ofa% Merger: and Techniques for ing Acquisitions by James ¢. Freund LAW URE eM ed PRESS 233 BROADW. NEW YORK, Ni Y. 10007Table of Contents Chapter 1 BY WAY OF INTRODUCTION Chapter 2. NEGOTIATING TECHNIQUES AND TACTICS 2.1. Some Preliminary Observations 2.2. 2.3. 2a Doin’ What Comes Naturally 2.1.2. Practice What I Preach The Central Role of Compromise 2.2.1. 2.2.2. 2.2.3. 2.24, 2.2.5. The Back of My Hand to the Non-Negotiable Demand How To Say “No” Without Seeming Negative Marshalling Arguments to Support Your Cause The Creative Discovery of Common Ground The Ultimate Solubility of Most Issues Getting A Leg Up 2.3.1. 2.3.2. 2.3.3. 2.3.4. 2.3.5. The Twin Virtues of Persistence and Perspective Volunteering for the Draft Timing—of the Essence To Swap, Perchance to Cede Hoist On His Own Petard vii 10 10 ll 13 13 18 21viii CO! 2.3.6. The Absurdity of It All 2.3.7. Threats, Fits, and Other Adventures in Brinkmanship 2.3.8, Staffing the Negotiations 2.3.9. Clients are People, Too 2.4, Some Closing Observations 2.4.1, Freedom of Contract 2.4.2. Creative Motivation 2.4.3. Gamesmanship and Other Instruments of the Devil 2.4.4. They're Not Making Negotiators Like They Used to.. S$ 8 &8s Chapter 3 PRELIMINARY NEGOTIATIONS 3.1. The Lawyer's Role in the Opening Rounds 3.2. Sidling Up to the Purchase Price 3.2.1. Alphonse and Gaston Revisited 3.2.2. Digging That Well-known Hole 3.2.3. A Deal Does Not Live by Price Alone 3.3. The Agreement in Principle 3.3.1. Is This Document Necessary? 3.3.2. A Matter of Form 3.3.3, To Bind or Not to Bind 3.3.4. Points to be Covered 3.3.5. Points to be Uncovered 3.3.6. The Other Side of the Coin 3.4. Federal Disclosure Requirements 3.4.1. Some Guidelines for the Public Announcement 3.4.2. Content of the Press Release 3.4.3, Interaction with the Negotiating Process 34.4. The Non-Agreement in Principle BESAQ Sass2e4 yuysa gvCONTENTS Chapter 4 STRUCTURING THE TRANSACTION 4.1. 4.2, 4.3. 44, 4.5. 46. 47. 48. An Ode to Structuring The Basic Forms of Acquisition Transactions As Between Them, Taxes Are Less Certain Than Death. 4.3.1. Lawyers and Tax Experts 4.3.2. The I-Hate-To-Learn-Tax-Law Handbook 4.3.3, Putting Your New-Found Knowledge to Work 4.3.4. The Tax Ruling Imprimatur The Merger Lawyer As Part-Time Accountant 4.4.1. Lawyers and Accountants 44.2. Pooling Is Not A New Form of Aquatics 4.4.3. Accounting Principles at the Bargaining Table Considerations of Corporate Law 4.5.1. The Requisites of Corporate Authorization Merger Mania; Appraising Appraisal Rights 4.5.3. The Practical View of Corporate Mechanics Dealing With Assets and Liabilities 4.6.1. Avoiding Unwanted Liabilities 4.6.2. The Pros and Cons of Piecemeal Assets Feeling Secure Under the Securities Law 47.1. A Bit of History Dealing With Registered Transactions Today ‘ The Corporate Private Placement 4.74. The New Game in Town A Wrap-up of the Subject 48.1. Miscellaneous Structuring Considerations . A Few More Examples 104 105 107 109 11 112 115 117 117 119 1295.1, A Brief Essay on Forms 5.2. The Anatomy of the Agreement 5.3. The Intricate Interaction of the Various Articles 5.4. The Built-In Purchaser’s Bias Chapter 6 PURCHASE PRICE CONSIDERAT! 6.1. The Principal Forms of Payment x AN OVERVIEW OF THE on 5 Chapter >" CQUISITION AGREEMENT 5.1.1. A Form in Every File Cabinet 5.1.2. The Cardinal Sins of Form Abuse 5.1.3. Riding the Coattails 5.14. Cheaper by the Pound 5.2.1. A Skeletal Outline 5. Simultaneous vs. Deferred Closings 5.2.3. The Simultaneous/Deferred Decision in Negotiating Process 5.3.1. The Four Horsemen: A Statement of Pi Representations Covenants Conditions Indemnification 5.3.2. The Case of the Late-Blooming Lawsuit 5.3.3. The Neurotic Seller and the Pound of F 5.3.4. The Problem of the Tardy Financial Stat 5.3.5. Reacting to the Delayed Disclosure Sel 6.11. Cash: Color it Green 6.1.2. Promissory Notes: the Deferred Recko Tax Treatment InteresteR CONTENTS Negotiability Security 6.1.3. Equity Securities: Join the Team 62. Negotiating Stock Valuation Provisions 6.2.1. The Seller as Semi-Involuntary Investor 62.2. Some Alternative Approaches to Pricing 62.3. Surveying the Relevant Factors 62.4. A Personal View of the Decision 62.5. Pricing the Publicly-Held Seller 6.3. Handling a Contingent Purchase Price 6.3.1 Some General Observations 6.3.2. Formulating the Earnout Formula 6.3.3. Defining and Computing Earnings 6.3.4. A Glance at Certain Purchase Price Components Who Runs the Show? . The Kick-out Clause 6.4. Tying the Purchase Price to Asset Values 64.1. A Statement of the Problems 642. A Proposed Solution Chapter 7 REPRESENTATIONS AND WARRANTIES 7.1. An Analytical Framework for Negotiating Representations 7.1.1. Discerning the Purchaser’s Purposes 7.1.2. Evaluating Objections in Terms of Purpose 7.1.3. Helping Seller Over the Hump 7.2. The Ubiquitous Disclosure Schedule 7.2.1. Backbone of the Representation Process 7.2.2. From the Seller's Viewpoint 7.23. The Schedule-less Acquisition 181 183 187 190 190 193 195 199 201 210 214 218 223 229 8 230 233 BREEvorite Caveats a 7.3. Every Seller's Favorite 7 re ee. Materiality is in the Bye of the Beholder 73.2, A Little Knowledge is a Dangerous Thin 7.4, Specific Representations of the Seller 74.1. Corporate and Stock Matters 7.4.2. Financial Statements and Bring-Down 7.4.3. Liabilities and Taxes 7.4.4, Asset Representations 7.4.5. Leases, Contracts and Other Commitments — 7.4.6. Representations Concerning Employees 7.4.7. Litigation and Compliance With Law, Ete, 7.4.8. A Mixed Bag of Warranties 7.5. The Purchaser's Representations 7.5.1. Negotiating on the Seller's Behalf 7.5.2. Symmetrical Schizophrenia Chapter 8 COVENANTS, CONDITIONS AND. CLOSINGS 8.1. Is This Chapter Necessary? 8.11. Yes—And the Culprit is the Deferred Clo 8.L2. Still Need Convincing? Check These 8.2. Covenants Pending the Closing 8.2.1. The Elusive Concept of “Best Efforts” 8.22. The Non-Negotiated Article 8.2.3. Specific Covenants 8.3. Conditions of the Closing 83.1. Some Random Thoughts 83.2. Specific Conditions 83,3. The Disquieting Comfort Letter 84. Legal OpinionsCONTENTS 8.4.1. Exquisite Sensitivities and Popular Sidesteps 8.4.2. Facing Up to Disclaimers 8.4.3, The Litigation Advisory 8.4.4. The Proper Subject Matter of Opinions 8.5. Providing For the Closing (Or Lack Thereof) 8.5.1. Pinning Down A Closing Date 8.5.2. Let's Call the Whole Thing Off Chapter 9 REGISTRATION RIGHTS “ 315, 318 321 323 325 9.1. The Legal Backdrop for Negotiating Registration Rights 326 9.1.1. Restricted Stock Under Rule 144 9.1.2. Contractual Provisions Regarding Restricted Securities 326 330 9.1.3. The Concept and Consequences of Registration 332 9.1.4. Preparing for the Negotiations 9.2. The Negotiating Variables 1. Demand vs. Piggy-back Rights . Some Matters of Timing . Mind Your Manners of Sale . Effective for the Duration - Mostly Mechanical Provisions 9.3. A Keyhole View of Two Sample Negotiations 9.3.1, Representing the Purchaser 9.3.2. Representing the Selling Stockholders 9.4. Registration Provisions In A Rule 145 Transaction . The Numbers Game—Shares and Registrations 335 338 338 339 343 346 349 . Paying the Piper—Expenses and Indemnification 350 351 352 353 356 358xiv Chapter 10 INDEMNIFICATION 10.1, Holding the Purchaser Harmless 10.1.1. The Scope of the Indemnity 10.1.2. The Indemnifiable Amount 10.2. The Seller Strikes Back 10.2.1. The Age-Old Craft of Basketry 10.2.2. Cut-off On Claims . Secking Fulfillment—With Stock . Additional Seller Gimmickry .5. Control of Third Party Proceedings . Joint or Several Liability 10.3. Escrows and Other Collection Devices 10.3.1. Holdbacks and Set-offs 10.3.2. The Care and Feeding of Escrows Chapter 11 EMPLOYMENT CONTRACTS AND MISCELLANY 11.1. Miscellaneous Contractual Provisions and Exhibits 11.1.1. Finders’ Fees and Other Expenses 11.1.2. A Glance at Some Boilerplate 111.3. Exhibits to the Agreement 11.2. Employment Contracts 112.1. Are Employment Contracts Necessary or Desirable? 11.2.2. When Should the Employment Contract be Negotiated? ee What Tone Should You Adopt? nee How Long Should the Contract Run? ee ve Apt the Money Terms? 2.6. Under at Circumst; ee ‘umstances Does the Contract 11.2.7, What About the Non-Competition Covenant?CONTENTS Chapter 12 FROM SIGNING TO CLOSING 419 12.1, Investigation and Monitoring 12.1.1. Coordinating the Investigation 12.1.2. Unearthing a Skeleton 12.1.3. Monitoring the Client’s Affairs BSS 12.2. Proxy Statements 12.2.1. The Legal Requisites 12.2.2. The Virtues of Early Preparation 12.2.3. Some Notes on Disclosure Problems 12.3. Dealing with Third Parties 12.3.1, Financial Institutions 12.3.2. Other Consents 12.4. Problems at the Closing 12.4.1. Disclosing the Missing Consent 12.4.2, The Purchaser's Reaction 12.4.3. Exploring the Unwaivable Condition BEES 888 BBER BR Chapter 13 THREE SPECIAL SITUATIONS 13.1. Purchase of a Division 13.1.1. The Jaundiced Eye Meets Deep Throat 13.1.2. Some Divestiture Nuances 13.1.3. Gauging the Operating Results 13.2. Buying A Controlling Interest 13.2.1. A Brief Survey of the Problem Area 13.2.2. Protective Provisions for the Seller 13.2.3. The Purchaser’s Concerns 13,3. Merger of A Controlled Company 13.3.1. The Key Themes of Fairness and Full Disclosure BS RSGR Base &xvi 13.3.2. The Use of Independent Professionals 13.3.3, Style as Well as Substance Chapter 14. A GUIDED TOUR THE SOFTWARE CAPER A Melodrama in Three Acts ACT ONE LET'S MAKE A DEAL: THE JOURNEY FROM INITIAL NEGOTIATIONS THROUGH THE LETTER OF INTENT Scene 1—The Germ of an Idea Scene 2—Fencing for Position Scene 3—Getting Down to Brass Tacks Scene 4—Putting It in Black and White Scene 5—Buttoning It Up ACT TWO SIGNED, SEALED AND DELIVERED: TAKING US FROM CONTRACT NEGOTIATIONS TO THE SIGNING OF THE ACQUISITION AGREEMENT Scene 1—Who is this Masked Man? Scene 2—Baiting the Trap Scene 3-—What Do They Teach These Kids in Law School Nowadays? Scene 4—Oil on the Troubled Waters Scene 5—Laying the Groundwork Scene 6—The Stage is Set Scene 7—St. Crispin’s Day Scene 8—What Can We Give Them? Scene 9—What Can We Get? Scene 10—The Laying-on of Hands Scene 11—Between us Professionals. . ee Scene 12—Never Leave Well Scene 13—Get Cracking Enough Alone”CONTENTS ACTTHREE HERE'S THE KEY TO THE PLANT: INDEX A VIEW OF THE PERIOD AFTER THE SIGNING THROUGH THE CLOSING Scene 1—The Gathering Clouds Scene 2—Consorting with the Enemy Scene 3—Seeds of the Cover-Up Scene 4—Reason Prevails Scene 5—In the Nick of Time Scene 6—The Moment of Truth Scene 7—The Big Stall Scene 8—The Main Event 530 531 537 538 539 541Acknowledgments In a typical acknowledgment section, after proceeding to list the entire supporting cast, the author concludes with a patronizing throwaway reference to his long-suffering family. Without mean- ing to denigrate the substantial supportive role of the friends and colleagues mentioned below, I want to change the pattern and start out with a salute to Barbro and the boys for their in- finite patience during all those evenings and weekends and vaca- tions—the really precious moments at the center of family life— which I frittered away on this project. Perhaps my only truly difficult moment occurred the Saturday that Erik (8), with visions of football in the park blighted by the reality of a father hunched over his desk, uttered the ultimate blasphemy: “You know, maybe I won't become a lawyer after all”—at which point Tom (6) chimed in with: “Specially if it means you have to write books. . . .” The great bulk of the time, however, the three of you managed to conceal your frustrations so successfully that my frequent pangs of guilt never attained the debilitating stage. Thanks so much for understanding. a the ae of my labors, I imposed upon a number of col- foe thrusting portions of the manuscript before eee a counsel and advice. Needless to say, I found their i cag dane, Pe a whole works: to Jim Tate i ins, who waded through the J » tor his superb tax counsel; and to xixxx ANATOMY OF A Steve Axinn, Ted Kozloff and Milt Strom. Bob Zimet did a fine’ ol of locating citations to buttress my observations and keeping me on the straight and narrow. Others outside the were of genuine assistance, particularly Leonard Douglas for his incisive approach to accounting matters; my gratitude to Ed Ben- nett and George Riordan should also be mentioned. Special thanks to my editor, Steve Glasser, for his many help- ful suggestions; to my secretary, Sue Tholl, whose multi-faceted skills and enthusiasm for this project proved so invaluable; and finally, to my senior partners, Joe Flom and Peter. Mullen, who initially led me by the hand to the bargaining table and whose consummate professional skills serve as a continuing model by which others can measure their progress. It goes without saying, of course, that notwithstanding t) above contributions, I assume full responsibility for any and all opinions, errors, excesses or omissions in the following pages. James C. Freund [New York, New York] {March 1, 1975]Author’s Note The idea for this book originated with some lectures I delivered on negotiating acquisitions at professional forums run by the New York Law Journal and the Practising Law Institute. At the time, I noticed an unusual degree of audience interest, which I attributed to the fact that while most lawyers engage in the nego- tiating process, the subject itself is seldom discussed or sub- jected to analysis, Perhaps, I thought, lawyers unconsciously relish the idea that the thought processes and oral disputation forming the grist of their daily mill—and which sometimes seem as far-removed from the grandeur and majesty of “the law” as driving a bus—possess sufficient hard content to give rise to a lec- ture. As it turns out (and hopefully, what you are about to read constitutes the proof and not merely a form of self-gratification), subjecting the acquisition negotiating process to the same kind of scrutiny that the structural aspects have long received spawns enough material for a rather lengthy book. As the reader would undoubtedly surmise, much of what ap- pears in these pages is precisely what I find myself attempting to communicate to the bright young associate lawyers of our firm, in the course of supervising an acquisition transaction. I have finally come to the realization that one of the unspoken premises motivating this project was some inner need to prove to my col- leno that there is more to this negotiation business than meets the eye. iANATOMY OF A MERGER xxii ividly recall when I was in the Navy, making my second i a el on an icebreaker. Between the two voyages, a most of the ship's officers (including the captain and the exeeu- tive officer) had been replaced by individuals with no polar ex- perience, and there remained only two of us who had ever been in the ice before. As we approached Antarctic waters, the other “veteran” took sick. As a result, when we reached our first ice the captain called me to the bridge. vee) Rae he asked, “what do I do now?” I performed some minor unskilled maneuver, and we slithered away from the — smallish ice floe