Working with Legal to Dial in Your M&A Strategy

If you're paying per page for a virtual Data room in 2022, you should be fired because that's just wasting money. And that's why there's firmroom.com a virtual data room that meets public company security standards for a fair price for only $500 a month with 10 gigs of data included, somebody had to build the best VDR out there. It's if you're getting duped into paying more than $10,000 for a virtual data room, save your money. Visit firmroom.com it's an M and A Science company. We don't build crappy products. I'm Kisan Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Welcome to M and A Science, where leading M and A practitioners share lessons learned from their experience. If you're interested in keeping up with the latest from M and a science, visit mascience.com to subscribe to our free newsletter. Every Monday we share highlights from our interviews and invitations to events as we build the greatest community of forward thinking M and A practitioners. Again, that's mascience.com Also, I wanted to plug in a special thanks to VRC for providing the office space for us to produce our podcast today. You can use any consulting firm out there for valuation work, but if you want to work with the best, check out VRC. Last year alone they did 10,000 securities and over a thousand deals. Who else can say that? I'm your Host, Kisam Patel, CEO and founder of M&A Science. Joining me today is Felipe Heiderich, Senior Counsel at Moderna. Moderna is an American pharmaceutical and biotechnology company based in Cambridge, Massachusetts that focuses on RNA therapeutics, primary MRNA vaccines. It's also traded on NASDAQ under mRNA. Today we're going to talk about what steps of the deal process the legal team needs to be part of and how do they help move the deal down the pipeline. Felipe, how are you doing?

Doing well, Keyson. Thanks for having me today. Looking forward to our discussion.

Hey, thanks for coming to hang out with me virtually. Can we kick things off with a little bit about your background?

I am an M and A lawyer by training, graduated law school, moved to New York City where I practiced at Davis Polk and their M and A group for about four years. From there went to Fenwick and West to focus more on technology and life sciences company again doing a lot of M and A and what I like to call M and A adjacent things. Equity investments, joint ventures, partnerships, that type of work. Really loved it at those two places. Got excellent training. Can't think of better places to get trained from there. Went to JJ where I was a part of their business development legal group. Again focusing a lot on M and A deals, buy side, sell side, public company, private company work, and again with a lot of what I like to call that M and A adjacent type work, other strategic deals, whereas not full control acquisitions. And about two years ago I joined Moderna here in Cambridge and have been on this kind of crazy ride since then.

You got to join Moderna at a pretty interesting time there, my friend.

Yeah, interesting is definitely a way to put it. It's been a wild ride, but one I really wouldn't give up for anything else. I've learned more, I think, in the past two years than in my previous entire career combined, maybe, and that's with some pretty interesting stops along the way. So I think that says a lot. But it's been a fun ride and one we're definitely looking forward to continue going.

Let's get into it. How do you see lawyers as value partners in M and A?

Maybe I'm a little biased here, being a lawyer myself, but I think it's pretty like all joking aside, I think it's critical to get your lawyers on board early and get them on board closely. Obviously there's really early stages of if you call the deal funnel from thinking about company strategy, what it is you may go after to target identification, all the way down. If you think about executing and closing at the end, there's different stages where lawyers may be more appropriate, less appropriate. But I think throughout that entire timeline, or funnel, if you will, there is an appropriate place to bring in your lawyer. The way I see it is as that deal funnel gets thinner and thinner, our involvement becomes more and more critical, more and more important. At some point along the way, maybe the lead, if you will, gets handed off like a baton. But I think from the very beginning, even when you're thinking about what to go after as business development, corporate development professional, as a cfo, I think having your closest, most trusted lawyer there with you helps avoid a lot of potholes along the way, especially as you think through specific targets that you may use to execute against that strategy, I think at that point already it becomes important not only flag legal risks because I think that's the narrow view of what we do and that needs to be absolutely true. But your deal lawyer has been around a lot of deals before can help you avoid or at least know what to look at along the way. And then as you enter into deal negotiation, execution, signing and closing, the more information we have as lawyers about what it is that we're trying to do from a company strategic perspective, why it is we're doing that, what are the value drivers of this strategy broadly and what's the value drivers of these specific companies, these specific deals. So why is this our strategy? And then why is this target where we're putting the weight of our strategy behind? The more we understand that as lawyers from the beginning, the more we internalize it, the more intuitive the analysis becomes. And I think the more we can help figure out where to focus time and money resources are unfortunately not infinite and you can't focus on everything. So. So there's always going to be a trade off at a certain point in due diligence process in terms and rights and obligations you're negotiating. The more you know about the why behind the deal, the more I think we can valuably and accurately get to what's the right trade off, what's the right value proposition? What's the right give and take in this particular scenario? So I think to answer your question, when do we get brought in and how are we valued partners? I'd say throughout the journey, the earlier bring us in the better. But it does become more and more important as a strategy. And then deal specific deal progresses to execution.

