Top 10 Ways Lawyers Can Mess-Up Deals
October 12, 2007
Sometimes deals fall apart, or turn-out badly, for reasons that have nothing to do with economics. One of those reasons can be the attorney/client relationship involved. The purpose of this presentation is state some of the miscommunications and other attorney/client missteps that can occur and how you can avoid them.TOP 10 WAYS LAWYERS CAN MESS-UP DEALS
In deference to an honorable profession, notice that I modified the verb in the title.
[I understand that you were supposed to have Ben Bernanke (Bern an key), but that he got very busy. With a name like "Samuelson", I would like to give you my theory as to why I think that the yield curve is substantially inverted today; however, I was told to speak about how we lawyers interact with you guys.] Therefore let me give you my Top 10 List of how we attorneys can mess up your deals.
10. Further negotiations and re-drafts, upon further negotiations and re-drafts; i.e. time is not money and does not jeopardize the deal.
a. This is the one high-lighted in your meeting announcement.
b. We need to know when we have enough of what we need and not to keep pushing to nail the point exactly. This also related to spending time, possible irritating the other side, and possibly having the point backfire as the other side may then start to open-up other similar issues. It’s like the trial attorney who does not want to ask that one question too many. We have to judge what are our risks in court of winning on summary judgment, even though we don’t have exactly the language we would like.
c. You need to review the drafts.
(i) If you see that a contract has been revised 10 times by one side or the other, you know that the legal bills are building-up. It’s time to see if there are business solutions to cut through the legal issues.
(ii) If you see one side changing “responsibilities” to “obligations” or “liabilities” or changing “reasonable” to “not arbitrary”, you know that you need to meet with the principal on the other side.
(iii) These are true stories that have happened to me from sophisticated opposing counsel; the one from “reasonable” to “not arbitrary” was last week from a partner at a major law firm representing a major life insurance company. On the other hand, commas are important. Furthermore, some seemingly inconsequential language is important: For example, there is a big difference between having “sole discretion” vs. “sole and absolute discretion”.
Spot check by asking your attorney why he is making some of those changes.
d. Be sure that you are keeping your attorney advised of the relative bargaining power of the parties, your key deadlines, your lost opportunity costs of delay, and your “Plan B” if certain key points don’t go your way. That way he or she has a much better idea of when to hold out and what to trade.
e. See whether your law firm is staffing the case with junior people. They may not have sufficient oversight or you may be paying to train them.
9. Getting great rights, but meaningless remedies therefor.
a. Always ask: What do I do if the other side lies or breaches?
b. My favorite is getting the right to terminate. The Seller’s attorney says, “OK, if you don’t like what you see, you can just walk away”. Once the Buyer has spent a lot of money on due diligence, and away from other opportunities, then, most of the time, the last thing the Buyer wants is the right to terminate. Sometimes, you can mitigate this by getting a breakup fee; but, I have found that the buyer has a lot of trouble getting this and that, most times, the Buyer would rather have monetary or injunctive relieve or the right to sever off part of the deal.
c. Another one is a Buyer’s holding out for the Seller to make broad representations and warranties, even though the Buyer plans to do extensive due diligence and is likely to discover the problem anyway. In that case the Buyer’s damages may be limited to reliance damages, i.e. its due diligence costs. Another example is the Buyer’s holding out for such representations and warranties when the Seller has no equity in the property and no personal liability. In those examples, maybe you ought to reprice the deal for what your getting, i.e. as an “as is” sale.
d. On the other hand, I’ve seen Buyers agree to very short and unrealistic due diligence periods or closing dates. In one case, the Buyer agreed to a very short deadline to get the necessary zoning approvals. In another case, with the sale of an internet company, the Buyer pressured its own technician to agreed to an unrealistically short date to switch over connections in time for the settlement. You know what was happening – the Seller was setting the Buyer up to be blackmailed at the point at which the Buyer had invested substantial sums of money and couldn’t meet the deadline. Therefore, the Buyer should always have the right to buy extension periods for fixed amounts.
8. Negotiating without researching the applicable law.
a. This is especially true with assets that are highly regulated. You’re all familiar with Hart-Scott-Redino filings, anti-trust reviews, plant closing notifications, OSHA and Americans with Disabilities Act requirements, environmental liabilities, loan due-on-sale clauses back by prepayment penalties, etc. However, it’s the little things that can kill you.
(i) For example: language in documents does not always mean what you would think. Most states have implied covenants of good faith and fair dealing, even if the subject document says nothing of the sort. Thus, if you reserve the right to consent to something, you may to say that you can be arbitrary or spell out some of the bases for your having the right to deny that consent. Another example is the various lender liability cases that arose.