that had been blocking our path. A little later, — we encountered more serious ice and again he sent for me. I tried a different technique, slightly more complicated, and after — a few minutes we were again free. This went on a few more times, and then we came to some thick blue ice. I ran through my repertoire, but the ship didn’t budge. I turned to the captain. — “Well?” he said. “That's it,” I answered. Z His face flushed as he stammered incredulously: “Is that your whole bag of tricks?” “That's right,” I replied, smiled weakly and headed for the wardroom. i Needless to say, the captain did not call me to the bridge again on that trip. But I'm informed that, shortly upon returning from the voyage, he decided to write a book about piloting ships in the — ice! Tm sure that doctors, after their first appendectomy, are con- vineed that they can handle anything that comes along, appendix- wise. With One or two prospectuses under his belt, many a young securities lawyer has “seen them all.” Actually, this is an admir- able attitude (self-confidence being such a ee todlay))a0 ling a iG precious commodity , loes not tend to self-deception. We all haveAUTHOR'S NOTE net should respond thus-and-so, to which no rational retort was pos- sible. Soon after, representing the purchaser in a negotiation, I made that particular argument. The seller’s attorney, whom I did not know and who had not otherwise distinguished himself that afternoon, immediately replied thus-and-so. As I fumbled to compose a feeble rejoinder, I glanced across the table at him and noticed a strange, expectant glint in his eye. My God, I thought, ‘he had been in the audience that day! I clammed up entirely and ceded the point. Let’s hope none of that sort of thing happens as a result of this book. . . . Potential adversaries take notice: I reserve the right in all future negotiations to counter any argument, revoke each concession, and disagree with every judgment made in these pages!is replete with parties. On the gaining with tive interests2 ANATOMY OF A MERGER chaser’s ability to seek indemnification if a misrepresentation is made? Are the conditions of closing weakened? What is the’ seller's lawyer really worried about? There is a sub-theme running through these pages, which ean be summarized as follows: to call off a deal is no trouble at but it requires some real ability to hold together the pieces of a difficult acquisition and accomplish it in a way that satisfies all parties. The skillful structural lawyer never stops at the point — where he has spotted the legal problem, but rather goes on to solve it in a creative fashion. Similarly, the adept negotiating law- yer does not allow a seeming impasse to sabotage an othery viable deal, but instead devises a workable compromise (whi sides without subjecting either to serious adverse consequenc This book represents a highly personalized view of the tiating process—witness all the “I’s” and the “my’s” that dot th pages. Unlike a work on abstract legal principles or such practical matters as structuring a merger, as to which there certain objective criteria for judgment, this subject often b down simply to a matter of “feel,” based on experience—as. where, for example, a particular line can and should be dt to compromise opposing viewpoints while adequately protectin each of the parties. Other practitioners would undoubtedly different stands on specific matters, and needless to say, reader is encouraged to seek his own level. There is no position on, or solution to, the typical negotiating probl achieve workable compromises and consummate deals, you m dismiss all rigid postures from your mind and roll with punches, adapting yourself to the situation and your number. Although this is not a book about the traditional subst: me aspects of acquisitions, it is obvious that principles of and securities law, tax and accounting form the fram the negotiating process. Moreover, the recognition that ingly arid principles of accounting or tax law are not | neutral, but rather can be used to negotiating advant: to effective bargaining. So, without attempting to biBY WAY OF INTRODUCTION 3 hensive, I have devoted one full chapter (Chapter 4) and tions of numerous other sections to sketching in some a more significant rules of the game. Obviously, the full complexi. ties of these substantive acquisition principles are Bahia the scope of this work; however, appropriate footnote references have been included to enable the reader to follow through in this respect. The technique of convincing (or conning) an adversary at the negotiating table necessarily involves some speculation as to what's on the other fellow’s mind, I don’t pretend to even an amateur knowledge of psychology; and in assessing motivation I have made every effort to avoid the use of psychological jargon, which always leaves me cold and uninformed. A gambit that has worked more than once, or an insight extrapolated from experi- ence, are offered strictly on a common sense basis, Because the text required a frame of reference, I have assumed that the typical reader is a lawyer—thereby eliminating the neces- sity to expound on the Anglo-American concept of jurisprudence, the law of contracts, and the status of the corporation as a legal entity. I have also assumed, at certain places, that the reader has had some practical experience in negotiating acquisitions. In fact, wherever I felt the need to have a tangible object out there, T have aimed this book at the typical law firm associate, several years out of law school with two or three transactions under his or her belt. Apparently, they don’t teach these “practical” considera- tions in the halls of ivy, and we practicing attorneys have the dis- concerting habit of throwing fledgling lawyers headlong into the fray without much analytical backup. ; é It is my hope that lawyers who have done substantial work in the acquisition field will also be able to glean some fresh ap- proaches from these pages. Conversations with certain battle- scarred colleagues tend to bear this out; most of us have simply been too busy doing deals to afford the luxury of reflecting much about the theory. Then too, the =i area is so complex that the learning process never really runs its course. 3 2 One other bi of attorneys could benefit from this book. I find that many private companies being acquired are4 ANATOMY OF A by otherwise competent counsel who unfortunately are ; perienced in acquisition work. The clients themselves are ra expert, and quite often they have no independent aud i investment banker to advise them. In this situation, it is us, in the seller's best interests to bring an experienced aequ attorney into the picture. This sometimes happens; either ¢ client realizes his needs or his lawyer acknowledges that he is ¢ of his depth. More often than not, it doesn’t occur. Perhar volume will be of some assistance to such a seller’s lawyer efforts to adequately represent his client’s interests, 4 My intention has been that one need not be an attorn otherwise experienced in acquisition matters, to derive of value here. Few esoteric legal matters’are discussed; the material is very much down to earth, as accessible to nessman or investment banker or accountant as to a lawy, also strikes me as desirable that others engaged in the acqu process receive some insight into what the lawyer is—or be—doing. Not infrequently, businessmen became very imp: with attorneys, and there is a lot of only half-jocular talk how businessmen make deals and lawyers break them. |] this book will assist the businessman in evaluating whether lawyer is being constructive or simply nit-picking. In this rega I particularly recommend Chapters 2 and 4 and Sections 5.3. In addition, the emphasis on the technique of fra business issue to assist the client in reaching an intelli; sion should aid businessmen to see in advance where a p line of bargaining or interrogation is heading. There is a great intermeshing of disciplines in connecti 4 merger negotiation. My experience is that everyone ¢ 1. A recent advertisement appearing in The Wall Street Journal entitled Wayninc TuroucH IntimipaTion contained the foll Have you ever had a deal blow up solely because of an attor [YJou must face the reality that attorneys have been, are, an tunately, probably always will be a major obstacle in just abe significant business transaction that takes place... . [YJou specific techniques . . . for protecting your flanks from the | €xpertise of the other side's attorney.” ‘or “financial.” ‘that everyone t concerned have an ink- nin the lawyer's mind in connection with ssues discussed are equally applicable to ublic or private companies, more often n the acquisition, by a public company, business. This is what occupies most of the jawyers; and although mergers of large more dramatic and often present more Jems or complexity of detail, I think you wr the negotiating process in the private e devoted considerable space to such areas egistration rights, which are usually not sition of a public company. On the other ions of the book—relating to such matters as 1 mergers with a controlled company—that le to acquisitions of public companies. action is not particularly important to the e book. Most lawyers who do this kind of on large deals and small ones and those that I think it is safe to say that the principles of ‘(as contrasted with such factors as the ial y) do not change greatly from one to an- ise specified, I tend to Jook at the transaction of the attorney for the acquiring company: most lawyers who handle acquisitions aa than not, find themselves on that side of th the more logical vantage point to examine suc com- ecasionally there will be a merger pee equal Mae he great bulk of cases one of the parties beat yes he combination. For our purposes, Bee rd Dee more commonly, the “purchaser,6 ANATOMY OF A MERGER questions as whether a party is receiving adequate representa- tions, whether he is protected by sufficient conditions, and so forth. However, most of the topics are viewed from both sides, and an attempt is made to examine the arguments that each law- yer will or should use. Obviously, regardless of what role you expect to play in a particular transaction, the matters discussed from the viewpoint of the other side can be of value in order to understand how your opponent is thinking, to sense how he is likely to react and to anticipate his maneuverings. With a few exceptions, I have not attempted to provide specific contractual language to accomplish the various points under dis- cussion, so as to avoid one of the real problems in negotiating— the tendency to lose sight of the principle involved by unduly concentrating on the words. My aim is to illustrate the particular concept; any competent lawyer should then be in a position to do the necessary drafting. If help is needed, he can turn to the forms provided in some of the literature cited, or to the numerous acquisition agreements which are on public file at the SEC or the stock exchanges as exhibits to proxy statements. Still, the im- portance of proper drafting to carry out the real intent of the parties cannot be overemphasized, and in acquisition transactions the traps for the unwary are manifold. In those cases where precise wording is critical and sloppy language can lead to unin- tended troublesome results, I have tried to raise appropriate warning flags. While we're on the subject of language, I should mention that I’ve indulged in a little harmless anthropomorphism by which, in addition to the reader-lawyer being referred to as “you,” the purchaser /seller corporate client often becomes “he” or “him.” That's the jargon of the trade, the result of getting yourself more emotionally involved with all these bloodless entities than you would have thought possible. You will also find such language as “killing the deal” and “walking away” from a closing and the like; it’s not highfalutin’, but it’s the way we all talk (no one ever actu- ally says “terminate the transaction”), and if you're going to ply the trade, you might as well get used to it. In line with this, I have made a special effort to get through the entire fourteen chaptersBY WAY OF INTRODUCTION 7 without a single “herewith,” “thereunder” or “witnesseth,” which is no small feat for a Blackstone-trained man. On the off chance that the table of contents has proved unen- lightening, let me sketch out for you briefly just where we're headed. At the outset, you will find a general survey of various nego- tiating techniques and tactics (Chapter 2), which will be fur- ther examined in later chapters in the light of the specific sub- ject matter under consideration. The stress here is on those twin, seemingly antithetical goals of negotiation: gaining advantages and effecting workable compromises. The scene then shifts to the negotiations which occur at the preliminary stages of the transaction, up through a handshake or the signing of a letter of intent, at which point the basic deal has been made although neither party is contractually obligated. This is often the most important part of the acquisition, because decisions are made (and omissions occur) at this stage that are bound to affect you later. The principal topics in Chapter 3 are the bargaining over purchase price, the contents of the typical letter of intent, and the role played by Federal disclosure re- quirements. At this point (Chapter 4), we will pause to take a hard look at the various tax, accounting, corporate, securities and other structural considerations which enter into an acquisition transac- tion, with a view toward their relevance to the negotiating proc- ess. Next, is an attempt to convey an overall picture of the acqui- sition agreement, the central document regulating the rights and liabilities of the parties. Chapter 5 contains observations on draft- ing, on deferred vs. simultaneous closings, and on the interaction of the various segments of the agreement—all, once again, as they have significance in negotiations. Purchase price considerations are obviously paramount, and Chapter 6 is devoted to an analysis of several important topics in that area: the medium of exchange; the valuation of stock to be issued in the transaction; contingent or “earnout” deals where part of the price may become payable in the future; and purchasing assets for a price tied to asset values.ANATOMY OF A MERGER _ We then probe a little more deeply into ré i warranties (Chapter 7). In addition to a aoeeHLah Gauri ‘ the specific representations generally required, there are obser- vations on such matters as the purpose of warranties, the dis closure schedule, the role of the seller’s attorney, and responding to his recurrent themes of materiality and knowledge. There fol- lows, in Chapter 8, a similar in-depth examination of the pre- closing covenants and closing conditions which form such an integral part of every acquisition agreement, with major emphasis _ on the legal opinions that must be furnished. oe