Categories
Corporate

Be cool, look sharp, take notes – these and more tips to ace your M&A negotiation

Drafting_for_Business_Deepa_Mookerjee.jpgIn my last post, I discussed some key points that you need to remember while preparing for a negotiation during an M&A transaction. Let us now discuss the things you have to bear in mind after negotiations have started.

Your demeanour

Clients and parties come with different temperaments. Some of them may seem polite while others may be a bit rude and even a little pushy. Irrespective of how the other side is behaving, you have to be equable and composed at all times. Be firm but polite. Do not get ruffled by any behaviour from the opposing side. Put your case across clearly and (if necessary) a bit forcefully but avoid foul language, impolite behaviour, and harsh words, all of which are more likely to lead to an unsuccessful conclusion.

For a negotiation to be successful, all parties must be calm, composed, and ready to find a solution or a compromise. Remember that you are the lawyer and therefore, do not have a personal stake in the subject of the negotiations. Your clients on the other hand, are financially (and possibly even personally) invested in the transaction, and so may be unable to take a balanced approach to some issues. You have to be the voice of reason.

As discussed in the last post, you need to know your client’s bottom line before the negotiation starts. However, if during the negotiation, your client is being unreasonable, either try to park the issue for a lengthier discussion later or ask your client to step out of the room to discuss the matter privately. If the discussion has stalled on a particular issue, try to move on and resolve other smaller issues before circling back to the unresolved one. Parties are likelier to feel that they have achieved something rather than return to an issue feeling like there was no resolution on any of the issues.

Your attire

While your attire may seem a slightly foolish (and even flighty) issue to even mention in this context, do not underestimate the importance of your clothes. For instance, if you came to the negotiations in your pyjamas or in wrinkled clothes that look like you just rolled out of bed, your client may feel that you are not taking the negotiation seriously. Even your opposing counsel is likely to feel that you have not taken the negotiation seriously. You need the opposing side to take you seriously and have faith in your abilities as a negotiator. Only then will they listen to you and consider your point of view. Dressing the part is important.

Always dress formally. Look smart, clean, and well put-together. Remember this is a key part of your job and you must dress in a manner that is acceptable in your office.

Take detailed notes

As a lawyer, we sometimes feel that it is not our job to take detailed notes. After all, we took notes throughout our student lives and taking notes during a negotiation might make us look like we are back in college. Having so much faith in your memory can get you into trouble because it is unlikely that you will be able to remember everything. After all, negotiations can continue for days and quite often, issues that had seemed resolved are re-visited to reach a fresh conclusion. Particularly in such situations, no matter how good your memory, you are likely to be confused if you don’t jot down those points or the conclusions that have been reached.

If you are not used to taking down notes while talking, keep a computer open in front of you and type out the conclusion concisely next to each point. Quite often, lawyers also ask for a very short break after a point has been decided to jot down the result before moving forward.

Remember that all of these points and conclusions will later be inserted in definitive documentation. Your client will rely solely on you to ensure the correct position is reflected in the documents. Having something written down – to refer to later – helps to ensure that your understanding of the results of the negotiation is correct and that you have not forgotten anything important.

Use the breakout room

The term ‘breakout room’ refers to a room outside of the room where the negotiations are being held, where parties can convene with their lawyers to discuss a particular issue. This helps break the monotony of the negotiation if there is any deadlock and gives the parties a chance to honestly review their positions with their lawyers without being overheard by the opposing side. While a negotiation process is going on, suggest a “time-out” or a visit to a breakout room if you feel that things are getting too heated, if you need to discuss an issue with your client privately, or even if you have a new idea or strategy for your client. It is always better to interrupt a gridlocked negotiation than continue to argue without any hope of a result.

Keeping these points in mind will help achieve a successful outcome to the negotiation. However, following these rules does not guarantee success. We should all remember that a negotiation depends mainly on the parties and their behaviour, which is bound to differ from one to the next. For lawyers, the best course of action is to keep these basic principles in mind and then adjust them to suit the temperaments of their clients.

(Deepa Mookerjee is part of the faculty on myLaw.net.)

Categories
Corporate

Five tips to help you negotiate an M&A transaction like a boss

Drafting_for_Business_Deepa_Mookerjee.jpgThinking 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.

NegotiationInProgressRemember 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

APCCLP_CompanyLaw-BannerKnow 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.)

Categories
Corporate

Learn to draft a loan agreement like a pro

DeekshaSinghLoan agreements, like most commercial agreements, have a standard structure that must be moulded and adapted to suit specific transactions. In corporate lending, that is, where a bank is lending to a company, the amounts involved tend to be substantial and both the bank and the borrower will typically have legal representation. The bank’s lawyers usually draft the first version of the loan documents and the borrower’s lawyers review and negotiate the terms of the agreement on behalf of the borrower.