I got it so really early. Would you get a sense of hey, here's stuff in the pipeline. Do you get involved in like a pipeline review meeting?

Yeah, absolutely.

Okay.

I sit in pipeline review meetings probably. I think the one place I'm not directly involved in as in sitting at the table actively giving input is when you talk about long range planning, really high level company strategy. But even then I'm still very much kept up to speed, asked to review decks, given readouts and summaries from our CFOs and corporate business development leaders along the way. And then as we sit through pipeline development meetings, what's interesting out there, what targets are we looking at? What type of deals could we do? And it varies company by company, but I can tell at the two companies I've been at, the deal lawyer is pretty active part of that process. Again, I think more listen mode than dictating at those really early stages. Then when compared to later on putting it as we'll get into it critical that we know where everyone's coming from and what the goal is. And it's hard to do that from a quick download after the fact. I think we need to internalize it and understand that as well as anyone else. Pipeline review stage onwards, I'd say we're very actively involved.

You talked about that earlier of how the more information you get, it'll help you in the later part around negotiations assigned to close by more information. You have one other interesting thing you mentioned because we always think of lawyers for the risk portion of like you do that and the part where you mentioned of just bringing experience to the deal in general that they've been a part of other deals. Talk to me more about that. What does that actually entail?

The one place I see it a lot is the what kind of deal should we do here? What are we trying to achieve and what's the best avenue for achieving that? Because as much as I love doing M and A and full control acquisitions, that may not always be what's most important and what's the best from a risk reduced perspective and from a cost perspective, the best way to achieve the strategy. So thinking through how prior significant equity investments coupled with a really significant commercial relationship has worked, what have we been able to extract and achieve from that in prior context or what a joint venture can do or can't do again versus what a full acquisition can do, I think is really important. So it depends what's our interest in the company? Is it in a specific business area, a specific program? Do we want to be buying revenue or are we looking for technology players? They're really interesting technology. Is there a potential future leader at the company that we think would be critical to run one of our businesses going forward? All of those are different things that people want to get from M and A deals. You hear that a lot, those refrains as value drivers in the M and A deals. But which one is it? Because a few of them could be done by strong commercial relationships partnered by a strategic investment. Others could be done by JVs. Others need naturally a full 100% control acquisition to really get done. And so seeing what has and hasn't worked, depending on the key things we're trying to get out of the deal at a high level, I'm not going to go into the model and tell you what assumptions or what hurdle rates you're using. So if you start to get technical deal analysis won't be able to give you valuable advice there. But I think at a really high level, what is it that we're seeking from a transaction and what's the best levers to pull to get that Done. I think just being like someone who's a deal geek, super interested, has experience and is thoughtful, that crosses specialties. And in that sense, I think it can be a really active and valuable participant around the table from a pretty early stage.

That's pretty cool that you get involved in connecting the strategy with this, bringing some prior experience to it. That's not all lawyers. All lawyers do that.

All good deal lawyers do that, that's for sure. I promise you I'm not the only one doing that. I've learned from what I think are some of the best people in the business. I see it happen and I'd see the value it adds and more importantly, how it resonates with the non lawyers on the team. The best pieces of people's practice, I like to steal those.

It's good to know because I never thought of it that way. This is important because I want to build the business I'm building now into something of a platform. So I got to know how to work with our attorney on this. But you got a good point is it's almost like bringing that feedback to validate, shape, get the other experience and angles and views against the strategy.

Absolutely. Because I think there's a lot of finance and deal professionals that aren't lawyers, as I said. Where do we spend a lot of our time? I think we should be brought in early on. But as the pipeline progresses, as the funnel gets thinner, that's where we become more involved and at certain points start taking a leadership role. And naturally, as that funnel gets thinner, the chances of success, or at least of closing a transaction get higher and higher. So while a lot of people that you may be working with around the table, advisors, financial advisors, consultants, corporate development professionals, spend a lot of their time thinking about what's next, thinking about what should we be doing as the lawyers, you end up getting a lot of views, a lot of reps, a lot of volume of executing really important deals. Get a sense of what works and what doesn't work from that sheer volume, that maybe other people having to focus more on the opening end of the funnel don't quite have the benefit of.