Chapter 9 is primarily concerned with the ability of seller’ stockholders to resell any shares of purchaser which they receiv in the acquisition, which involves the negotiation of registration rights between the two attorneys. Chapter 10 covers indemnifica- tion—how much, what restrictions, and whether there should be — a hold-back or escrow of part of the purchase price to protect the — purchaser. Chapter 11 is a catch-all of miscellaneous aspects of ~ the acquisition agreement, along with a closer look at employ- ment contracts between the purchaser and seller’s key employees. The period from the signing of the agreement through th closing is the next object of focus (Chapter 12)—including such matters as investigation, client monitoring, obtaining sharehold approval, dealing with third parties, and problem situations in the closing itself. Attention is then directed (in Chapter 13) three special situations that surface sufficiently often and e enough distinctive characteristics to make them worthy of ; rate consideration: the purchase of a division, the purchase controlling interest in a company, and the merger of a contt company. Chapter 14 is my idea of some instructional fun: a guid through a hypothetical negotiation, in the course of which tried to illustrate many of the principles discussed in chapters. : So sit back and relax, light up that Churchillian sti let's begin the negotiations. aCHAPTER 2 Negotiating Techniques and Tactics 2.1. SOME PRELIMINARY OBSERVATIONS I suppose it’s only proper that a book on negotiating should begin with a chapter on the techniques and tactics commonly employed in negotiating, although I must confess that discussing this subject in print makes me a trifle uncomfortable. There are a number of books around which purport to raise negotiating to the level of an art-form, containing probing discussions of such matters as “The New Theory of Negotiation” and “Non-Verbal Communication,” plus a healthy dose of scientific jargon. More power to them, but I’m afraid I have to pass. At the risk of |. A Good example of this type of book is G. Nierenberg, Tue Ant Or Nesoriatine (1968).ANATOMY OF A WV 10 sounding anti-intellectual, let me start by advocating ty simple but basic guidelines > What Comes Naturally 2.1.1. Di ; First point: everyone has his own negotiating style, worst thing you can do is to adopt a negotiating techni does not feel comfortable, simply because a man in a b that he uses it to advantage. In my book, credibility, ba an evident sincerity, is the most important single asset 0 negotiator.” This applies both to form and substance. If you are uncomfortable negotiating style and not exuding credib will probably get nowhere; if gambits are not your you are bumbling through one that somebody mentioned | 81, it will boomerang. With respect to substance, you sho ask for what you feel you can reasonably support. Try and your arguments don’t ring true; ultimately the hol in your approach will show up and get you in trouble, perienced negotiators go even further and ask only” they actually think the other side should give them. us back to the same basic idea: you must feel comfor what you are doing. 2.1.2. Practice What I Preach Second point: in the last analysis, you cannot learn techniques from a book. You must actually negotiat 2. That's true in other people’s books, too. In the chapter ¢ On Bargaining” in Thomas C. Schelling’s THE STRATEG 21 (1960), Professor Schelling views the key to all ing the other person believe the truth of what you easier to do if in fact it is true, and if the other part evidence of this. He uses the example of a potential | ing to persuade the seller that he will not pay more a house that is really worth $20,000 to him, (i) vocable and enforceable bet with a third party, ac aos pay for the house no more than $16,000 or f« succeeds in communicating this knowledge unambiguous way. 4NEGOTIATING TECHNIQUES AND TACTICS u be the height of folly for me (or anyone) to say to you, “Here are eight tactics that you should use in negotiations,” and suggest that you're now in business. The discussions of strategy in this book arose out of actual negotiation situations; out of watching my partners and clients using certain tactics to advantage; out of becoming aware that other tactics had been successfully utilized against me and my clients; and finally out of abstracting from all this a sense that a particular approach can be useful under certain circumstances, What this chapter, and really this book, is intended to do is simply to advance the ball a little by articulating some of the things that you have been doing or have noticed others do, but have never attempted to generalize from or subject to analysis, Hopefully, when the subject comes up in a deal next time (and it will), you will remember seeing it discussed here, and per- haps a counter-argument will come to mind a little quicker than it otherwise might have. So, the idea is, read about it but then do it. 2.2. THE CENTRAL ROLE OF COMPROMISE The basic premise of this book is that your negotiating goal should be to achieve solutions that both parties can live with, that accomplish the purposes of your client without making the fellow on the other side so unhappy that he walks away from the deal or (perhaps worse) goes through with it despite a per- manently scarred relationship. That means compromise. If your adversary gives you everything you want and never knows what hit him, relax and enjoy it. But if, as is more likely, he resists, and his resistance is not clearly unreasonable, then you must search for what we can term the favorable common ground.* 3. Secretary of State Henry Kissinger, in another context, put the thought in these terms: “A presumed monopoly on truth obstructs Gaeesre and accommodation. . . . Good . . . results may be given up in the quest for ever-elusive ideal solutions.” Speech to Pacem as To October 8, 1973, quoted in The New York Times, October 23, a at 36.12 ANATOMY OF A MERGER Remember, it’s not like selling a parcel of real estate; the seller and buyer of a business very often have to live together for a long time after the deal is closed. 2.2.1. The Back of My Hand to the Non-Negotiable Demand There is an opposing school of negotiation (one is tempted to say the “old school”) that comes on strong, like so: “Here is the way we do things, and we don’t tolerate any compromise. Take it or leave it. The point is non-negotiable.”* If you come up against this Cromagnon style, you must first determine whether it’s a bluff or for real. The best way to accomplish this quickly is to steer the discussion to some relatively simple, hardly material points, on which your reasoning is truly non-assailable. If Flint- stone remains intractable and you decide he’s not kidding, my suggestion is not to waste your time in further negotiations but consult with your client as to whether he wants to accept the contract on the other guy’s terms or call off the deal. One caveat, however, in the case where it’s the lawyer who is acting tough while his client is not in attendance. If you suspect that his client might favor the deal even on compromised terms, adjourn the meeting and have your client phone his client to indi- cate what transpired between the lawyers and where such an at- titude on Flintstone’s part is likely to lead. When bully boy turns up tomorrow, he might just be meek as a lamb. On the other hand, if you put Flintstone to the test and con- clude that he is bluffing, then you should continue to negotiate with him in the same manner as you would with anyone else. It’s just that it takes infinitely longer, every little point is a crisis of confidence, and you'll be tearing your hair out in clumps. Pre- sumably, however—provided you're smart enough to force your client to watch the agony—you'll be well compensated for your patience, 4. For an example of this technique at work, see Chapter 14, pp. 486-487.NEGOTIATING TECHNIQUES AND TACTICS B 2.2.2. How To Say “No” Without Seeming Negative Pardon a slight digression, but I should probably mention briefly, a variant of the Cromagnon style that represents a valid negotiating technique not deserving of the same abuse. It is based on the same principle as the straddle: if you want to buy something for 75 and the offer is 100, you had better bid 50 so that you can ultimately split the difference. The idea here is to initially take issue with every significant point raised by your ad- versary, in order to preserve your bargaining leverage—but you manage to say “no” without seeming negative. For example, the seller’s attorney wants to omit any representa- tion concerning the seller’s qualification to do business in other jurisdictions;* you reply: “We always insist on that, but Ill be happy to listen to your arguments as to why it’s unnecessary in this case.” The seller's attorney asks for demand registration rights;* your response is: “I’m inclined to limit the rights to ‘piggyback’ situations in view of the small number of shares in- volved, but I'll take it up with the purchaser and see what we can do for you.” When an astute seller's lawyer hears this kind of constructive negativism from purchaser's attorney, he knows that he will probably be able to do business on some of the points—but by the end of that first meeting he hasn’t gotten to first base (which is precisely what you had in mind).* 2.2.3. Marshalling Arguments to Support Your Cause Ifa major goal of negotiation is to achieve viable compromises, to my mind there are two key techniques to achieve this end. 5. See Section 7.4.1. for a discussion of this representation. 6. For the distinction between demand and “piggyback” registration rights, see Section 9.2.1. 7. If your opponent is one of these non-negative-no creatures, make sure your reading of him is sound. Nierenberg, supra, at 104, makes the point that a cultural difference in the use of the word “no” causes trouble between Japanese and American businessmen. The Japanese negotiator who wants to draw the line feels that if he answers with a complete negative, he causes the American to lose face. The American, unaware of this, keeps negotiating without what he feels is a clear response.4 ANATOMY OF A MERGER | 4 hall arguments in favor of your is the ability to mars! i eas fe ‘ul and reasonable to convince ition which are sufficiently forceft pant that you are right (or, at Jeast, that you are ae 4 so far off base as to forfeit any entitlement toa compromise _ solution). I find that rarely is @ negotiator able to win 4 point when he has no cogent argument to support his position, except in a case where the bargaining strengths are completely unequal. The plain fact is that acquisition negotiations, which can often become acrimonious, do tend for the most part to be good-na- tured. At least, that’s the mood you should strive for—a feeling of give and take (you win this one, I get that one, we split the next) in an atmosphere of reasonableness. In such a situation, when your arguments in support of a particular point are couched in rational terms—illustrating why you need the protection of a certain representation, why you believe you ought to be indemni- fied against a certain potential liability—your opponent is put to the task of disputing your view—showing why you don't require that representation, why you need not be indemnified—in terms which he hopes are more reasonable than yours. And so it often develops that the more logical arguments you can come up with in support of a point, the greater are your chances of winning or successfully compromising that issue. This usually requires some advance preparation on your part, especially when you Toy at issues are likely to be discussed; and it often calls for ee is Seay, since the reasons are not always readily side) § » if apparent, not necessarily acceptable to the other i aaey is) the purchaser's attorney, you have included in tions to the a an asset acquisition agreement separate condi- “4 obligation to close of both seller and purchaser that @ specified tax ruling from the Internal R 3 ceived? At the initial negotiating sada HEM Service Dea makes the point that, although ee seller's attorney to be'a condition tu the sellers chee oe ie obligation (since a tax-free reor- 8. In this rey gard, see Secti reed 9. See Sections 5.3.1 Conditions, Bry. reative motivation.” ; ; and see Section 4.4.4. with fens ot conditions to. the 4NEGOTIATING TECHNIQUES AND TACTICS 15 ganization is critical to seller's stockholders), he does not think it forms an appropriate condition to the purchaser's obligation, since the rulings sought don’t seriously affect the purchaser. If the ruling is not forthcoming, he argues, and the seller still wants to go ahead with the deal on the basis of his counsel's legal opinion that the transaction is tax-free, the seller ought to be en- titled to close; and the purchaser should not be able to use the non-receipt of the ruling as a pretext for walking away from the deal in the event that he sours on it for some other reason. Now, you simply cannot refute the seller's attorney in this in- stance by blandly saying, “No, we think it ought to be a condition to both parties’ obligations,” or “Everything is symmetrical in this contract.” Conclusory axioms of that sort just won't wash. After all, he is making a pretty good prima facie point. On the other hand, it’s not that important an issue from his point of view; and if you have a good argument ready as to why the tax ruling should be a condition to the purchaser’s obligation, it’s a good bet that he will back off. So you improvise something about the ruling being important to you in order to insure the validity of the net operating loss carryforward, or to set to rest your tax partner's philosophical worries about basis, or the like, and you're in busi- ness. But if you have no arguments—if you're caught flat-footed— the contract will probably end up being changed. Take a more complex illustration. Assume the transaction is being done on an earnout basis," where a portion of the purchase price is deferred and contingent on the earnings of the seller's company in the several years immediately following the acquisi- tion. The seller, anxious that his earnings remain intact and not be subject to diminution at the hands of the purchaser, is seeking a provision in the agreement that will preclude any accounting charge against those earnings based on the purchaser's home office overhead. He begins to marshall supportive arguments. His company, he says, is a self-sufficient entity. It does its own accounting, legal work, public relations and so on, and intends to continue in the same fashion. Frankly, he says, no offense in- 10. The use of a contingent purchase price is discussed in Section @216 ANATOMY OF A MERGER — tended, but it’s not expected that anybody from purchaser's home q office is going to contribute anything to the operation, so there’s no reason to record any special charges against the earnings. If