(ii) Another example is a failure to consider city and county ordinances; for example, out-of-state counsel will research Maryland law, but be surprised to find out that Prince George’s County taxes indemnity deeds of trust in real estate loans at the rate of 1.4%.
7. Not looking for potential defenses by the other side.
a. In the examples I gave you about not being able to get zoning in time, or switch the telephone connections in time, look at the other side of the transaction – the Buyer is left with his/her “back to the wall” and may claim it is entitled to be let out of the contract due to a defense of commercial frustration or impossibility of performance. Thus, a deal could be too good.
6. Not understanding the other side’s situation.
a. Understanding (i) what they can compromise vs. what they can’t, and (ii) other things that can be thrown into the pot.
b. Sometimes we become so engrossed in our own advocacy that we lose track of the strength of the other side’s position or become too afraid of it. You sometimes need to ask us to argue the other side’s position and what worries them about our position.
5. Not knowing when to say “No” to the client.
a. Believe it or not, we attorneys are human, too. Therefore, sometimes (i) we want to “go along to get along”, (ii) we get caught up in the details of trying to make the deal happen, or (iii) we’re too intimidated to stand-up and challenge you.
b. You’re not paying us hundreds of dollars an hour just to be the scriveners. As the president of Pepsi told the companies’ attorneys, you’re looking for us to take a step back for another prospective, not just to be the best technician producing the best possible document for a deal that doesn’t work. And that was before SOX (Sarbanes Oxley). Remember that when you think that we are just holding up your deal.
c. This comes up, for example, when the Buyer wants side letters, instead of changes to the contract or formal amendments. I should be worrying, not so much about the language of the side letter, but as to why the Buyer wants it. Is he or she going to show it to his or her lenders or to the applicable governmental authorities?
4. Spending lots of time when the other side isn’t.
a. If the other side isn’t offering to do the drafting, but is suggesting that you do everything, are they just stringing you along while they are considering other offers or deals? Are they just “shopping” your deal? Are you just drafting the documents for the other side to use with a third party? We need to be on the look-out for such tactics.
b. This also comes up when it is questionable whether the people you are dealing with have the influence to sell the deal within their own company. Sometimes the client doesn’t want to risk spoiling the relationship by asking the people on the other side what power and influence they have. Sometimes the attorney doing the negotiations “gets no respect” within his or her law firm, i.e. he or she is being routinely second-guessed by his or her superiors within the law firm. The other side may be just playing “man in the back room”, i.e. they come back and say: “I think that you are absolutely right and I agree with you; however, my boss or managing partner just won’t go for it”, in which case want happens most often is that, you have so much invested in the deals that the points you gave up as part of the negotiating trade-offs are permanently lost, and the points you won in the trade-offs now become up for re-negotiation. In other words, it becomes, in President Kennedy’s words: “What’s mine is mine, and what’s yours is negotiable”. Sometimes, we, the attorneys can kill or harm a deal by not being the “bad guy”, i.e. the one to speak up to question the power and influence of the people representing the other side.
3. Not knowing when to draft a letter of intent or other preliminary agreement.
a. Sometimes we see you guys going at each other “tooth and nail”, but not coming to a deal.
b. Sometimes it helps the parties to focus by listing (i) the points that have been agreed to, and (ii) the points that are still open.
c. Even though the economic terms or even a duty to negotiate are not legally binding, it indicates that a deal is likely and, thus, makes each side more comfortable about devoting the necessary time and monies to making the deal happen and closing its options vis-a-vie other potential deals. Generally, there is a feeling that is a little embarrassing to back out of a signed letter of intent or to re-negotiate the terms thereof when it comes time to negotiate the contract or lease itself. The letter of intent can also be used to establish drafting and signing deadlines and procedures. It can be partially binding so as to provide (a) break-up fees, and (b) incentives for starting the due diligence process before the contract or lease is signed. The risk is that the Seller or Landlord may “shop” the letter of intent.
2. Not willing to issue a firm opinion.
a. Sometimes in negotiations, you need to know what the legal risks are of making a particular concession, what approvals are required, or what the applicable regulatory, construction or other deadlines are. You don’t want some wishy-washy thing that protects the issuing law firm under all scenarios. Just as a judge is forced to make a decision (which may be wrong) in a contested case, you expect us to do so as well.
1. Thinking of every possible legal objection, without offering practical alternatives.
a. The thing you guys hate about us the most.