Seeing that makes a lot of sense. Can you talk to me about prioritization?

That is the most important area. I think that as a lawyer you can not only influence, but heavily influence, if not control. And that's what I'm getting at when we're talking about understanding the value drivers of a deal. You can't focus on everything. Because I'd say if you focus on everything, you're focusing on nothing because not everything can be equally important. Understanding for a particular transaction what it is that we're trying to get done will inform all the levers that you can pull both in the merger agreement and and in a deal process more broadly about extracting value. So due diligence I think is a great place to use as an example. You're going to have a ton of contracts uploaded to a due diligence. You're going to have commercial contracts with customers, you're going to have significant input contracts, whether that be real estate contracts, lease contracts with critical, we'll call it vendors. Although oftentimes depending on your industry, they can be much more strategic than what people typically think of as vendors through to your leadership team and employment contracts, retention contracts. What is it that we see as the key value driver of this company? Especially in the M and A setting, this is really important, but maybe to lesser degrees if you're doing something short of a full acquisition. But in M and A settings, what is it that we want to get again? Do we want to buy revenue? Is that really important for us to get increased sales? Is that a key part of the financial driver for this deal? If so, you have to really go pull in and understand the back of your hand. The customer contracts, customer relationships, how does the customer funnel work? What's the contracting, what's the business development of the target process, what's the contracting process, what's in place now? And then you focus what's the term of these contracts? How long are they? How much is left, what's the pricing like? Do we see this company is getting advantageous pricing? Do we think we can get pricing improvements when added to our platform so that maybe it's not always we want sticky long contracts. I think that's great if you want to keep the contract, but depending on what your finance leads, your sales leads view is on the key customer contracts of the target. Maybe keeping the contract isn't the most important thing to you. On another hand, what if it's particularly important R and D operation or they have great software that you want to acquire, Maybe they have a few customers with change of control provisions and they're going to be able to terminate those contracts when you close the deal. But maybe you don't care too much about that. So you leave a contract review, customer revenue side, contract review on the side and you focus on IP patents, the code and you bring in technical review, code review and you bring in your IP team to make sure that the kind of power and Potential that you think you want to acquire from this R and D or technical engineering organization is really there. And there's a there. And you're not focusing entirely on change of controls and customer contracts and supplier contracts. And you spend all your time on that. You have a really pretty looking, really thorough looking due diligence report at the end. But of the portfolio isn't patentable and you're not going to be able to leverage it afterwards. And that's really the thing you are after. These are obvious examples, but at the margins it's going to make a big difference. And sometimes you'd be surprised at how little communication between the legal team doing the execution and the sales team, finance team, manufacturing team. The times there is to understand that the corporate development, business development lead and the lawyers typically always have a really close relationship. But as lawyers trying to reach one level beyond that and understand from the various functions, sales, manufacturing, supply chain finance, what is it that they're looking at? Because that's all the aspects of the business you're buying. There's an expert in each function. I think really lets you dig into the right places. When you're doing due diligence.

As an example, do you have to work with all those functional leads?

Yeah, absolutely. The way I think most internal deal teams are structured, there will be a functional lead that's appointed by senior management for each function. And as a lawyer, that should be your best friend. Those 7, 8, 9, 10 people be talking to them almost every day during the execution phase of a deal.

Are there certain functions that you'll spend a lot more time with than others?

Corporate development, business development, kind of investment function is my key partner as a deal lawyer. I spend day in, day out with those people, understand their motivations, understand what they're working towards really well at all times. Once there's a specific deal to execute, even at the really early stages where we're just doing some preliminary evaluation, start working really closely with other functions. I think what comes to mind is sales, manufacturing and finance. I think those are the three that almost without exception I'm running through the big deals I've done recently. And those are three key partners throughout everything we do. It makes sense. What are you making, how do you make it, what are you selling and how do you sell it and how do the numbers work?

What about the HR folks? They get left out of it.

That's again really important to know what it is that we want out of the deal. Okay, is there a particularly talented management team? If so, the HR team is as key of a partner as you're going to have. How do we continue to incentivize the target management team? How do we retain them? What is already in place, what do we have to put extra? And those are really tactical conversations that you need to have. Similarly, if you're buying a massive company with 10, 20,000 people, you're going to need those people. That's not going to be an easy integration. It's not going to be a situation where you can pick the crap jewels and operating yourself relatively quickly. In those cases, HR becomes critical as well. How do we continue to motivate a dispersed and wide based workforce? And those two extremes, whether it's very specific, talented management team that we know, these three, four or five people we need to keep or else the business doesn't run without them. There's a lot of businesses like that, a lot of businesses not like that, or really large workforce, heavy. I think acquisition targets. Again, HR becomes really important.