what the seller says makes sense, then his conclusion might logically follow. But nine chances out of ten, the purchaser will want to expense some home office charges against seller’s earn- out income, and therefore the purchaser (or his attorney) is going to have to come up with some plausible arguments as to why the seller is mistaken. He can’t merely say, “It’s appropriate,” or “We do it all the time.” So the purchaser's president ticks off the bene- fits the seller will be enjoying under the purchaser’s roof. All insurance, he says, is handled on a group basis, resulting in lower rates for everyone. One man oversees it for all divisions, and the seller should be delighted to bear a portion of his salary. Seller has some patents, he continues; well, there’s a patent lawyer on purchaser's staff. It’s cheaper for seller to carry part of that man’s wage load than to go out and engage special patent counsel. Other examples follow. And then he concludes, on a fatuously self-deprecatory note, “I myself intend to be spending at least a few days a month at your shop, and it just might be that I” provide some small help, enough to justify a modest overhead charge.” Well, the seller has to make a reply. He can’t simply leave the ceed oe on the table. He should attempt to counter ap ee a aes to the seller's business of being under scare ee wing, but this has to be done rather delicately Purchaser's president has injected himself into the fray on @ personal basis. So perhaps the seller i o t tack to buttress his atest oeNEGOTIATING TECHNIQUES AND TACTICS v7 This is a strong argument, and the purchaser has to be ready for it, It’s not enough to say, “A deal is a deal,” or “You should have thought of that when we first negotiated the earnings test.” The purchaser has to be able to show the seller a number of specific offsets (reductions of expenses, increases in revenues) that are made possible by the acquisition and that more than balance out the overhead charge. The usual result of all this seesawing back and forth is a com- promise, which often takes the form of putting a maximum dollar amount on the permissible home office overhead charge (perhaps expressed as a maximum percentage of the seller’s net sales). It seems clear, however, that to position yourself adequately for this ultimate compromise, you must support your position through the kind of give and take described above; and the exact point at which the final solution is fixed will in large part be dictated by the quantum of logical support you have brought to bear on the subject. By the way, it isn’t always the superior logic of your argument that carries the day. Occasionally, when up against an inexperi- enced lawyer on the other side, a fast shuffle can serve equally well. Some lawyers are embarrassed to show their lack of knowl- edge, especially in front of their client, and you can often turn this to advantage. Consider the following colloquy (with apolo- gies to Stephen Potter): Inexperienced “What about this phrase in here, ‘di- seller's lawyer: rect distribution expense’? What is that intended to cover?” Cagy purchaser’s “Well, you know, that refers to the ex- lawyer: penses directly associated with distri- bution. It’s standard language; we use it in all our deals.” Inexperienced: [On the defensive now, but still not totally convinced]: “Yes, but isn’t it awfully broad?”ANATOMY OF A MERGI 18 “Not at all. I could make it mu broader by including ‘indirect’ also. we could lump in ‘selling expenses.” a matter of fact, now that you bring ap aie ; I ienced: [Darting a quick look at his frownin oer client]: “No, no, that’s all right. I think you've handled it quite properly.” Cagy: 2.2.4. The Creative Discovery of Common Ground The second key technique to achieve desirable compromises consists of the creative ability to discover the ground upon which | the accommodation is to be based.’* Naturally, there are times when the solution is obvious, as when the argument revolves around $50,000 and the amount is ultimately split down the mid- _ dle, But more often than not, some real analysis is required. The lawyer must ponder such questions as: What interest of my client am I protecting? What is my adversary really worried about? And — (perhaps most important if the issue appears insoluble), what assumptions about the answer to this problem have I been making which, if modified, might yield an unexpected solution? Then, when you come up with the solution, you have the fur- ther problem of how best to i i being premature or you ru tejection—or worse, that # necessary to polarize the d spike e deadlock first, lish where the in '€ a series of questions, to estab-_ ne interests of the parties lie, a t me give an example to ilh ples of this sort of ‘ a "and Chapter 14, pp. sos ene See Sections 5.3.3NEGOTIATING TECHNIQUES AND TACTICS 19 an unrelated third party. Your client is not satisfied with that arrangement and wants to purchase the plant from the owner prior to closing the acquisition. Negotiations commence on the plant purchase, but although progress is made, your client is anable to reach final terms with the owner as the time for signing the acquisition agreement draws near. Since, however, the agree- ment calls for a deferred closing in 10 weeks, the purchaser is willing to sign, provided that the purchase of the plant is a con- dition precedent to his obligation to close the acquisition.’ This makes the seller very unhappy. The plant transaction is by no means a sure thing, and he is concerned that it could abort or at the very least run into considerable delays; this, in turn, could cause the acquisition to be called off by the purchaser. So the seller takes a firm position against the plant purchase being a condition to the acquisition—the buyer will just have to take his chances on getting the plant while committed in any event to the acquisition. A great deal of skirmishing then ensues, but neither party is willing to back down from his position. Suddenly, it dawns on you that there is a very simple way out of this impasse. You recognize, however, that if the solution is simply sprung on the seller, you run a strong risk of rejection— particularly if the seller fancies himself in the driver's seat and believes your client will ultimately fold on this point. Accord- ingly, it’s necessary to posture the seller, preferably out of his own mouth," so that when the compromise is revealed its internal logic will appear to all concerned as the most sensible solution. The first step is to check with your client, as unobtrusively as possible, to ascertain his willingness to go along with the terms of the compromise, since it somewhat restricts his flexibility.’* The purchaser likes the idea and authorizes you to proceed. 12. The interval might be for any number of reasons—e.g., to secure a tax ruling, to hold a stockholders’ meeting, to await audited financial state- ments, See Sections 5.2.2. and 5.2.3. on deferred closings. Conditions to closing are discussed in Sections 5.3.1.-Conditions, 8.1.1. and 8.3. 14. See Section 2.3.5. for more on this technique. 15. See Section 2.3.9. regarding consultation with the client. 13.ANATOMY OF A ME 20 Then you go to work, to elicit by a series of questions" wh is that really bothers the seller about giving the purchaser h particular condition. - ; Be As you had suspected, the interrogation reveals the seller's co cern over the substantial change in position he will be experi ing prior to the closing, and his consequent fear of the transact 0 being called off at the last moment—even though he is ina po tion to perform fully—by reason of a matter outside the di t control of both seller and purchaser. You press the seller a little more: exactly how will his position be changing? And the s begins to go into detail about certain matters: important ob) tions his company will pass up that otherwise would be pru to incur; omitted talks with the union that he would otherw: feel obliged to begin; the initial phasing out of a source of supp because your client owns a competing supplier who will take — over when the deal is closed. Your questions now become more pointed, aimed at pinning him down in terms of timing. And gradually it becomes clear that the real changes in position will not begin to occur until 20 days before the scheduled closing. At this point, you spring your compromise. We're bogged down, you explain, because we've introduced an artificial dichotomy— the notion that the plant purchase either be a condition to the closing or no condition at all. Instead, how about making it a con- dition to the 20th day before the closing? In other words, the agree- ment will read that if, prior to the 20th day before the closing, the purchaser has been unable to enter into a contract to the plant (which he should use his best efforts to expedite"), then at that moment he will have the right to walk away. If he does, the seller is not prejudiced, since he has not yet begun to purchase lapses and the purch: It’s a good compromise, to which the seller shoul 16. The zahiect of ‘elicitin, interrogation ii 17. The best efforts sblgath ground, id ultimately information and itioniy a discused in Section Bag kU" Sdvertary ion is covered in Section 8.2.1,NEGOTIATING TECHNIQUES AND TACTICS 21 assent. His objections about changing position have been as- suaged, while the purchaser has been given the additional time he needs to decide whether he will be able to strike a deal with the third party. It fulfills the parties’ needs; it has broken some new conceptual ground; and you stage-managed it in a way that makes it difficult for the seller to turn you down, 2.2.5. The Ultimate Solubility of Most Issues It may sound like the height of cynicism, but I am a firm be- liever in the ultimate solubility of most issues negotiated in an acquisition—by reducing down to dollars what appear to be sacred principles. When an adversary states that an issue is non- negotiable, I take it to mean that the price is very high, or at least that he would like it to be. I don’t mean to trample on anyone's idealism, but once you have witnessed the seller’s presi- dent read your draft of his employment contract, gasp, stutter, and denounce the document for violating the Thirteenth Amend- ment to the Constitution (“I'll never agree to that; I’m no in- dentured servant . . .” etc., etc.)—and then, having offered him a salary increase of $5,000, watched him get ink on his fingers from signing so fast—you don’t retain too many illusions. To be sure, there are a few points that really do involve a prin- ciple, and which cannot easily be settled by money alone. For example, there is the recurring issue of control in an earnout situation.’* The seller will be paid on the basis of his company’s net income during the three years after the closing; in effect, he is earning his purchase price. He will undoubtedly feel that he must stay in day-to-day charge of his company in order to assure making the necessary profits. That is a principle which the seller cannot easily back off. If his new boss has the right to fire him at any time, he loses control over maximizing the purchase price. No handful of additional cash will solve his kind of problem, But this is the rare case; usually dollars do the trick. Tn certain instances, however, money or additional shares are not enough; there must be dollars plus some sort of face-saving eer. 18. See Sections 6.3.5., 11.2.1, and 11.2.6,ANATOMY OF A MI ‘or the party who has taken a firm device, to furnish room f in the negotiations to ba x spposing lawyer may nee : i ; Hea that what is being given up is not really that impo a ck off without embarrassment. Or | a bonus concession to convince ‘And sometimes the dollars alone just look too raw, so you spt a little gloss on the basic compromise and give everyone ing to feel good about, 4 thing to fee! Govtreement in principle has been reached for th purchaser to acquire all the seller's stock for 100,000 shares of th purchaser. Further assume that, as is so often the case," the seller was not represented by counsel in the initial negotiations; and t letter of intent drafted by you, as the purchaser's attorney, was very simple document which went into no details. i In the course of the subsequent negotiations, seller's two sto holders take the position that they are entitled to pull out their company prior to the closing all of its cash in excess of th $75,000 required for ordinary working capital needs. They cla that this was intended all along, and their argument is the melange—that there were some allusions to this in the early aes that since their company is being bought on the ba: crt i cnn, e st bate rome really matter to the purchaser; and that si ¢ Money isn’t neede e. Opel th t needed for the i eller's bu 3 ‘ peration of seller’s busin tic The purchaser, who had frankly never thought about this qu eign | adopts the posture that he assumed the cash com Hy i i ne me that he is buying the stock of the sell liquid funds—4 tight to all its underlying assets, inch Pf3%, 8 discussed in Sect; and liabilities is covered ect 743NEGOTIATING TECHNIQUES AND TACTICS 23 priate provision. To which the sellers reply, well, we were not represented by counsel at that time, and things begin to get into . touchy area which the buyer would just as soon not discuss, As negotiations proceed on this point, the seller's stockholders, in marshalling their arguments to support their cause," emphasize that the main reason they are pressing this issue is their need for cash to pay off certain personal obligations each has incurred over the years while running the business. No one questions them closely on the nature of these obligations, but there are hints di- rected at some bank debt to be liquidated, the necessity for in- vestment in a second car (which had formerly been carried by the business), and so on. And naturally, none of this can be accomplished by means of the shares of purchaser’s stock they will be getting in the deal, which will not be saleable for quite a while.” The purchaser has been advised that the payment of a large cash dividend to seller's stockholders just prior to closing would probably defeat pooling treatment,* as would a purchase price that included cash, so the seller’s stockholders’ demands are sim- ply out of the question, However, the buyer realizes that he has negotiated a pretty sharp deal with respect to the purchase price; and although he feels he is right in this dispute (and is annoyed that they have brought up this point), he wants the acquisition badly and is willing to compromise by splitting the difference—in the form of additional shares of his stock. In other words, if the seller has $175,000 cash in the till (an excess of $100,000 over working capital needs), each of seller’s stockholders will receive an additional $25,000 worth of stock (5,000 shares in the aggregate if, for instance, the purchaser’s stock is trading at $10 per share). The purchaser is sure this will satisfy the seller's stockholders; he definitely doesn’t believe their story about the need for cash, feeling it was manufactured solely to support their argument. 