INSIGHT: Keep the End in Mind During M&A Dealmaking

Strategic players or private equity funds involved in mergers and acquisition transactions usually aim to sign and close them smoothly and quickly and then part their ways peacefully. More often than not, a deal lawyer’s hard work is stuffed in a binder and placed on a shelf to gather dust.

When a deal is pulled from the shelf and dusted off, it’s usually because something has gone wrong. To avoid any unwanted surprises, one of the best things you can do is to keep “the end” in mind when negotiating a contract.

Deal makers don’t normally kick off negotiations by discussing what happens if things go wrong. However, instead of hoping for the best and reacting to (and scrambling to resolve) problems when they occur, consider spending time identifying the key problems that could arise and negotiating remedy provisions that define what will occur if they do arise.

Starting at the End

The obvious advantage of starting at the end is that you will have a game plan to adhere to when things unexpectedly go wrong, which would reduce the need to resort to litigation (or threat of), which could be costly, time-consuming, and may result in unwanted publicity.

Starting at the end also forces you and the business parties to think through the entire transaction in order to identify the key problems that could arise. It is critical to have open and continuous communication among the teams conducting the due diligence, the business team evaluating and having decision power on the transactions, and the legal team negotiating the transaction documents. When a potential issue is identified, the business and legal teams will be timely apprised of the issue and evaluate its impact on the transaction.

Often times, when a significant issue is identified, the first option is to rely on the termination right. In addition to providing the opportunity to walk away, it could also be seen as a chance to renegotiate to get a better deal or save it.

The problem with this approach is that the leverage will likely have changed, and if you or your client really needs the deal, you or your client may be left giving too much or accepting a lot less. The best time to get agreement on the “renegotiated” deal is at the beginning. And, while it’s not possible to account for every possibility, the more that is pre-negotiated, the more predictable the results and less likely a breach will end up in court.

Factors to Consider

Once a significant issue is identified, in order to determine the appropriate remedies, you might consider the following:

1. The importance of the transaction to you or your client;
2. The availability of an alternative buyer or a target company of similar value;
3. The costs associated with negotiating the transaction, including monetary costs and lost opportunity costs;
4. The likelihood an event will occur (e.g. the transaction won’t close or representations made are not accurate); and
5. The measurability and magnitude the potential damages.

In considering the first three factors, if an acquisition is strategically important, and there are no alternative targets or buyers readily available or significant costs in negotiating the transaction have been incurred, then it is important to work with the business team to craft a specific remedy to the issue (or to a failure to meet a closing condition related to the issue), instead of relying on your termination right to walk away.

Additionally, consider including a specific performance right to force the counterparty to take the remedial actions and close the transaction. As additional incentive to close and depending on the leverage, you may request, or agree to, a termination fee for failure to close.

The likelihood of damages and the measurability of those damages will also affect the types of pre-negotiated remedies. If it is relatively certain that damages will follow from the identified issue, you may consider a longer survival period of the relevant representations, warranties and covenants, a higher or even no cap on indemnifications for the relevant damages, personnel guarantees, or a separate escrow account set aside specifically for dealing with the relevant damages so that you don’t have to chase each stakeholder.

With respect to measurability, if it is difficult to measure the potential damages, you may consider a pre-agreed remedy amount or agreeing on equitable remedies.

It may seem antithetical to start a journey at the end, particularly when you hope never to reach it, but through careful thought and drafting, you can make that journey, if needed, well planned with the least unwanted surprises.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Dan Aiman has extensive experience leading and guiding transactions of all types, in industries including retail, manufacturing and technology. He recently served as vice president and general counsel for Ashley Furniture and is well-versed in negotiating a wide range of M&A and commercial agreements.