If you are looking to undertake a transaction such as raising capital or selling your company, a lawyer will be a vital part of your team. This article will first describe the role that a lawyer will typically play in a transaction, then provide guidance on how to select a firm or individual who may best fulfill that role.
The lawyer’s role in a transaction
There are many legal dimensions to a transaction, including:
- Information disclosure to investors. The process of selling a company or raising capital involves an enormous amount of information transfer to investors - whether in the information memorandum, data room, or just questions answered informally. At a minimum, a lawyer should prepare or at least review all information disclosed to investors that is of a legal nature (e.g. information on ownership and clean title to real estate, assets, etc.; information about the regulatory environment in which your company operates; and information about litigation in which your company is involved, etc.) You may, as a matter of prudence, also wish to have your lawyer review all information passed onto an investor.
- Deal structuring. Should the investor purchase assets or shares? Should the investment be by way of injection of fresh capital into the company? Is an “earn out” appropriate, and if so, how should it be structured? Lawyers are experts on transaction structuring.
- Drafting legal agreements. There are numerous legal agreements which may be required in the course of a transaction: confidentiality agreements, term sheets, heads of agreement, employment agreements, shareholders’ agreements, non-compete agreements, and the sale and purchase agreement. Of these, the sale and purchase agreement is the typically the most crucial and difficult, especially the portion pertaining to representations and warranties. In other words, if the owner of a business sells all or a portion of the shares of a company, he or she will usually need to represent and warrant that the information provided was full, true and plain disclosure, and that there were no errors or omissions in the data room, and possibly in the information memorandum or other documents as well. The investor will typically reserve the right to claw back all or a significant portion of the purchase price in the event that there were material errors or omissions.
In other words, a significant portion of your purchase price depends on your lawyer. Select your lawyer carefully.
Selecting your lawyer
Your lawyer should be someone you know and feel that you can rely on - don’t hire a mercenary, but someone you can really trust, with sound judgment and advice. However, one of the most common mistakes a business owner may make is to select a lawyer with whom he or she may have a long-standing relationship (e.g. the company’s general commercial counsel) - who may have little or no transactional experience - to act on a transaction. This is no more appropriate than asking your commercial counsel to represent you in a divorce hearing.
The lawyer you select should have acted on at least half a dozen or a dozen transactions. Try to find out your lawyer’s track record with respect to those transactions. Did the transactions close successfully? Obtain some references.
Another important point: your transactional lawyer should be an excellent negotiator. Often the negotiation on representations and warranties is tougher and more challenging than negotiating price. All the legal knowledge in the world is of limited use unless your lawyer is a capable of projecting that knowledge and achieving positive results in negotiations.
Should you hire a sole practitioner or a law firm? Larger transactions definitely require an entire legal team, and hence require the services of a law firm. In such cases, you should select one lawyer within the firm and ensure that he or she personally has the requisite credentials, and that he or she will personally supervise all work and be present at important meetings.
It is important to find a lawyer who does not feel compelled to participate in or influence the commercial aspects of the deal - which should be left to the principals and their financial advisors - unless otherwise requested by the client. And your lawyer should not only point out the risks involved in any transaction, but be capable of offering solutions in risk management, for example through creative deal structuring.
In short, your lawyer can make a tremendous difference: between your transaction closing or not closing; between your becoming embroiled in litigation or not; and between a substantial portion of your purchase price being clawed back by the investor or not. Your choice of lawyer is one of the most important decisions you will make determining the success of your transaction.