21. See Section 2.2.3, 22. I am referring to the restrictions imposed by the Federal securities laws, as discussed in Section 9.1. 23. gee ie concept of a pooling of interests is discussed in SectionANATOMY OF A ME 24 But now you make the very valid point a pas client a osed, this compromise will probably fail. Your reasonit ete vs: if the sellers in fact have cash needs, the comp om off : iohal . if, on the other hand, the necessity to receive ames ils’s stockholders (even though favorably dispo ed vvannot afford to accept the compromise—since to do so would Ib to concede, in effect, that their cash needs problem (which compromise does nothing to solve) was a hoax. And that is” kind of concession most people just don’t care to make. So you suggest a face-saving device to add to the compron package. In addition to the extra shares, the purchaser will the seller’s stockholders in obtaining a line of credit at the p chaser’s bank‘ in an amount up to $100,000 to be used for tl cash requirements. Now they are in a position to accept ously since they emerge with their integrity intact. I want to add just one footnote to this discussion of the of compromise. Occasionally, you will find yourself smack in middle of a deal where the obstacles—either external, sti or between the parties—are so awesome that they can’t be o come, no matter how much effort is expended. When you such a clinker, it requires fully as much professional skill to nize the symptoms, know when you're licked and advise client to call it a day, as it takes to act as the catalyst in putt together a seemingly impossible deal. 2.3. GETTING A LEG UP All right. That’s enon, modation. Now let's tall : a business is highl oe sionally you have to shake t hly competitive, so oc on the eight ounce oe fhe old Henry Clay image and Purchaser has to be careful a financial arrangement Lee ta;OTIATING TECHNIQUES AND TACTICS 25 NEG 2.3.1. The Twin Virtues of Persistence and Perspective ant to direct a brief salute to the twin virtues of per- It may well be that the most pa i f difficult negotiation is a prior goo nee fs ong i nai given up on points that would not have been conceded in the early bargaining, when we were relatively fresh. The same incentive to drive a hard bargain just doesn’t exist when you are physically and mentally tired. There isa tone to want to wrap it up”; often the price for such finality is to forego second- ary goals. All of which is to point up the obvious fact that, like the proverbial tortoise and hare, the persistent, unruffled, untiring lawyer will more often than not ultimately prevail over his flashy but early-wilting antagonist. But persistence that is untempered by perspective can be self-defeating, You have to employ some rule of reason in the trading process. Save yourself for the important issues; let the other fellow win a few. I would hate to count how many times I have seen a lawyer so enmeshed in the pursuit of trivia that he loses all sense of what is really important. He may think he’s giving the client his money's worth, but a point is reached where the client’s best interests are no longer being served. Such tena- Ciousness creates ill feelings, making it that much more difficult to obtain concessions or reach compromises in areas of real im- portance.2* _ One aspect of pers is the adroit use of First, I w: sistence and perspective. pective that should never be underestimated humor as a negotiating tactic. To be sure, i of minutes Temaining until 5:00 P.M. PT0POrtion to the number 5, sr ee expressed a similar thought in these terms: “Ni a a to seize an advantage, the most important this in Ug x when to forego an advantage.” is Nicreabene: aan a ge.” Quoted in Nierenberg, supra,6 ANATOMY OF A 2 acquisitions are serious business, and a er complex subjects tend to be rather sober-si & . Bul 3 here, a wisecrack there, a pun or an irreverent referen > necessarily thigh-slapping and all in good taste—can be to set the tone of a session, to prevent tensions from ove to serve as a low-key introduction or reaction to a con! subject, and above all to keep all parties a taking # or the matter under discussion too seriously. This is as good a place as any to refer to a not u con phenomenon in acquisitions—the overt or tacit desire of client to complete the transaction no later than yesterday. an understandable attitude of businessmen which probably _ counts in large measure for their operational success—yet it's sponsible for introducing a tremendous sense of pressure in proceedings. Sometimes there is a reason for the e in a proxy statement before they become stale; more often, ever, the time limits imposed are almost wholly arbitrary. a situation that calls for large doses of both persistence and spective. You obviously want to please your client, which m tail some all-night sessions and perhaps a willingness to bend what on points where you might otherwise hold firm. Still, must have the moral courage not to yield any protections or fa to make any inquiries you deem vital to your client’s terests, even though he is chafing at the bit. 2.3.2. Volunteering for the Draft Remember the old Army adage, “Never volunteer for thing ? Well, forget it. In negotiating acquisitions, the ‘The fact is that there are so man: i Ne 'y elective op drafting a contract—choices in the fata ad eat 27. For examples, see Section 3.2.9. and Chapter 14, p. 510.NEGOTIATING TECHNIQUES AND TACTICS 27 concepts, the omission of certain language, the deliberate use of ambiguity, and so on—that a fair number of your resultant edges are bound to slip by the critical gaze of even the most astute ad- versary counsel. The recipient doesn’t necessarily know what points were troubling the draftsman, and it is often possible to achieve a certain result without your opponent ever knowing what hit him. Then too, when you are in charge of the drafting, you can control the timing of the negotiations; if the other lawyer has the responsibility, you may find the delays interminable. I should note that implementation of this axiom sometimes re- quires educating the uninitiated client who, generally speaking and all things being equal, would probably prefer the other side to do the drafting and thereby economize on his legal bill. I have no hesitation in recommending that, in the long run, it will inure to his benefit for you to draft the document. The etiquette in an acquisition is for the purchaser’s attorney to draft the basic agreement.” This makes eminent good sense, since most of the protective provisions in the agreement are for the purchaser’s benefit, and his lawyer should have the oppor- tunity in the first instance to let the seller know what is expected. If you represent the seller, and the purchaser’s attorney elects to exercise his prerogative to draft, don’t argue. If that rare oppor- tunity presents itself when the buyer’s attorney has invited you to prepare a draft, by all means seize it. And remember, even where the purchaser’s attorney is the basic draftsman, there may come a time in the course of the proceedings when a particular compromise needs to be put into words; if it seems appropriate at the time, don’t hesitate in volunteering to take a crack at the language.*° : It may seem petty, but I have to confess to one thing that really irks me: when my initial draft of the agreement comes back from the seller's attorney completely revised in his own form; ie., 28. For an example of this, see Section 7.5.2. 29. See Chapter 5 for a general discussion of the acquisition agreement. 30. For an example of this, see Chapter 14, p. 518.% ANATOMY OF A MERGER where not only substantive changes have been made, but strictly formal ones as well (the sections are renumbered, the introduc. tory clauses now all begin with “Whereas,” and so on), I consider this very bad form, justifiable only in the infrequent instance where the purchaser's attorney has so hopelessly botched the job that the seller's lawyer has no choice but to start from scratch, (Hey, wait a minute, do you think he was trying to tell me some- thing, . . ?) Typically, the seller should live with the purchaser's form of agreement, without being precluded in any way from negotiating any and all substantive matters. The normal responsive technique employed by the seller's law- yer is to tell the purchaser's attorney: “I don't like paragraph 3(a). I want it changed to make clearer that liabilities which are reflected in the June 30 balance sheet are intended to be ex cluded.” Once they have agreed upon the concept, the purchaser's attorney will redraft the paragraph to reflect the understanding. If he doesn’t do a satisfactory job, the seller’s lawyer should raise his objections once again. There are, however, certain exceptions to this scenario. If the purchaser’s lawyer is a hapless draftsman, the seller's counsel can say, in a low-key vein: “Here are some minor changes I propose. To save time, I have taken the liberty of drafting some language; T have no pride of authorship though, and you should feel abso- lutely free to put these in your own words.” More often than not, the buyer's attorney, without conceding his insensitivity to the mother tongue, will accept the proferred material. Another excep- tion occurs when seller's lawyer is suggesting so many changes that it would be a waste of time to sit around and go through them one by one with the purchaser’s attorney. This is often handled by delivering an informal memorandum of the proposed changes, with some recommended language for concepts that be difficult to articulate in the abstract. A Occasionally, a seller’s lawyer will go even further. I will n forget being handed a bulky package by the attorney for seller, who said: “I received your draft. I want you to know I think you did a fine job in looking after your client's Now here is the other half of the contract on belNEGOTIATING TECHNIQUES AND TACTICS 29 client.”** That, however, was the unusual situation where the par- ties were roughly equal in size, the buyer was in a somewhat shaky financial condition, and the seller, who was aware of his strong bargaining leverage, sought substantial protection on the stock and notes he was taking in the deal. 2.3.3. Timing—of the Essence As with most aspects of life, proper timing can be critical in a negotiation. The precise point in the discussions at which a cer- tain subject is brought up may be just as important as its substan- tive content. The game of chess, where the sequence of moves is so crucial, provides an apt analogue: at one stage of the match a particular pawn thrust may be innocuous, whereas several moves later it can be devastating, Take a simple example. Assume that the seller is positively paranoid on the subject of an escrow of part of the purchase price.** No holdback for him; he wants to get paid every cent at the closing. This man is well-advised to make his point, take his stand and get the matter resolved before issues surface that reveal his fear of making certain representations. If the order is reversed, and the seller’s uneasiness becomes known at the outset—there he is, asking for a “basket,” trying to get a key representation stated “to the best of his knowledge,” introducing “materiality” concepts by the score**—then by the time the escrow issue arises, the pur- chaser will probably decide that he needs a holdback to protect himself. But if the purchaser has already yielded on the escrow point, it will be difficult for him to take it back. So, a certain amount of planning is advisable to ensure the optimum timing, notwithstanding the ordinary chronology of events. Similarly, when you are making a series of points, the order of presentation should not necessarily follow the order in which the 31. For an example of another type of initial approach by seller's attorney, see Chapter 14, p. 510. 32. Escrows are covered in Section 10.3.2. 33. See Sections 7.3.2. and 7.3.1. on knowledge and materiality caveats, and Section 10.2.1. on “baskets” in the indemnification area.30 ANATOMY OF A points appear in the agreement, but should rather be desig, for maximum impact. For instance, assume that the sel objected to provisions in paragraphs 2, 3, 6 and 7. Pa deals with an issue that seriously concerns you, as purch counsel; but the points raised with respect to paragraphs 3, 7 are not significant and can be yielded. In that situati might very well approach opposing counsel as follows (a obviously not so briskly): “With respect to the point in 3, I'll give you that one. Now on the issue in 6, I’m not inclined to argue ab that... . With respect to the point in 7, I still think th provision is fair but if it really bothers you we can cha it as you suggested. . . . Now, about that question in m her Been If you handle the matter in this fashion, there may be an u standable predisposition on the part of your adversary to operative on paragraph 2, especially if you can drum up reasonable support for your position. On the other hand, if had kicked off the negotiating session by saying, “Now, ber 2, I have a lot of trouble .. . ,” the other lawyer know whether you are going to have the same sort of on every one of his points, and he will probably be less to go along with you. Another thought on timing for which I have no obj dence—purely a visceral reaction—is that when you are points in the negotiation, when you have the mo should not stop to analyze the mechanics or draft the to implement those points. It is much better to solve t] Principle now and draft later, recognizing that there to be further discussions down the road and that pe don’t have everything wrapped up in a neat package ture. For all you know, you may have caught your ad the day that his boy got into Princeton; it would be a bog down and waste the opportunity. (NEGOTIATING TECHNIQUES AND TACTICS 31 2.3.4. To Swap, Perchance to Cede Remember that seller of a few paragraphs back who timed his discussion of the escrow so exquisitely? Well, it all went for naught. Unfortunately, even though the purchaser was inclined to yield and eliminate the escrow when the subject arose early in the game, he reacted in this fashion to the seller’s arguments: “Okay, I understand what you're saying. We'll come back later and decide whether there will be an escrow, after I hear all your other points." Aside from the obvious desirability of becoming edu- cated about the seller's problems prior to the ultimate decision on an escrow, there is another principle** at work here: namely, that many negotiators, faced with an issue which they are will- ing to cede, avoid immediate concession so as to retain bartering material for future use. The issue can always be passed with a line such as, “Well, that’s a tough one; why don’t we come back to it?” or “I'm inclined to be negative but let me think about it” or “I’ve got to go back to my clients on that.”