I like how you've walked me through learning this strategy, starting to understand those risks and prioritize and then it expands into the work you do in diligence. Do you have an example walking through how that unfolds?

So at a prior job we were looking to buy this company and one of the key pieces of value that our team saw was this really unique manufacturing process that they had for their products. And that was the key value driver in that deal. They had really interesting products, really interesting branding around it. But the most important part wasn't the branding or the customer contracts that they had, but how they sourced their materials, how they made it and how they're able to supply it to their customers. There was a lot of brand value and strategic value attached to the entire manufacturing and supply chain process. And we wanted to understand it really well because it wasn't a plug and play into our system that wasn't it. Their special sauce was what they made and how they made it. And it just happened to be that transaction hit the most critical parts of the business and technical due diligence process in early March 2020. And I think we can all remember what happened back then, especially for that first month or two. The world froze. We didn't really know what we could do, what we couldn't do, where we could go, where we couldn't go, how we could keep each other safe. And so we just stopped traveling and there was a pretty firm ban on getting together with people and with traveling. But at the same time we were trying to close this deal and we couldn't do it. In a way we could say to the board with a straight face that we understood what we were buying, what were the values and what were the risks. Without having eyes, visiting these manufacturing facilities, understanding for ourselves, what do they look like, how do they do it? We're like, how can we do that if we can't show up in person? Because that's what our manufacturing supply chain team, who does due diligence on these targets, is used to doing. Go do an audit of the facility. Go do a tour of the facility and understand it. We put our heads together, we need to close this. We can't wait for the world to reopen. And we also can't bypass this piece of our due diligence. What we landed on is drones. There has to be a way for us to remotely be in that facility and be able to go everywhere that we want to go and see what we want to see. And we were able to do that through drone cameras. We consulted a company that operates drones with kind of high visibility cameras. We were able to convince the target that this wouldn't pose a risk to anyone at the facility. We're able to do this in a safe and thoughtful way. And we had a full tour of the facilities by high resolution drone cameras and were able to see a remarkable amount of what they did, how they did it. And we're able to get really comfortable, really excited actually, about what they were doing through these drone tours of the manufacturing facilities, which is not something that even a few months prior to that you would have asked me, how are you going to use drones in your legal M and A practice? What is it? You can't. They have nothing to do with each other. That's an interesting anecdote of A, understanding what's important important B, not skipping it, emphasizing it at the expense of other things and then just being creative on how you get it done.

That's actually a really interesting example. After you pinpoint what your priorities are, what's next for legal team, for the.

Legal team, after we really understand how the priorities are, it's diligence. Again, you're never going to know everything about a company, but that doesn't mean you shouldn't try. So you really should focus heavily on due diligence. I do think it's the best way manage and limit risk is knowing. And by knowing you can decide what you care about, what risks you can assume with certain mitigants, what risk you can assume absolutely and what risks you just can't. But it's really Hard to do that without diving in and trying to understand as much as possible about the company. The next step after that is how do you mitigate the risks you do know about and how do you protect yourself from the unknown risks? And that's the different levers you have in the deal contract, the merger agreement. And so I think step one is translating everything you know about the value drivers and what you've learned through due diligence into the kind of representations, warranties and indemnity schemes in your typical acquisition agreement, which is the first front, I think in the deal document of risk protection, that's another place. And I think this is just like a theme coming back to can't focus on everything, can't win every battle. And there's representations and warranties that run the gamut of a company's business operations. And that's where you need to figure out what you care about. Is it customer contracts? You want to make sure those are shored up completely and you have a valuable indemnity behind it. If they aren't what you think they are, is it a key supplier or key manufacturer? Absent that relationship, the company just doesn't work the way you need it to. And so you need make sure that you have a valuable indemnity backing that up. Is it an intellectual property or pipeline or R and D kind of play? In which case maybe you can have very loose kind of business side revenue side warranties, but you're going to really focus heavily on it. I think that's step one in the deal document. And again, as you go through the document, I think chronologically as it shows up, but also mirrors the chronological progression of a deal. Interim operating covenants is a big lever you can pull. What is it that the company can and can't do in signing and closing? And then again, closing conditions I think is another big lever you can pull to make sure you're getting absolutely what you need out of the company to acquihire talented management team. HR talent plays is a great example of that. Are there certain people that without them doesn't make sense to buy this company? If so, make their continued employment a closing condition to the deal. Make their execution of retention packages and employment agreements a closing condition to that deal. Maybe you don't care. Maybe that company runs really well with your management. You think your management is going to unlock value that's not there. You don't need to worry about spending political capital, field capital and time negotiating those types of closing conditions. Those are just like a few examples, but they Abound, I think in every kind of aspect of the company and every place in the merger agreement, there's a few levers you can follow.