Remember, a loan agreement goes through many rounds of discussions and negotiation. A drafting lawyer must be prepared to rework the draft several times.

Term sheet

Before the lawyers begin drafting, the bank and the borrower enter into a term sheet that lays down the key commercial points that they have agreed upon in relation to the loan. Referred to as a financing term sheet, it is the basis for the legally binding documents that the lawyers have to draft. Generally, it covers only the more important aspects of a deal, without going into every detail covered in a binding contract. Typically, the authority or committee within a bank that reviews and approves loan proposals also considers financing term sheets.

Facility agreement

Often, a corporate loan is also called a ‘facility’ provided by the bank to the borrowing company and so, a corporate loan agreement is also known as a facility agreement.

A facility agreement between the bank and the borrower sets out the terms laid out in the term sheet in the form of a binding legal agreement. It contains the details of the loan, the manner in which the loan will operate, and the terms and conditions that have to be fulfilled by the parties to the agreement.

Each facility agreement is different and is drafted bearing in mind the nature of the facility. While there are several ways of drafting facility agreements, all of them can be divided into the following key sections—introductory, interpretation, operational, terms and conditions, and boilerplate clauses.

The introductory section

APCCLP_CompanyLaw-BannerAt the beginning of a facility agreement, the introductory section contains all the vital information that sets up the contract. This is typically the part where the drafter tells the reader what is being communicated, and what will be contained within the body of the contract.

The title, the exordium, the recitals, and the table of contents, which are items that are found at the beginning of most commercial agreements, are placed at the beginning of a facility agreement also.

The interpretation section

Every facility agreement also needs a separate section defining the special terms used in the agreement, or terms that are used in a particular way in the agreement. Typically, in facility agreements in India, definitions are provided at the beginning.

This section should be accurately drafted as it will significantly impact the way in which key clauses in the agreement operate. Many definitions are common to all facility agreements, but they can have minor variations depending on the specific transaction. It is, therefore, important for the drafter to tailor the definitions to suit the term sheet.

Most facility agreements will define terms like “Borrower”, “Obligor”, “Material Adverse Effect”, and “Event of Default”. A drafter must examine the terms of the particular loan transaction and determine how they should be defined.

In addition to a definitions section, a facility agreement can also contain a section that sets out specific rules for interpreting the agreement. These rules apply through the document.

The operational section

DraftingCreditFacilityAgreementsThis is the section of the facility agreement that deals with the operational details of the loan, that is, the amount of the loan, the term and purpose of the loan, how the loan will be drawn by the borrower, the repayment schedule, the details of payment of interest, conditions relating to prepayment of the loan, and so on. Obviously, these details are transaction-specific and the drafter will need to rely on the commercial understanding contained in the term sheet to draft the clauses in this section.

Terms and conditions

The terms and conditions section of a facility agreement is transaction-specific and contains the terms and conditions based on which the lender agrees to give a loan to the borrower. These terms and conditions differ among agreements and include both generic conditions that any lender would ask of a borrower—such as the borrower’s capacity to take the loan—as well as conditions that specifically relate to the facts and circumstances of that particular facility. An example of a specific condition is one where the borrower has to obtain the necessary environmental approvals, if the loan is for setting up a power plant.

Broadly, the provisions in this section can be categorised as representations and warranties, undertakings, events of default, and consequences of events of default. This section also includes provisions protecting the bank from changes in circumstances that could affect the loan.

Representations and warranties

The representations and warranties in a facility agreement typically focus on issues such as:

– Whether the borrower is a legally incorporated entity, carrying on business legally, and is duly authorised to take the loan and enter into the agreement;

– Whether the loan agreement and other finance documents for the transaction will be valid, admissible as evidence, duly stamped or registered, and binding on the borrower;

– Whether the borrower has committed any default in relation to the loan or has committed any default that could impact the loan;

– Whether all the information, including financial statements, that the borrower provided to the lender, are true, accurate, and in the form that the lender requires;

– Whether the rights of the lender under the loan agreement or the security documents are in any way subordinated to any other creditor of the borrower;

– Whether the borrower has any legal proceedings pending against it that could affect the borrower’s business or its ability to repay the lender; and

– Whether the assets offered to the lender as security are legally owned by the borrower, and whether they are free of any existing encumbrances.

Covenants

Covenants or undertakings are provisions in the loan agreement that relate to actions that the borrower company is required to carry out (known as affirmative covenants), or prohibited from carrying out without obtaining prior consent from the bank (known as negative covenants). These can also be financial covenants, which  set out parameters for the borrower to follow during the tenure of the loan. Typically, this section contains some specific financial definitions provided by the bank, based on which the bank intends to judge the financial performance of the borrower. The breach of these covenants can be an immediate event of default.