** Even if your opponent knows exactly what you are up to, it is rare for him to insist upon a decision on the spot; at worst, he will also save some trading bait for later. On the other hand, there may be times when you will want to concede points gracefully, without deferral, especially when they are particularly obvious and no advantage is to be gained by holding them back. Occasionally, it is good bargaining to make a concession that has not even been requested, the idea being to impart to the proceedings a certain bonhomie that might stand you in good stead at a later time. To be effective, though, this has to be accomplished with no visible strings. For example, assume that the deal to acquire the seller was struck at a time when the purchaser's stock was being traded at $15, and that this was the value used to determine the number of shares issuable in the acquisition.’ Prior to signing the agree- 34, Other examples of this technique can be found in Chapter 14, pp. 517 and 538-539, 35. Akin to the constructive negative response, 36. On this last response, see Section 2.3.8. ; 37. Valuation considerations in transactions where the purchase price is payable in stock are covered in Section 6.2. discussed in Section 2.2.2.-: ANATOMY OF A ment, however, your client’s stock dropped to $14 and has ¢ been sitting at that level. The purchaser is particularly con that, due to factors beyond his control and unrelated to his pany, the market value will further decline in the period b signing and closing;** and although the seller will be co to sell at the contract price, he will be a very unhappy situation possessing negative organizational overtones, Under these circumstances, your client might be well-ad to walk into the conference room on the day of the signi make the following little speech to the seller: “When we made this deal, our stock was at $15, an it could have gone up as easily as it could have gone down. The fact is that it has decreased to $14, and must say, much to your credit, I haven't heard a out of you. That’s the kind of person I like to do busi- ness with. I want you to feel that I’m the kind of perso you like to do business with, too. And so I am going agreement to $14, which will give you approxi 7,000 additional shares.” Once your client has taken this posture of seeming; erosity, it will be difficult for the seller to raise too mu matter of feel, based on the existing situation. Most of u ever, do like to have in reserve a few unresolved, squé points, just in case... . 2.3.5. Hoist On His Own Petard Seated among all those business and financial types at a negotiation, dealing in concepts (such as generally 38. If the anticipated drop were based on adverse inside cerning his company, he would be faced with a Rule 10 see the discussion in Sections 5.3.1—Indemnification andNEGOTIATING TECHNIQUES AND TACTICS 33 counting principles) which are so far removed from a fee tail or a motion to dismiss, it is often easy to forget that you are a lawyer by trade. As a result, you may tend to ignore that one basic skill of advocacy—honed to perfection by the litigator but still nascent in all of us—the ability to pose an intelligent line of questions.” In acquisition situations, interrogation not only serves to elicit important information but can play a significant role in the negotiating process. We have seen* how a line of questioning can set your adver- sary up for a compromise that you have already formulated. It can also serve to suggest new lines of possible accommodation. For example, if the parties have reached an impasse on the issue of the prospective salary of seller’s president under his employ- ment contract with purchaser,*t gentle probing with respect to past fringe benefits may suggest an approach in which the de- sired salary adjustment is handled under other auspices. But the primary use of questioning in acquisition negotiations, as far as I am concerned, is to put yourself in a position where you will later be able to foil the other fellow out of his own big mouth. This is a basic negotiating tactic that simply cannot be ignored.** It requires some foreknowledge of where you ulti- mately want to go, a modest technique to pose the questions in a manner that does not suggest cross-examination and thus put your adversary on his guard, the patience to listen, the ability to recall what was said, and a fair share of just plain luck. For instance, at an early point in the deal, perhaps over a sand- wich, I like to ask sellers the question: “Why are you disposing of your business?” I find that the answer can often be helpful in unexpected ways at some later time. For instance, assume the key 39. Nierenberg, supra, at 92 et seq. in discussing this subject, illustrates the importance of properly phrasing the question by the story of the two en who separately approached their superior. The first asked, “May I smoke while praying?” Permission denied. The second asked, “May I pray while smoking?” Permission granted. 40. In Section 2.2. 41. Employment contracts in connection with acquisitions are covered in Section 11.2. 42. For an example of this technique, see Section 6.3.2.a 34 ANATOMY OF A seller replies that he is selling because his company, while mode. ately successful, has always been inadequately capitalized, he simply doesn’t want to have any further worries about cash, The negotiations proceed in the direction of a contingent pur. chase price, and there ensues the usual heated debate over con. trol of the operations of seller's business during the earn period.** You just might be able to cut through most of the pr lems by suggesting that the agreement should obligate the pu chaser to provide the seller with adequate working capital durin the term of the earnout—at the same time turning to the k seller and reminding him: “That’s what you really want, d you? That's the reason you said you were doing this deal.” rebound effect of his own words can often have a greater than their content would seem to merit. Take another example. The purchaser is acquiring the selle assets, but the issue of whether the seller's liabilities will be tained by the seller or assumed by the purchaser is still open. The purchaser has taken the position that the seller's po liabilities appear to be substantial, and he does not want to sume them. The seller now goes to great lengths to convince purchaser that the exposure is minimal. Aided by purch adroit guidance, the seller is finally jockeyed into putting a low estimated dollar value on the liabilities package. The chaser now springs the trap. He asks the seller to retain liabilities and, in exchange, he will increase the purchase by the low value seller has placed on them. The seller difficult position, since his refusal can be construed as cession that the potential liabilities are far greater than has postulated.*® 43. See Sections 2.2.5. and 6.3.5. on this subject. 44. This kind of transaction is discussed in Section 4.6.1. 45. Of course, the seller will not necessarily be struck dumb a and can be expected to argue that he wants to sell his u so as not to have any further liabilities hanging over theless, the basic damage may well have been done.NEGOTIATING TECHNIQUES AND TACTICS 35 2.3.6. The Absurdity of It All One of the most common techniques employed by advocates in arguing the merits of a question is the use of what I call the “ab- surd example.” This consists of pointing out to your opposite num- ber, in haughty and incredulous tones, how a particular concept he has advanced or contractual language he has used could lead to clearly preposterous results. His reply that this was “certainly not intended” is feeble in the face of the ridicule which you proceed to heap on him; and he may be so taken aback by the unintended result that he is ripe for a compromise solution. Ac- cordingly, this is an important weapon in your arsenal, particu- larly to tighten up over-broad draftsmanship. A favorite absurdity target is the typical condition to the pur- chaser’s obligation to close that all of seller’s representations be true at the closing.** Representing the seller, many lawyers will ask for a caveat to this condition, to the effect that if the seller's misrepresentations taken as a whole are not material, the pur- chaser will still be obligated to close.*? The purchaser's attorney generally resists this provision at the outset. Now, here is where you, as seller's counsel, must come up with some absurd examples “Wait a minute,” you sputter, eyes wide with disbelief, “this means that if my client forgets to furnish you with just one of his contracts—say, the rental agreement that covers the Xerox machine—you can walk away from the whole deal?” The pur- chaser replies, in soothing tones, that he obviously wouldn’t do that. “Maybe not,” you respond, gathering strength as your voice rises to a crescendo, “but that’s the effect of reading this con- dition together with the representation that we have fur- nished you with all our contracts.** Remember? You wouldn't Jet me have a materiality standard there, either. And how 46. See Section 5.3.1—Conditions with respect to this important condition. 47. The concept of materiality, with particular reference to this condition, _ is covered in Section 7.3.1. . See Section 7.4.5. on this representation.36, ANATOMY OF 4 about if my client happens to omit from the disclosure . ule one little liability for under $2,000. Should that an out, too?” Well, you can guess what usually happens. Either you caveat in the condition section, or the purchaser goes b provides you with some sort of materiality standard in th tracts and liabilities sections. The absurd example has the seller achieve a measure of protection.” 2.3.7. Threats, Fits, and Other Adventures in Brinkmanship ‘A few words are probably in order about the martial negotiating—the threat to call off the deal, the calculated up, stalking out of the room, and other assorted brinkman: techniques. There are some lawyers and businessmen wht compelled to indulge in this sort of self-gratifying macl every opportunity. Each momentary impasse is transfo a crisis; a contravened bargaining position is treated as and seemingly fatal affront. Obviously, I have minimal. for the “hairy chest” school of negotiating in the acqu context. Nevertheless, to paraphrase Ecclesiastes, there’s a every gambit, and occasionally you do have to pull the ¢ only word of advice is, make sure you have picked priate spot.®° For example, if you are determined to that a particular provision is a deal-breaker, by all m a point that is clearly material—not some trivial side | you make a great show of packing up your yellow pads 2 ing the premises, your actions should appear a warr: tion to a particularly grievous insult dealt you by your And don’t neglect to check with your client first—since be prepared for the other side to call your bluff. 49. This technique is also explored in Section 5.3.3. 50. An example of exploding over the wrong issue can be ter 14, pp. 526-527.NEGOTIATING TECHNIQUES AND TACTICS 37 Losing your temper is a slightly different matter. In the first place, this is not always a calculated response, but an honest surge of emotion over which you have little control. It is wrong to lose total control of yourself in a negotiation, but a momentary flare-up is not unusual or necessarily adverse, Secondly, unlike the threat and the walk, the blow-up is not typically a deal- breaking tactic, but an expression of disapproval on a relatively narrow basis. To the extent you can regulate your emotions, the calculated cry of anguish should arise naturally out of the situation and relate to a real or imagined depredation by the other side. It is not appropriate to get mad if your opponent once more reiterates the same position on a certain item he has been taking all along. On the other hand, you are permitted to lose your temper if he suddenly tries to retract a concession previously granted. As a matter of fact, when that charlatan across the table suffers a con- venient loss of memory, or misquotes you, or otherwise exhibits bad faith, my frequent feeling is that taking him to task in measured tones may simply not be sufficient. A brief but con- vincing show of the depth of your reaction is often needed to alert him that he’s heading down a dangerous road. 2.3.8. Staffing the Negotiations There is no single answer to the question of who should be in the conference room at a given moment in the negotiations. It is clear that a team should be assembled for every acquisition trans- action, consisting (at a minimum) ‘of the businessman who can make the decisions, a financial man from the company, the inde- pendent accountant, the tax expert and the attorney. You need these various inputs to be in a position to reach intelligent deci- sions. The businessman might think that a contingent deal rep- resents a great idea from his standpoint, but the accountant will advise him that it will wreck the pooling” and his financial man will provide the numbers to show how the necessary amortization 51. See Section 4.4.2.38 ANATOMY OF A MERGER of goodwill would prevent the kind of earnings per share ine : in future years that the businessman anticipates. The attest might want to add some sweeteners to the deal for negotiatin, purposes, but the tax man will point out that this constitutes “boot” and may destroy the tax-free reorganization,™ Two Par. ticularly important areas where business, financial and legal tyyus must work closely together is in reviewing the seller's disclosure schedule® and coordinating the investigation of seller,5 But what about that conference room? Who should be on the invitation list? I want to discuss two aspects of this subject, The first is that you can often best accomplish your objectives if the financial man and the lawyer on the other side are not working in tandem. Whenever you are in a tricky, business-oriented, num. bers kind of negotiation, and you suspect that the other lawyer doesn’t really understand the significance of what is going on, it’s to your advantage to negotiate with him privately, without the presence of his businessman or financial expert who can point him in the right direction. (Conversely, if you feel that you are in over your head, make sure to bring your own experts along.) The following example illustrates the necessity for communica tion between the lawyer and financial man. Assume the seller is in a business, such as mortgage banking, where there are several accounting possibilities in fixing the point along the commitment process when profits are to be booked. Prior to the acquisition, he has been using an early stage in the process; and his historie unaudited financial statements reflect this method, whieh is 7 in accordance with generally accepted accounting p accountants are in the process of restating seller's fin ments for future use in a way that will reflect income ance with generally accepted accounting principles sistent with the manner in