Those are great. You should actually teach a course on that. That would actually better.

Yeah.

You got M and A. Science academy will welcome you to any. Time to walk through.

I would love that. I like teaching. I like talking about this stuff.

Yeah. Because I could tell it's hard doing a podcast to walk. I mean, we could. But I want to get through this whole big picture of working with the lawyer and making sure I don't screw that up on the next deal. Actually, let's talk about screwing it up on the next deal. You've seen this before. I'm sure you have, where the deal guys make a deal and they hold off on bringing the attorneys in late. Can you walk me through a contrast? What happens in that scenario when you.

Get brought in late and the deal has essentially been ironed out without you in the room or without.

Basically where I got loi signed.

Yeah. Without getting your advice.

I got a template. I just drafted it, got signed. Hey, Felipe, come check this deal out.

Pros and cons. First of all, I think I'm biased, but I think pros are very little. Keeping your lawyer out of that process. I think from your perspective as a deal lawyer, though, what you do at that stage, I think it's the same exact process you go through had you been brought in. But you just have a higher threshold for risk and a higher view towards benefits. I think it probably skews your risk benefit analysis because if you force your client or your colleague to walk back something, you're now adding existential deal risk to it. Because the key tenants I feel of deal making of any kind is your word is bond. You have to be trusted. Walking back retrading is the quickest way to lose trust with a counterparty. With a prospective partner, the prospective target, you have to take that newly introduced risk into your advice. And I think that's the main difference. Otherwise, I would take the loi, take the offer letter, whatever it is. Take a term sheet if it's been agreed to an mou, whatever kind of style of document that has been memorialized at that point before you were involved at all. I would run through the same kind of analysis, try to understand where we were coming from. Why is this the deal we want to do? Why is this the prospective partner target? How do we structure it that way? We seek to learn because you're no longer going to be there to shape it in the front end. So seek to learn how we got where we are, have an open mind about it and then where you see key risks, have an open discussion with your business partner on it. And then I think there's probably three level of risk at that point when you're brought in that lane to the game. One is the I probably shouldn't have done it that way, but we can overcome it, we can live with it. The other is, okay, I think this is an important miss. But there are other ways to get at in the deal document that are absent in this term sheet, that are absent in this loi. So those ways haven't been foreclosed to us. We may have agreed to A, B and C, but there are other things that this preliminary document is silent on where we can really cover ourselves. So let's try to do that. That'll be a point of emphasis as we're negotiating definitive agreements. And I think there's the rare one, which is the third category, which this is critical. We missed it. We can't do the thing that is agreed to in this loi. We're going to have to revisit it with the partner. I think that is never take that lightly. That's incredibly serious. Again, open discussion, trust with your business partner and say, this is why I think we need to revisit this. And maybe as you bring in the key relevant functional leads, you may be able to push it back to the second category. If there's another way to address this that doesn't involve retrading or backtracking every once in a while. There's not. You need to reopen an issue. So I think you approach it the same way. You just give more and proper weight to the fact that now there's some existential deal risk introduced if you retrade things. But at the same time, you take your advisor role and your legal risk management role just as seriously. So if there isn't an alternative way to address something that is a significant problem, unfortunately, you may have to just hit that address ahead on and reopen certain points. I think it's rare. If you're thoughtful and creative and have good relationships with your functional leads, you'll find a lot of things that can fit into that second bucket. Okay, not great. But there are other ways to address it that aren't foreclosed by the current state of the agreement. That's kind of how I think about managing that. When you get the oopsies, when you, sorry, this is done, forgot to bring you in. But I need Your help. Now, that's where I part from, where.

I start from good lawyer to work with deals on fully paid. So what I'm hearing is, even though, as a deal guy, I don't want to bring the lawyer up early because they always find reasons not to do the deal, but you're still going to take this similar approach on managing the risk. And essentially by bringing you in later, I'm actually adding more risk because you may have to make some of these significant adjustments which lead to those retrading and those kind of actions which breaks a lot of that trust between the buyer and seller. All said, bring the lawyer in early.

