In March 2019, I laid out the basic steps to consider when entering into an M&A transaction.
As mentioned in my February 2019 article, every successful attorney should be adaptable. I flexed this muscle at the end of last year representing a first-time buyer in an unusual acquisition. My client worked for the target company for 13 years. She spent the better part of last year negotiating the terms of her offer with the owner/seller.
Because the company held a certification from the Women’s Business Enterprise National Council (WBENC) that could not be transferred/sold to a purchaser of assets, this deal was structured as a stock sale. In stock sales, all of the liabilities of the target are transferred to buyer, as opposed to an asset sale, where certain liabilities can be excluded and remain solely seller’s responsibility.
Typically when representing buyers in stock deals, I recommend doing a thorough due diligence review of the target. Because my client was effectively running this business, had spent months investigating and negotiating to buy it and had a tight transaction budget, she felt comfortable she knew where all the skeletons were buried, and I wasn’t authorized to undertake the due diligence that would customarily be performed.
As stated in my March 2019 article, it’s common for buyer’s attorney to prepare the initial draft of the purchase agreement. In this unconventional deal, however, seller’s counsel served up an initial draft that was 4-pages, double-spaced, devoid of representations or warranties, and provided no indemnity whatsoever.
So rather than provide a few comments, I had a lot of rewriting to do. This was challenging because even though my client was directly involved in the business, as the buyer of stock, she was entitled to receive the same protections that any third party purchaser would expect.
I successfully produced an agreement that elicited from seller sufficient information about the target’s business, without overwhelming the parties with an overly-comprehensive agreement more appropriate for an arm’s-length transaction between unaffiliated parties. Surprisingly, all of my changes were acceptable to seller’s counsel.
In determining the nature and scope of the representations and warranties to be included, I sought to have seller provide as much information as possible about the business through the disclosure schedules. In my May 2019 article, I said that schedules to a purchase agreement disclose exceptions to the representations. They also provide information to the buyer, such as listing the target’s material contracts, and its clients/customers and employees.
Notwithstanding my efforts to keep this deal reasonably arm’s-length, I learned my client was preparing the disclosure schedules on behalf — and as an employee — of seller. This was highly unusual, but because she had been running the business, she seemed to know more about the day-to-day operations than the owner herself. It was a win that seller agreed to stand behind her representations and warranties by fully indemnifying buyer.