which purchaser's Own | banking operation handles its accounts. Since this ae completed by the time of signing, however, the | 52. Tax-free reorganizations are discussed in Section 53. This is ified i i =. This matter is am ified in Section 7.2.1.NEGOTIATING TECHNIQUES AND TACTICS 39 agreed that the seller’s financial statement representation” in the acquisition agreement will state that his historical financial state- ments have been prepared in accordance with generally accepted accounting principles except for this particular timing matter, At some point in the negotiations, it is decided that, as an addi- tional condition to purchaser’s obligation to close, the seller's income for the most recent fiscal period must exceed a certain minimum amount.” The purchaser's attorney drafts the necessary insert in terms of income as evidenced by a quarterly financial statement prepared in accordance with generally accepted ac- counting principles. At the next meeting, the seller's lawyer, un- accompanied by a financial man, properly questions this language; shouldn’t there be, he asks, the same exception regarding gener- ally accepted accounting principles as was contained in the rep- resentation covering the historical financial statements? No, says the purchaser’s attorney, reminding the seller’s lawyer that the accountants have been busy restating seller's numbers and so will be able to handle this most recent period in the new manner. Seller's lawyer phones the accountants, who verify the statements of purchaser’s attorney. The point is dropped. What seller's lawyer has not focused on, however, is that under the circumstances of an expanding business this change in ac- counting method will have the short term effect of depressing seller’s earnings. And this will make it more difficult for seller to achieve the targeted minimum earnings for the quarter, which the businessmen had negotiated on the old basis. Now, if seller's finan- cial man had been in the room, he probably would have picked this up right away. He might anyway, at a later point. But he also might miss it, not being that sensitive to contractual provisions (“lawyers’ stuff”), So in this case, splitting up the seller’s team may have redounded to the purchaser's advantage, furnishing him with an cut down the road (which might form the basis for some 55. Representations regarding financial statements are discussed in Section 74.2. 56. With respect to this type of condition, see Sections 3.3.4. and 5.3.4. and Chapter 14,40 ANATOMY OF A renegotiation ) that he would not otherwise have had if the se lawyer and financial man were working together. The other aspect of this subject is something I call the “g back to our people” syndrome. It involves a judgement as whether or not you want everyone needed to make a final d sion present in the room at a particular time. This usually turns whether you need an immediate determination or can afford luxury of taking two shots at the target. If the negotiations have proceeded to the point where only a few knotty problems remain and you need some decision-ma then you must have the businessman (and perhaps other necess r experts) right there with you. It is simply a waste of time for the two lawyers to sit down and bargain hypothetically, unable reach any agreement in the absence of their clients. At 0 times, however, with negotiations proceeding at a more leisur pace, you might want to make your initial pitch on a la t lawyer basis. Then if you can’t gain a particular objective, f decision is reserved pending consultation with your principal, might still be able to convince the other principal man-to-ma Before each round of negotiations, you should anticipate points that are likely to be coming up and decide whether it be preferable to press for a decision or play for the extra Implicit in this discussion is the notion that you an have determined in advance the identity of the ind other side who is really calling the shots. In almost tion, there is a single person who should be the prinei your heavy artillery. He is not always the person charge. Quite often there is a key executive to and recommendations the president (or other negotiating team) will defer, in substance if not | occasion—particularly where there has been a. - client relationship in which the attorney is that transcends merely legal matters—it the major influence. In any event, n you're dealing with—often informal «NEGOTIATING TECHNIQUES AND TACTICS At aployees of your adversary will elicit this i h ot neh in the right direction! 3 aga en A corollary proposition, which has bi mentators,”* is that the farther an sada hea one aa ing table, the more forcefully he negotiates, It is very eas as Ea executive to sit back in his office and pontificate: “Don’t Hite on this point” or “Make sure you get that protection.” You constantly have to guard against your client (or your adversary’s client) suf- fering from this malaise. When they are brought face to face, and hear the logic of the other’s argument or sense the depth of feeling he exhibits, those preconceived notions will often go right out the window. Incidentally, the greatest negotiator I've never met (sic) was the president of a company who at no time during the negotiations deigned to meet with the lawyer on the other side (me). He would take non-negotiable positions from afar, then permit his lawyers and subordinates to meet with our businessmen and lawyers, where we would work out compromises that he would promptly veto. It was a continual whipsaw, but I must say that our clients kept their eye on the ball, let him do his thing, quieted my frustra- tions, and ended up with a satisfactory deal. and aim 2.3.9. Clients are People, Too There is a broader principle involved here, that might seem self- evident but is unfortunately often flouted. At all times, the lawyer must be aware of how his client wants to come out on a issue, The easiest trap to fall into, once you gain some in acquisitions, is to fantasize that you are | or what you want is what the client wan! ing, that he will accept anything you wrong. The lawyer should never attempting to achieve certain 58. See, e.g., ACQUISITION seq. (M. Strage, ed.42 ANATOMY OF A MERGER pal. If you engage in a fierce struggle to obtain a benefit that your client doesn't really want, you have actually done him a dis. service in creating unnecessary ill will or loss of respect, Before embarking upon any negotiation, you should always make sure to seek out the client’s views: what matters are im- portant to him; which subjects are of little significance; on what points is he prepared to go to the wall, even if it might break the deal. After working with a particular client several times, you begin to get some idea of the types of concerns he has. Unfortunately, however, it is not always possible to be fully briefed. Suppose that, representing the purchaser, you have sub- mitted to the seller a first draft of the acquisition agreement, A meeting is then scheduled between the parties to hear the seller's objections. You cannot anticipate what all of those points will be _ in advance, and yet you will be sitting there with your client, ex. pected to react as each issue is raised. ale not present a serious problem; he will give you all the indicatio you need as to the desired response. An inexperienced client is more cause for concern. In addition to not knowing how to tele graph his reactions, he might be unable to formulate an appropt ate response on the spot; in fact, he might not even grasp the port of certain points being made. (You will naturally be hesi tan to offer explanations in front of the assembled multitude. ) theless, it behooves you to react when the point is initially r or you risk compromising your ultimate position; it is al cult to plead outrage later if you stood mute upon first There are several solutions for this type of problem. are really concerned, it may be advisable to meet first lawyer, without clients, to hear your adversary’s certainly respond to the “legal” points; and you the more obvious “business” matters (“I w client will not be inclined to make that 59. This point is elaborated further in lawyer is often called uyNEGOTIATING TECHNIQUES AND TACTICS 43 ness points that are more difficult or subtle, where you are not sure what your client's response will be, can simply be noted with the statement that you will inform your client of the issue. This is a useful device for eliciting all of your adversary’s problems be- fore being forced to make piecemeal decisions, and facilitates trading off. If such a preliminary session is not practical, there is absolutely nothing wrong with responding to a delicate point by quickly stating, before your client can answer, that this is a matter you would like to discuss privately with him. If you anticipate a num- ber of such instances, you might even make a general opening statement to the other side (“We're here to listen to all your sug- gestions, after which we will caucus and get back to you on the Jot”), so that your absence of reaction is without significance. When in doubt, of course, you should never concede the point, although ultimately it may prove to be in your client's best interest to do so—he is entitled to know the risks of concession, which should be explored in private between you and him. Although I have never experienced any problem in asking that a meeting be adjourned so that my client and I may step outside and converse privately with respect to a matter, I wish to urge one word of caution. If you are concerned about a certain problem which has not yet surfaced in the negotiations, but the timing of your departure is such (e.g., on the heels of a particular remark) that it arouses your opponent's suspicion and causes exploration of the matters, your actions have been self-defeating. The better approach is to allow the conversation to pass on to other subjects before asking your client to step outside, thereby eliminating a i raised eyebrows. ci If you have a client who is a poor negotiator and 1 away the store, you should try, in gentle but firm fi him out of the negotiating room. Obviously, this g of the attorney-client relationship that are not sul zation, and I will say no more. Occasional Y; you have a client who overestimates the tion. With this species, you have a tou ik 7 sic hands. When the client refuses7, ANATOMY OF A MERGER - 44 n’t reach agreement without some com- Pentin, the path of duty lier in coovintog histo lm Fr UetWeally petite thoi doa Mie Maveveed feel uncomfortable in this role (since they can’t be sure that the client 's baa br will not prevail), and clearly you may be ae to consi 7 able second-guessing after the fact (“Jim, my boy, i SJ have held out on that point; I know the other guys woul: eventu- q ally have caved in.”). But, in my view, that’s exactly the kind of | judgment you get paid so well to make. 2.4. SOME CLOSING OBSERVATIONS 2.4.1. Freedom of Contract In putting together an acquisition, you must keep in mind that _ you are not dealing primarily with matters of law, but rather with FE matters of agreement between the parties. The great bulk of every acquisition agreement is designed to answer in advance certain questions that might otherwise be the subject of differing inter- a Pretations, disputes, and ultimately litigation. For example, you don't sit around and speculate as to whether a court would decide — that the representations in the contract are to be considered sey- eral, or joint and several, among the selling stockholders: you simply state that they are joint and several. You don’t leave it to a judge to construe whether a reasonable time limit di which a particular option may be exercised ought to be infe and then to conclude judicially what that duration should be; Provide for a thirty-day period. : One of the lawyer’s key roles in an acquisition is to translate in legally cognizable concepts the often fragmentary and simplified notions of the parties as to the terms of the deal be them, and then to articulate those concepts through mea 60. This is made e see Section 2.9, See, however, tion of which asier if you have devised a creative compron 61. ‘Se Section 10.2.5., for an ‘might better be left to a example of a m; later day,NEGOTIATING TECHNIQUES AND TACTICS 45 contractual words and phrases. The agreement should specify the rights and obligations of the parties with a minimum of ambiguity. To be sure, certain concepts may be introduced-such as "mo, teriality’—which inherently require construction; and if the par- ties are ultimately unable to agree upon the Proper interpretation, a court could get into the act. As discussed below,** however, it is often possible and desirable for the parties to attempt to quantify such concepts as materiality in terms of the specific matter at issue; for example, instead of requiring the seller to disclose all of his material overdue accounts receivable (thereby running the risk that seller’s and purchaser's views of materiality in this con- text do not coincide), the agreement could be phrased to require disclosure of those overdue accounts receivable in excess of, say, $25,000. The other side of the coin is that you still have to possess a pretty fair idea of the various laws and regulations governing your client and the transaction in order to be an effective negotiator—if for no other reason than that, in many instances, what you leave out of the agreement, you don’t get. A simple example is the matter of state sales taxes in an assets transaction."* Under the laws of most jurisdictions, as between the seller and the purchaser, the latter is liable for any sales tax (although the seller acts as a col- lection agency for the state); and if nothing is said about sales taxes in the agreement, the purchaser will probably end up paying it. But, unlike the purchase of cigarettes in a retail store, saddling the purchaser of a business with this liability is not necessarily logical. Perhaps the purchaser wanted to buy the seller’s stock (in which case no sales tax would be due), but the seller insisted on selling assets because of certain income tax problems or in order to retain particular properties; surely, the purchaser should not automatically incur the sales tax because he has accommo- dated the seller. So, an alert purchaser's attorney will bring up the matter, with the result that he may be able to effect a comy mise, such as splitting the tax or trading off its nent fc other concession. Had 62. See Section 7.3.1. 