Bring the lawyer in early. We're not no police. I want to do a deal just as badly as anyone. So we are here to help together figure out what's the best way to do it. Not to not do it.

Hey, I got to put it out there. I got to wear my Persona on these interviews. That's the fun part of this business. You get an appreciation for lawyers and M and A. They earn their value. They do a lot of the work. How do you do a deal without attorneys?

Yeah, I think an M and A deal is really tough. The merger agreement, whether it's public or private, and it varies what parts of it are important, but is such a key part. Even people who like to say, and I think it's rare, honestly, a lot of people in this space are, regardless of what role they play, are really sophisticated, really experienced. So the old trope of the deal, professional who says, I don't need lawyers, I hate lawyers. What's the point of lawyers? I don't think I actually exist that much in practice. And so you see it. Even people who have that kind of. You may be more generally towards lawyers. You see them, I see it day in, day out. They crack open the merger agreement. They crack open the JV agreement to figure out what they can and can't do. So once. Once it's memorialized in the contract, that thing is going to govern. Even when people don't follow the exact rules of the contract, the exact principles in the contract, even when people try to renegotiate points after the fact still sets up the playing field. That's kind of the backdrop for everything that's happening. I think it's pretty impossible to negotiate a merger agreement without merger lawyers.

I agree. You could do a deal without bankers as long as you got good lawyers. But you can't just have the bankers and not the lawyers.

The opposite is tough.

Let's talk about Drafting a contract. What are the considerations when drafting a contract?

The considerations when drafting a contract, again, not to be a broken record, but understanding value drivers is the baseline critical aspect. You there's so many terms you can put or remove, emphasize, de, emphasize, fight for, give up that without knowing what you're trying to achieve with a fair amount of specificity, I think it's impossible to appropriately scope even the first draft of a contract. I think that's one from this level, what we're trying to achieve. Two is frankly, how important is timing to this deal? How fast are we trying to close? That's always going to inform your opening draft. Three, on the kind of deal risk side of things, is this a process? Are we responding to a process letter? Are there going to be other competitive markups going in? Again, will inform how you're preparing that contract or even if it's not a process, do we see particular interloper risk here? If so, that's going to really inform what kind of interim operating covenants you're going to have in there, what kind of deal control, deal certainty type covenants you're going to have in there, what kind of closing conditions you're going to have in there.

Interoperating covenants, what is that?

What actions does the target have to take or is restricted from taking between the time you sign the contract and the time the deal actually closes? You have an operating version, a set of covenants, which is really about running the business. What type of customers can you sign up? Which ones can't you? What type of contracts can you renew? Which ones you can, what type of hiring can you do? And then there is a governance strategic type of covenants you often see most commonly in a no shop or a go shop or an exclusivity component, which is how tightly is this target bound to you? Who else can they talk to? How can they react to other unsolicited offers? What information do they have to give you? How much can you know about these competing offers? Do you know the identity of who the prospective new deal interloper, deal jumper is? Can price, can you see the offer letter? How much you care about those things will be informed by what your view is on dealer risk. That's just, just an example.

This is all between sign and close.

This is all between sign and close. Yeah, because at that point both parties, especially the buyers, put a lot of time and energy and money into diligencing the target and into executing the contract, into getting it signed. And the company, on the other hand, very similarly, there's been a lot of distractions in their business while taking focus away from the day to try to get this deal done inside, each party may have different views or different tensions into what you want to do. Typically, because the company has been so distracted from its business, has been so focused on getting this deal done, the seller is going to want complete deal certainty. Typically, the buyer wants to close the acquisition, has signed the documents, but until it's yours, you always want the option to walk away. At a broad level, people say buyers want less deals on duty, sellers want more deal certainty. That's a rule of thumb that there's a ton of exceptions to. And so understanding your specific scenarios of who the target is, what the market out there for that target looks like, what's the interloper risk, and how do you successfully mitigate that is an important part of the interim operating covenants.

And when you say sign, this is signed purchase agreement, the signed purchase agreement.

And again, I think this is more of a public company setting, right, where you have a lot of shareholder votes, other approvals, hsr, kind of antitrust. And so there's stuff that needs to happen in signing and closing. I think the great part of a process, private deals, you can often get those to happen simultaneously, the signing and the closing. And so that kind of risk goes away.

You sign the contract, money gets changed, boom. Next day, business is under a new owner.

Exactly.

Okay, so we go through this going.

