including financing contingency. The LOI may also contain some key provisions of the future SPA including, for example, the guarantee cap and the deductible and trigger threshold, transaction milestones, the conduct of the business until closing, the confidentiality of the LOI and information provided, the assumption of costs by each party and choice of law and jurisdiction provisions[4].
Due Diligence (“DD”) and reporting to the investor in a “red flag” format. This is the increasingly common format for mid-sized transactions. It consists in going straight to what is essential and avoiding long descriptions with low added value. The pragmatic approach here is to report only material findings[5] which may affect the target’s operations, its business value or threaten the investor’s interest in the transaction. Typical findings worth mentioning under this selective approach are:
- Poorly drafted agreements, essential to the target’s business with clients and main suppliers for example, or transferring title over the shares of subsidiaries or land and buildings in which the business is operated;
- Lack of compliance with key legislation, including but not limited to health and safety, AML, tax, environment;
- Repeated work accidents that may lead to heavy fines, temporary suspension of the business activity or a ban on participating in public tenders;
- Litigation with main clients or suppliers, the tax or local authorities, the work force, the unions or minority shareholders; and
- Unusual provisions in existing shareholders’ agreements when the investor is bound to “cohabit” with other shareholders after closing the transaction.
Beyond reporting the material findings, it is customary to suggest how to address the DD findings in the SPA or in other documents to be amended or prepared during the transaction process (e.g the articles of incorporation, shareholders’ agreement, undertakings to buy or sell shares or the post-closing disposal of a business unit, TSAs…). This is a particularly useful approach in multi-jurisdictional transactions and a regular expectation of lead counsels when dealing with the specific issues in relation to foreign subsidiaries in the transaction documents.
Failure by the seller(s) to provide complete Data Room information. This is an unusual scenario. But it has been experienced despite the customary commitment in the LOI to set up a fully-fledged legal, tax and financial data room. The reason can be found in the lack of organization or coordination within the seller’s team or the target. Testing the acquirors’ appetite for the transaction can also be a reason, particularly in a competitive open bid process. Avoiding disclosure of a situation that could have a downward impact on the purchase price is the worst-case explanation.
This is again where pragmatism comes into play when the buyer decides to continue the negotiation process despite missing information and unanswered queries from the seller. The obvious approach then is to state in the SPA that information requested by the buyer was not provided and to append a list of unprovided information to the SPA. That usually resolves the situation. If it does not, the next rational step is to exclude the seller(s)’ representations and warranties in relation to the missing information from the guarantee cap. This is naturally a negotiation, where the most determined party gets its way.
If he were still alive, Henry Ford might have considered that the standardization of an M&A process from the LOI to closing and the expertise developed in the field by law firms over the years is a true step forward. But his opinion might certainly be tempered by the increasing number of regulatory and disclosure requirements and possible obstacles in a vast number of areas, such as competition, information of employees’ representatives, foreign investment, financing and stock exchange requirements to mention just a few of them.
[1] Is dual qualified, in Paris and Luxembourg and permanently based In Luxembourg
[2] Henry Ford, founder of Ford in 1903 and of the first moving assembly line
[3] French Civil Code, article 1583. The Luxembourg Civil code has an identical concept
[4] These last provisions (confidentiality of the LOI and information provided to potential buyer, assumption of costs by each party, choice of law and choice of jurisdiction) should to the contrary be binding on the parties
[5] With some minor exceptions, often in relation to the key provisions of leases (rent, indexes for rent increases, term, exit conditions.….)
