Often merger and acquisition transactions encounter problems that could have been avoided if the attorneys involved in the transaction communicated better with their clients. Business owners can often overlook the importance of good attorney-client communications and don’t anticipate the problems that can arise when attorneys fail to listen to their clients or, more commonly, fail to ask the appropriate questions of their clients.
Smart Business spoke to Scott Galer, a partner at Stubbs Alderton & Markiles, LLP, about what business owners should expect from their attorneys in an M&A transaction.
What defines effective communication in an attorney-client relationship?
One of the biggest complaints I hear when companies are looking to switch legal counsel is that their current legal counsel is not responsive. While responsiveness is crucial, effective communication in the M&A process means more than just returning phone calls, it means that the attorney actively listens to the client and understands the client’s goals in pursuing the transaction. If an attorney does not understand why his or her client is pursuing a transaction, that attorney cannot effectively represent and protect his or her client’s interest. Also, the attorney is likely to waste the client’s time and money analyzing issues and negotiating deal points that do not further the client’s goals.
What makes an attorney a true adviser in an M&A?
When an attorney gets a call from a client about a potential M&A transaction, often the attorney’s first instinct is to focus on the structure of the transaction and analyze the various legal issues that may arise, including tax, transfer, securities and approval issues. While these issues are all important, it is equally important to ask and understand why the client is pursuing the transaction. Unfortunately, many attorneys dismiss this important question as a ‘business’ issue and incorrectly assume it has little bearing on the legal issues at hand. When this happens, the attorney assumes the role of a mere administrator of the transaction, instead of acting as a value-added adviser.
How should the due diligence process work?
If an attorney does not know what assets the client is interested in acquiring, how can the attorney do effective diligence in an M&A transaction and advise his or her client? All too often at the start of a transaction, the managing attorney will have a junior lawyer, with little or no knowledge of the client or the transaction, spend several hours preparing a diligence checklist. This can often result in a generic checklist with only new names and dates added. But what more can one expect, if even the managing attorney does not understand why the client is pursuing the transaction? When an attorney effectively communicates with his or her client, the diligence checklist (and thus the diligence process) will focus on the important assets and issues that will help the client achieve its goals.
For example, let’s say a large shoe and apparel company were pursuing the acquisition of a small shoe company that has a well-known brand of shoes. As part of the diligence process, an attorney would likely analyze whether the small shoe company owns the trademarks, logos, slogans and related intellectual property rights associated with its brand. After all, it doesn’t take a rocket scientist to figure out the small shoe company’s value is linked to the strength of its brand. However, what if the buyer were interested in expanding the small company’s brand into other apparel products? In such a case, a diligence review that focused only on the seller’s trademark rights within the footwear market and did not consider whether the brand could be expanded into the apparel market would fall short of realizing the client’s goal.
How can companies in an M&A avoid wasting time and money?
The diligence review process can also be highly inefficient if the attorney does not understand the ‘why’ of the transaction. As part of the diligence process, attorneys often review and prepare detailed summaries of the seller’s contracts. This common practice is appropriate if the contracts are important to the seller’s business and the buyer desires to acquire them. However, this review would be a waste of time and money if the buyer plans to cancel the contracts, especially if the contracts are terminable at will.
Effective communication is not only important for attorneys who represent buyers; it is equally important for attorneys representing sellers. Often, attorneys will spend hours negotiating a provision in a contract, for example, limiting the scope of a representation or warranty, even though the provision presents little or no risk for his or her client. An attorney can avoid negotiating unimportant provisions and issues by taking steps to understand his or her client’s business and goals at the outset of the transaction.
An attorney who understands his or her client’s business and its goals in pursuing an M&A transaction has taken the first step to effectively and efficiently representing a buyer or seller in a transaction. You have to look (and understand) before you leap.
Scott Galer is a partner at Stubbs Alderton & Markiles, LLP. Reach him at (818) 444-4513 or [email protected].