Back to what are your steps to drafting a contract? What are you looking at? You start by being informed by the business goals and that informs what reps and warranties you're going to really push for which ones you're going to de emphasize again. Similarly, how does the indemnity interplay with that? What kind of buyer are you? Maybe it's a really competitive process. There's a lot of people who want this target. How can you differentiate yourself? Obviously, price is one of them, and that's not really the lawyer's job, but there's a lot of places the lawyer can add value in differentiating your bid from others. And I think what you do with the indemnity is one of them. A lot of sellers, as you can imagine, are going to want the entire purchase price paid to them. They're shareholders. They've been in this company for a while. They want to exit. They want all of those exit proceeds right away. They don't want to be tied up for 12, 18, 24 months waiting for 10, 20% of what's theirs to come later. If nothing bad Happens to the business, which is traditionally how you see a private company indemnity structured, where I'll pay you 80, 90% of the proceeds today, I'll hold some of it back either with myself or in escrow until some time passes post acquisition. I get comfortable that the reps were true. No big problem has come up with this company. But if there's a lot of competition for this target, one good way to distinguish yourself you could imagine, is I don't need that holdback. You get 100% of the proceeds upfront and then how do you protect yourself as the buyer on the back end? There's obviously rep and warranty insurance, which has become really popular in private transactions in the past five to seven years. But if you're a large company with a massive balance sheet, maybe you get comfortable. If you do sufficient due diligence in the right areas, you can self insure that transaction. They don't even have to incur the cost of buying rep and warranty insurance. And so again, when I talk about working closely with your functional leads, that's a key area where finance and legal often team up is to do that risk assessment. Finance will have a view on balance sheet and risk on pricing of their rep and warranty insurance product. And together we can walk through due diligence findings on this side. Is this so attractive that we should forego your typical indemnity holdback? If so, do we want to take out a rep and warranty policy? Do we want to self insure? Depending on how much, like the strategic imperative for this particular target, depending on your view of risk, depending on your balance sheet, depending on the markets at the time, that's going to inform all those little levers that you can pull the deal document.

So this is like when you take a trip and they try to upsell you the flight insurance and you're like assessing the probability of things going awry that you like, buy it versus not buy it.

Exactly. Where am I going? Am I like, what's the risk of my wanting to go there? Changing in the next few months? How busy is my job right now? Am I going to have to cancel this trip? How expensive is that trip insurance? Are they asking for eight bucks to cover your entire vacation? Do they want a couple hundred? And so it's the same exact thing. It's the same exact thing. You think through all that and decide where on that continuum you want to land as a buyer.

I know this is a whole sidebar topic, but I'm just curious if you ever worked On a hostile situation, I.

Have not on the acquirer side, but I have been involved in a few deals that we thought were short up and were then forced to defend a deal either as the target or the acquired number one, let's call it from an interloper. And that's always a wild ride. Sometimes you see it coming, sometimes you don't. Sometimes they have a clear price advantage which makes the target's board decision easier. Sometimes they don't.

Is it the same flow though? Is it, here's a letter of intent and then we're moving to a purchase agreement type of thing.

So if you as the hostile acquirer are able to convince the board that letter of intent is something that is the best thing for their shareholders and to discharge their fiduciary duties, they should accept it. Then yeah, then it becomes the same thing. And you hear a lot that is repeated among deal practitioners. And I forget depending on the year the exact percentage changes, but it's 95 plus apostle deals eventually and friendly. So they end with a negotiated agreement at the end. It's rare that the company actually gets fully acquired on a proxy battle without any kind of negotiated agreement at the end, but it happens.

It's like going to war. I'm taking you over. You're all hostages now.

Exactly. And even if that's going to happen at the end, how do you get the leverage to make sure that agreement occurs at the end? There's a lot there. You bring in media consultants, PR consultants. Obviously proxy advisors have a huge influence in real estate. Ultimately they're a battle of hearts and minds of target shareholders if you're doing a truly kind of hostile approach.

So once the deal closes, are you done? Wipe your hands clean. Because I know there's all this post close and integration stuff, but do you have to do anything with that as.

The deal lawyer once the deal closes? Not done. But I do tend to take a pretty significant step back at that point. And you get brought in if there are significant issues that come up with the business, with management, if there are, depending on what kind of deal structure you do, there could be some former Target shareholder problems, whether that's holdouts or suits. In those instances, I definitely get brought back in. I get updates to know how the deal is going because I think that's another important piece of being involved. Post closing with the business is learning what worked and what didn't work. And that may inform how you do other deals going forward. Definitely take a significant step back at that point, but nonetheless never think completely out of the picture, get brought in back deeply if there are issues that happen. And even if it's smooth or relatively smooth, I like to have kind of periodic updates with the various teams that are leading and heavily involved in that business to understand how's it going, what worked well. Even if you have no significant issues that have to come in from a conflict management perspective, what are the bumps along the road or hiccups that did happen? And these are really complex. M and A is buying company a company are really complex organizations. So no deal is going to be free of bumps along the way and you're never going to be able to completely prevent them. But again, having that close connection with your business colleagues after the fact can reveal some tidbits here and there that can inform how you do something in the future.