Events of default and consequences

InfrastructureLawThe section on events of default tends to be extensive, in order to protect the interests of the bank in the best way possible. Broadly, events of default focus on the following key points:

– Events relating to the loan agreement: Naturally, any non-payment of any amount due to the bank, any breach of, or any misrepresentation under the loan agreement will be considered an event of default by the lender. Similarly, any breach, or misrepresentation in relation to the security documents will also be included as an event of default.

– Events relating to the borrower: There will also be some other events, which affect the borrower’s ability to repay the loan that will be included as events of default. These include cross-default provisions that consider non-payment by the borrower in other loans as a default, any events in relation to the insolvency of the borrower, the cessation of business by the borrower, any illegal activity by the borrower, and so on.

Since loan agreements tend to be fairly one-sided documents, where the obligations remain primarily on the borrower, events of default are usually linked only to breaches by the borrower and not by the lender.

Deeksha Singh is part of the faculty on myLaw.net.

Categories
Corporate

Learn to structure and communicate a good due diligence report

Drafting_for_Business_Deepa_Mookerjee.jpgIn my last post here, I listed out some points that are important for a due diligence exercise. Completing the investigation (or the due diligence) however is just half the job. The latter half – often more confusing – is to organise all the information you have collected in a structured manner and communicate it effectively to your client.

Before starting to draft, determine the type of due diligence report your client wants. Typically, though there is no formal classification, there are two types of due diligence reports.

A comprehensive due diligence report

You will come across this type more frequently. Many pages long, often going into hundreds of pages, it will contain all the information that you have found from your investigations about the company. It is usually divided into many chapters, each containing information about a specific part of the company.

Generally the chapters include:

Corporate information: This chapter contains details about all corporate matters related to the target company, including its date of incorporation, number of directors, provisions in the articles of association, corporate compliances, and key decisions of the board and the shareholders.

– Litigation: This chapter lays out the details of all the litigation pending against, and filed by, the target company and their impact on the transaction, if such litigation is decided against the target company.

– Material agreements: Here, all the material agreements that a company has with its suppliers, consumers, and retailers, are reviewed to understand the important terms of such agreements, and determine whether there are any particular clauses that will hinder the transaction.

– Human resources: Here, a broad overview is provided of the employee structure, the key employees, their terms of employment, and conditions of their contracts.

– Financial information or indebtedness: In this chapter, all information about loans or financial indebtedness of the company is reviewed, and key issues such as requirement of consents from lenders, and restrictions on transfer of shares or assets, are highlighted.

– Compliances: In this chapter, there is a detailed investigation into the registration and licenses required under law to carry on the business of the company. Information regarding all statutory compliances is found in this chapter.

– Property: Information about all property (movable and immovable), whether owned or leased by the company, and their terms and conditions, is reviewed and outlined in this chapter.

– Intellectual property law issues: This is important if the target company has registered trademarks, copyrights, or patents. All documents in relation to their registration, ownership, or assignment are analysed, to examine any restrictions present on such intellectual property rights.

– Environmental law issues: If the target company is a manufacturing, construction, or engineering company, acquirers ensure that the company is in compliance with all environmental statutes in India and does not violate any pollution standards that have been prescribed.

– Insurance law issues: This chapter outlines the insurance policies taken by the target company, to provide the acquirer with a general idea of the protection available to the target company.

Since such a report runs into many pages, a client often asks for a separate document listing key issues to accompany this report. The list of key issues is a three-or-four-page document (maybe more depending on the transaction) which only lists out the problem areas of the company and provides concrete suggestions on how to solve these problems. Remember that the client will always want a solution to the problems. It is not enough to only identify the problems in the company. As a lawyer it is your duty to provide a solution. Therefore, while drafting, take some time out to think clearly about the manner in which a particular problem can be solved, and then specify that.

An “exceptions only” due diligence reportAPCCLP_CompanyLaw-Banner

Here, a lawyer is only supposed to list out the problem areas or issues with the company. The due diligence report will have language to the effect that “everything is in order with the company except the following…”. This is a report where the client assumes that all the items are in order except those listed in the report. The only problems with the company or its operations are those identified in the report. In other words, while drafting, you will only list out the problems with the company that you have investigated. You will not spend your time stating facts about the company that are in order.

In a comprehensive due diligence report, you will provide the client with all the facts (whether they are in order or not). You will obviously identify problem areas specifically but provide a complete picture as well. In an “exceptions only” report, the client will assume everything is in order except those issues that you have mentioned. Reports like this are becoming common and clients often ask for such reports as they are more concise and much easier to plough through.

Obviously the manner in which you will draft will depend upon the type of report that your client asking for. However, there are some basic drafting points to keep in mind for any report. See the image below.

DraftingaDueDiligenceReport_DosAndDon'tsKeep these points in mind while drafting your report. While some of these seem very simple and obvious, browsing through it before starting to draft will always help refresh your memory and hold you in good stead in your career as a commercial lawyer.

