Thinking about negotiations, we may picture lawyers from opposite sides meeting in a conference room. Negotiations however, can take place over the phone or even through email. While most ‘big-ticket’ M&A transactions will comprise at least one meeting where the parties and lawyers are physically present to discuss all the major issues, minor issues can always be discussed through email or over a phone call. Remember, after having studied how to conduct an effective due diligence exercise and draft a comprehensive report, we are now moving ahead in the timeline of an M&A transaction. Actually, as you will see below, it often happens at the same time as the due-diligence.
Consider this scenario. Care Insurance Limited, a foreign insurance company, is investing in 26% of the equity share capital of Happy Life Insurance Limited, an Indian insurance company, and both companies have entered into a memorandum of understanding (a preliminary document about which we have already learnt), quite a few issues remain open. Care Insurance has two options. It can (a) wait to see the results of the due diligence exercise and then commence negotiations; or (b) if it is reasonably sure about its intention to invest, it can commence negotiations while the due diligence exercise is going on and then decide on any issues that may arise from the due diligence. More often that not, parties chose the second option unless they expect to see major red flags after the due diligence.
M&A negotiations can start in one of two ways — either one of the parties will circulate a first draft of the definitive documentation that can then be negotiated at a meeting or the parties will circulate a list of major negotiation points, which once decided, will then be inserted into definitive documentation. The choice of process is entirely up to the parties.
Remember that a negotiation process is very sensitive and delicate as parties (sometimes with completely opposing positions), need to arrive at a mutually acceptable solution. Your job as a lawyer is to facilitate the closing of a deal. Here are five points you should keep in mind while preparing for a negotiation. Some of these may seem pretty obvious but after several negotiations, you will realise that even the smallest issue can make a difference.
1. Think about what to negotiate
Always sit with your clients to prepare a comprehensive list of issues that you would like to negotiate, before any meeting with the opposing counsel. Unless your clients would like to keep their position confidential till time the negotiation commences, it is best to set out their positions on these issues and circulate it to the other side. At times, the opposing counsel will also set out their responses to the issues you have circulated. The result is that before the negotiation commences, you will have a document that lists the major negotiating points and the views of both sides on each. This will help structure the discussion as the parties will be focused on the issues at hand. It will also give each side some time to consider the other party’s position before the negotiation commences, often aiding in a smoother negotiating process.
2. Be on the same page as your client
It is best to have a few meetings with your client (whether over the phone or in person) before your meeting with the opposing counsel. You should know how your client would like to see each individual issue resolved. Make sure that you have discussed possible outcomes with your clients and that you have taken them through both the best and the worst-case scenarios. Think about how the issues might relate to each other—for instance, is there some issue your client might be willing to concede in order to succeed in another aspect of the case? Finally, and importantly, make sure that you have determined—in consultation with your client—your ‘bottom line’, that is the point beyond which you cannot concede in a negotiation. If for example, Happy Life believes that Care Insurance must at least invest Rupees One Hundred crore for purchasing 26% shares in the company, then Rupees One Hundred crore is the bottom line. You cannot go below this number in your negotiations.
3. Know the transaction
Know the contours of the transaction and the several issues that can arise. Be aware of the law and the manner in which it relates to the transaction. This will ensure that you never agree to anything that is illegal (due to your ignorance of the law) which you will have to go back on later. For instance, you should be aware that the maximum permissible limit of foreign investment in any insurance company is 26%. Also, be aware of the manner in which the Foreign Investment Promotion Board allows a company to make this investment. Is investment allowed by way of preference shares or only equity shares? How can a foreign partner exit the company? Is there any guidance on the number of directors that can be appointed by a foreign partner? You should have answers to all these questions before you start negotiations.
4. Keep copies of all supporting documents ready
Make sure that you have enough copies of all supporting documentation (emails, preliminary documents, term sheet, reports and the like) that you might need before you enter into a negotiation. Keep additional copies in case anyone needs it. It is always best to have more copies so the negotiation does not need to be halted for something as trivial as taking printouts or photocopies. Also, make sure you have enough stationery – pens, papers, and notepads — for all participants in the negotiation.
5. Plan the conference
Make sure you have a comfortable environment for the negotiation. It should take place in a private room, such as a conference or meeting room. If possible, you can provide a smaller, private room for the other side to go to if they need to discuss anything in private during the course of the negotiation. This is typically called a break out room.
Ensure that facilities such as printers and photocopying machines are available through the duration of the conference. Finally, keep in mind that refreshments such as water, juice, lunch, and dinner should be provided to all the parties with minimal fuss so that they can be focused on the discussion rather than deal with ancillary issues.
Remember planning the meeting is as important as your conduct in negotiations. Good planning leads to an effective negotiation while incomplete planning will result in a bumpy negotiation process.
In my next post, I will discuss the manner in which you should conduct yourself at negotiations and the steps you should take to conclude your negotiation successfully.
(Deepa Mookerjee is part of the faculty on myLaw.net.)