What are surprises you've come across when working on deals?

People, in one way or another is the biggest X factor or difficulty predicting when we talk about value drivers and strategic imperative for a particular target and how you can help ensure that those are achieved. I brought in the kind of talented management team as an example, and I think that's a place that surprises a lot. You often have management teams and especially kind of founder operators of a target that are incredibly enthusiastic about the company during the introduction, negotiation and due diligence process that seem to have all the financial incentive of the world that you structurally set up through retention packages and retention agreements and employment agreements. And from dinners with this person, negotiations with this person, the enthusiasm that this person exudes about their company, you think, no chance they ever leave. And then you close. And the day after closing, you get whatever notice period is required under the retention agreement or clear waiting period. You see the person waiting for the first significant invest or two and then they're out. You go, oh, where was all this enthusiasm that you saw that I saw months ago or years ago? Where is it now? Never fully predict how people are going to react.

Yeah, captains jumping ship.

I'd say most captains go down with the ship, but that's far from all. Far from all captains who tell you they'll go down with the ship actually do. Again, it's surprising because it's not common, but it does happen. And it's hard to predict just based on kind of structural incentive and someone's attitude during the courting process. The other key surprise that we already touched on it for a second is interlopers. Sometimes those come out of left field, either the fact that there was an interloper or at least the specific one One, the identity of the interloper sometimes is really unpredictable and it throws the entire transaction into chaos. Trying to defend the deal. As a lawyer to deal professional, you have a pretty set game plan and schedule and checklist that will get you to closing a deal. And when you bring an interloper in, crumble that and throw it out the window because now you have to react and that's always a bit surprising and jarring.

Yeah, not fun dealing with them. Any other advice you'd give to M and a practitioner?

I think we've talked about it a lot. I think I've shared all the good stuff that I know, but honestly I can't emphasize enough the idea of thinking like an owner, thinking like a business professional, putting yourself in your owner's shareholder board's shoes as a lawyer and trying to understand at every level, from a high strategic level all the way down to an operational business level through a risk management level, what is it that we want out of this transaction. And be thoughtful about all the levers you can people both in the agreement and the process to ensure that happens. Lawyers and business people I think are much closer to each other than they probably each think. Usually thinking past functions, thinking past silos and really becoming putting yourself in the owner's shoes and then using your legal skills and experience to correctly and thoughtfully execute on that. I think that's much easier said than done, but I can't emphasize the importance of that enough.

Now I know what to look for when finding one of the best lawyers to work with. Anytime keys on anytime you earned your billable hour. But before you go, I gotta ask, what's the craziest thing you've seen in.

M and a craziest thing I've seen in M and A? I gotta say the drone. Using a drone for due diligence purposes was a fun one.

No, that's not crazy. That's what the world is coming to is the robots doing diligence for you. Give me a story of your lawyer, just don't give me names and dates. Tell me something crazy.

Let's put it this way, where interlopers come from, who and how they're going to show up and what they're going to say in the media about a company or about the CEO of a company. Sometimes as eye opening people can get personal about business. I think the other one is oftentimes you may be learning a lot both through documentary due diligence and background checks on key executives at Target. And you'd be surprised on some of the personal issues that may arise that you learn through court filings or interviews that are certainly not for publication and certainly nothing that they would ever want want other people to know about them. So I think how personal it can get both from a interloper like media battles, or through just learning about who runs the company you want to buy can be surprising sometimes.

I like the interlopers coming out of the woodworks and just the stuff you can find in diligence. We do these roundtables and I got to get you because we do the Chatham House Rules. I feel like I could get some more fun stories out of you when we're not recording. We got Chatham House Rules. Protect the innocent.

I could. Yeah, I like that. I like chatting off rules.

I'll make a point to make sure we add you to our guest list for those roundtables. Thank you Felipe for taking the time. I enjoyed it. I learned a lot and this was really helpful. I look forward to collaborating with you again, hopefully getting as an Academy instructor to create some more coursework for us. But yeah, I appreciate it.

No, likewise, thanks for having me. This was great. Really enjoyed it.

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