(Deepa Mookerjee is part of the faculty on myLaw.net.)

Categories
Uncategorized

Six tips for an effective due diligence process

Drafting_for_Business_Deepa_Mookerjee.jpgEven though Ray Limited has agreed in principle to acquire 30% shares in Whirl Limited and has signed a memorandum of understanding to this effect; it does not have enough information about that company. For instance, it does not know whether and to extent the company is in debt, how its business is doing, and who its main customers are. Obviously, just as you will not buy a car or a home theatre without a thorough investigation of its benefits, Ray Limited will never purchase shares in Whirl Limited without having complete knowledge about that company. Ray Limited will only invest in Whirl Limited once it carries out a thorough investigation of Whirl Limited. Such an investigation, called a ‘due diligence’ process, helps an investor carry out a cost-benefit analysis of whether the investment is beneficial. During this process, an investor investigates the financial, commercial, and litigation-related details and contractual and other information about the target company.

Such investigations can be of different types. They include:

Commercial due diligence: This consists of a review of the industry, market, and business model of the target company;

– Reputational due diligence: This includes a review of the credit worthiness and reputation of the target company;

Financial due diligence: This includes a review of the tax, financial position, policies, and internal controls of a target company; and

Legal due diligence: This is usually very broad in nature, and consists of a review of all relevant documentation and material contracts. This due diligence process, which is the focus of this post, aims to understand the business and identify potential legal issues that can impede the transaction or affect the transaction value.

Requisition list

As a lawyer carrying out a legal due diligence, the first step is to send to the target company, a questionnaire or list of the documents you require. This list is typically called a requisition list or a due diligence checklist. It helps the other side of the transaction organise documents in the manner you want and ensure that all the documents you require are provided to you. In the absence of such a list, confusion is likely to arise about the nature of documentation required.

APCCLP_CompanyLaw-BannerThis information is provided by the target company in a data room, set up for the purpose of the diligence. Such a data room is either a physical data room or an online data room, which is becoming more prevalent these days. Depending upon the nature of the deal and the extent of confidentiality required for the documents, the target company can grant limited access to the advisors of the acquirers or permit them to examine the records, contracts, and information about the company in person (in a physical data room) or download or edit them (in an online data room).

You will always have to comply with the directions of the target company in relation to handling sensitive information. For instance, you may be asked to not make copies of any documents. You will have to strictly comply with that direction.

While carrying out this investigation, bear in the mind the following:

1. Remember, what you are doing can make or break a deal.

You are the one who has access to all the company’s records and therefore, you have a responsibility to provide a complete and true picture of the company you are investigating. Your client will depend on your report to make a final decision. Never cut corners while investigating. Ensure that all the information is made available to you. If you face a problem accessing any information about the target company (which you feel is vital), let your client know that your investigation will be incomplete unless the information is provided to you.

2. Never assume any fact.

Always ask for documents or written evidence to confirm any statement made by the company. For instance, if a company says it has paid off a loan of Rupees 10 crore in the last two months, ask for written evidence (such as a letter or undertaking from the bank) stating that the loan has in fact ben repaid. If you don’t get what you have asked for in the beginning – ask again.

3. Never forget the nature of the transaction.

The type of documents you will ask for depends on the type of transaction. For instance, if you are only going to buy a specific part of the business, ask only for the documents relevant to that part. If you are acquiring the whole company – you need documents pertaining to the whole company.

4. Always be polite and courteous to those who are providing you the documents.

A Business Men Climbing a Pile of Papers
It can often seem like this but make sure you retain your cool during a due diligence process.

Remember, the documents will often be provided to you by employees or company secretaries who have little or no background to the deal and may not know the reason why the document may be important to your investigation. Patience is key to a successful due diligence investigation.

5. Where you can, make copies of documents.

Always keep copies of all documents you have looked at (if you are permitted to photocopy documents). If not, make detailed notes of every document. This will be helpful while preparing the report as you can look at your notes to refresh your memory. Remember, once the target company has provided some information, it is unlikely to provide it again. So, your notes will form the basis of the report and your conclusions regarding the deal.

6. Be efficient.

Almost all due diligence investigations are carried out within a limited time period. Parties are eager to close the deal and there is immense pressure on lawyers to carry out a diligence efficiently and effectively. While actions such as sending a requisition list will help save time, never hurry up the investigation and ignore documents just to complete the process on time. If necessary, ask your client for more time after providing a detailed explanation about why you need more time.

After this process is complete, as a lawyer you will be asked to prepare a due diligence report setting out details about the investigation and your conclusion about the legal issues in the deal. I will discuss the important points to keep in mind while drafting the due diligence report in my next blog.

(Deepa Mookerjee is part of the faculty on myLaw.net.)