63. See Section 4.6.2.46 ANATOMY OF A MER 2.4.2. Creative Motivation I want to touch briefly on the place of euphemism in the nego- tiating process. I don’t intend to defend what I call “creative motj- vation,” but you must be aware that in the minds of most merger lawyers there is a clear distinction between, on the one hand, a mistepresentation of fact (which is a “no-no”) and, on the other hand, not being altogether candid as to the reasoning behind a request or a demand or a refusal. The rationale seems to be that you are not required to let your opponent see the inner workings of your mind, since he is not telling you what he is thinking. As an example, you don’t have to be in very many negotiating sessions before you start to hear reiterated, like a sonorous litany: “We'd like to give you that point, but our lenders won't let us.” If all the abuses that are committed daily in the name of institu. a tional lenders were laid end-to-end, they would stretch from Pru- dential Plaza to the home office of the Bank of America! But it’s a very difficult argument to contend with, since the lender is almost — never around to be cross-examined. ; Let’s say you represent a purchaser who is worried about sign- | ing the acquisition agreement for the following reasons: (i) he — knows that the seller will press him to fix a price in the a for purposes of valuing the shares he is goin; stockholders; (ii) presumptively, the fixed his stock’s current market value; (iii) not agree to a formula pegging the price to market value immedi-_ ately prior to the closing; and (iv) he expects the market Price of © his stock to rise prior to closing, as a result of which he will end up issuing a greater aggregate market value of shares for the ace quisition than he thinks the ac quired company is worth os he would really like is a simultaneous agreement and closing ao 'greement to issue to the selling Price will be based on he is certain that seller will 64. Or, as Fred Charles Ikle put it, “The compleat negor; ... know how to dissemble without being a Tia tt ie Nanioxs Necortate, as quoted in Nierenberg, supra, ‘a¢ grt 65. The issue of valuing stock used for the purchase pric’ Section 6.2. o{GOTIATING TECHNIQUES AND TACTICS 47 NI he road,”* with the tacit understanding that the parties will fx ‘ f rice of the issuable stock just prior to the closing, presumably wo on what the market value is at that time. ba Obviously, the purchaser can’t use his concern about the rising k price as the reason for suggesting a simultaneous agreement oa closing, or the seller will force him to agree on a price imme- dalle So the purchaser's attorney, in the course of a meeting with seller’s lawyer, suggests the desirability of a simultaneous agreement and closing asa device to save paperwork, to get away from the covenants-conditions syndrome, and so on—noting that there are no proxy statements or tax rulings or such which would require a deferred closing. The seller’s lawyer sees the logic of all this and recommends it to his client. The issue of a rising stock price has been neatly obfuscated. I can't say I would feel very comfortable being in the position of purchaser's attorney, but there’s no question that lawyers are doing this kind of thing every day. The rationalization in that par- ticular case might be threefold: one, a simultaneous agreement and closing does save paperwork, etc.; two, if seller and his lawyer are also worried about valuation, they should reject the ‘uggestion and move promptly to negotiate the stock price; and three, the purchaser could be mistaken in his prognosis, in which case he would be damaged if the market price were to fall. All of which should suggest the rather obvious point—reiterated cxample throughout these pages—that in negotiating an acqui- n it becomes extremely important to speculate on your ad- “asary’s motives. Ostensible rationale should not be x holy writ; unusual requests should be analytically x-rayed; “cious defensive tactics should touch off all sorts of | to?” becomes a r by siti is kind of thing: “How did he react *--.” “T understand his w be worried about mor48 ANATOMY OF A MERGE anxious to close by April 30? . . .” This kind of speculation is n only necessary to avoid being taken to the cleaners, but also suggest acceptable avenues of compromise.” In the same vein, although I hesitate to raise the subject, it is deal went through. As a consequence, this lawyer proved to be a 4 veritable pussycat throughout the negotiations; no demand ema- nating from our side was too brazen to elicit other than instant — acquiescence. I found it all terribly degrading—even as we took — advantage of the opportunities so created for us—and, of course, his client was grievously ill-served. Need I remind the reader how inadvisable it is for a lawyer to have a direct financial stake in _ the outcome of a deal?** The other side of this particular coin also presents a serious problem. Typically, a consummated acquisition means a lost client for both the seller's lawyer and his independent accountant. There have been times when certain purchaser clients and I felt strongly that the extremely negative advice seller was getting from — his professionals was colored by their interests in retaining a client. This is obviously not a charge to be lightly leveled, since a patina of justification usually exists for any advice imparted by an intelli gent professional, and the lawyer should never express his suspi- it. T have known clients, however, to ipal-to-principal discussions with their 67. In this regard, see Section 2.9.4 68. It is true that lawyers traditionally bill aborts than when it closes, and I suppose i wit ess when @ deal financial interest in a successful conclusion, Such Ife? hey have & ever, represents a voluntai i mang Practice, ho ry decision on th . Knowledge does not materially influence the acer pate ut le sel—perhaps in part because of his realizar, ‘ consummated deal later backfires, he yt? that if ay res, he in improvid responsibility with the client. © may have to shoulder pareNEGOTIATING TECHNIQUES AND TACTICS osite numbers, in the course of which the suggestion is im- ed that the advice being received by the adversary may not Itogether disinterested. opp: part be a 2.4.3. Gamesmanship and Other Instruments of the Devil | feel the need at this juncture to direct a word to those readers who might be slightly put off by the seeming “game” and “games- manship” aspects of what we have been and will be discussing. I don’t want to wax too philosophical, and I suppose this could be handled more gently, but the fact is that the world of business is peppered with gaming elements, and negotiating an acquisition may well be the biggest game of all.** I say this with no disrespect or opprobrium; quite the contrary, it is these very ingredients— the movement of big money, a high-level matching of wits, achieving tangible results in an expeditious time frame—that for me make acquisition work so fascinating. But it would be delu- sive to suggest that this kind of endeavor has a number of socially redeeming features, and if you hanker for that, negotiating deals will probably leave you empty and dissatisfied. For those of us who can accept this altruistic void, however, there are special rewards. What I sense is that businessmen get tired of running their businesses every once in a while—too much of the old routine. The opportunities for negotiating an acquisition sive rise to an enthusiasm and fascination with the process (at least in those executives who have not yet become jaded) that in- fects you as their attomey, and makes what you're doing doub exciting. You feel that you're where the action is, which, world of assembly lines and otherwise beset by boredom, small thing, & : — 69. Nierenberg, Supra, at 23, disagrees, distin Same on two grounds: a game has definite | values, whereas negotiating is more jimpetitive situation, striving to attain y Pusiness deal you're trying to achieve Victory, with both parties feelingANATOMY OF A 2.4.4. They’re Not Making Negotiators Like They Used to... What is sad, however, is that far too many lawyers and busi i men, though skilled in other endeavors, are mediocre negotiato They become so wrapped up in the difficult substantive que: dotting the landscape that they neglect the necessary analysis how best to arrive at their goals. Only rarely do they stop to 2 up an adversary or ask themselves what is really troubling the dividual on the other side of the table. They may be masters of. intricate details and tedious boilerplate, but they are unable or unwilling to appraise the effect that a particular contractual modi- fication might have on the whole fabric of the agreement. They are not adept at compromise; when both sides stick on a certain point, they cannot summon forth the inventiveness to devise a middle ground that satisfies their adversary and yet retains the substance of what they really need. So that is what this book is all about, a look at the “how to get | there” aspects of acquisitions. But, you may ask, why lawyers? Can’t businessmen negotiate these matters on their own? The an- swer, in most cases, is no, Without disparaging businessmen in the least, the fact is that they are usually not skilled in the business of identifying, clarifying and resolving the hundreds of small ques- tions which make up the tissue of a successful acquisition. Then, too, lawyers possess the training and experience to ask hard questions so necessai iatii 5 4 ight to realize that the P really met on all aspects of the question.7° disposition to settle things at that Point, arties’ minds have And since they are why not take that e 70. Brandeis said: “Nine-tenths of the in life result from misunderst:NEGOTIATING TECHNIQUES AND TACTICS e step?” The parties agree upon the formula for sloyment contract; it is to be based on net ee ee But is that bonus to be based on the net earnings before or after the bonus itself? The parties didn’t think about it, but the question has to be asked. And more often than not, it is the lawyer who plays that crucial role. Finally, an alert lawyer has the ability to lubricate the often sticky channels of verbal communication between friendly ad- versaries where complex concepts are involved. Unfortunately, the mother tongue can at times become quite an imprecise in- strument for imparting significant information, Lawyers can be helpful in identifying and clarifying situations where a seeming disagreement actually involves a failure to distinguish between several separate issues, or conversely where an apparent accord between the clients conceals the reality that they are operating on two different wavelengths. So much for some general thoughts on negotiating. Now it's time to turn to the acquisition proper. And the best place to start is right at the beginning. — TL. Unless, as noted ia alone, enoughPreliminary Negotiations In many respects, the most critical stage of any merger transac- tion involves the preliminary negotiations—the period running from the commencement of negotiations through the signing of a letter of intent or other confirmation that the parties have reached an agreement in principle. A number of basic problems are re- solved during this phase, leaving less room for maneuvering down the road. 3.1. THE LAWYER’S ROLE IN THE OPENING ROUNDS ‘ Unfortunately, lawyers are often not involved in these pre- liminary discussions, Particularly where the terms of the transac- tion are relatively straightforward and apparently devoid of com- 53/ / 1. Shakespeare, who was not exactly enamored of the legal srkesee : ANATOMY OF 4 plex structuring consideratio: at the point when the partie in principle—with that unsp the client's part (“I know y but you better not bollix up my deal with a lot of -..”).1 In other situations, where the client Teposes parti fidence in his attorney, or the transaction requires precise rate or tax analysis, or counsel is known for his creativity (as. trasted with mere technical competence), the lawyer will prob be involved at an early stage. My advice to attorneys is, if have a choice in the matter, try to enter the picture at the ear possible time, because decisions are going to be made which affect the entire bargaining process. Let’s assume you do receive a call from your client, who s; is contemplating making an acquisition and wants your a The first step you should take is to have the client tell you e thing he knows about the target company, and how he propos to do the deal. Then you should proceed to probe those mai that the client may have overlooked. For instance, if the tran tion is for cash, you ought to ask the client whether there will be a holdback or escrow of part of the purchase price, to protect against misrepresentations.* Don’t be surprised at the fact more often than not, he hasn’t thought about the point. So you jointly develop a posture on it: e.g. (i) you will not require escrow; or (ii) you will require an escrow and will ask for it right away; or (iii) you will ask for an escrow right away, but will then. trade it for something else; or (iv) you intend to ask for an escrow ns, the attorney may be cal] 's are about to conclude an ay oken but covertly hostile g ou lawyer types are a nece your demand appear more appropriate. It is a good idea to work out with the client both the major terms on which he wants (or is willing) to make the acquisiti->, a i do, let's kill all the lawyers. King, te atte 55-61), chuacesteciiea orators of miseries,” Richard III, Act IV, Sc. 4, line ys } in Section 3.3.PRELIMINARY NEGOTIATIONS 35 ‘ion for achievin, the st foots € not, of course, ne Fag stated objectives, and your negotiating posi The ‘essarily the s assistance to the client on the negotiating soonets ios et perienced attorney should have a ood feel for the stance. But the decisions as to the basic terms on whi the deal should never come from the lawyer, This is the client’ The lawyer can and ought to provide various inputs 6 ions, but he should not usurp (or allow himself to be put in the position of making) the final judgments, In every long term lawyer-client relationship, from time to time the client will ask the lawyer: “What do you think of this deal? S a matter of business judgment” or “I'd rather not advise you on that”—all of which sounds too much like a ducking of responsibility, I think that a reply along these lines is the preferable course; “If you believe their Projection of $300,000 after taxes, and you think you can get around that problem of the record-changers being in short supply, and if we can solve the tax problem so that you get the full stepped-up basis, then I gather it’s a pretty good deal. On the other hand, if the earnings are likely to be off . . .” etc. In other words, I feel you should attempt to posit an analytical view of the deal, setting out the major premises which have previ- ously been discussed and on which the client should properly base his decision. In that way, you are fulfilling a useful function with- out going beyond the bounds of professional advice. This is a role that the client can understand and appreciate, while recognizing that it is up to him to make the ultimate business judgment. It is good practice during preliminary negotiations to allow the sparring to take place as much as possible between the principals of the two companies. In general, the lawyers should confine their 4, On this point, see the discussion in Section 2.3.9.56 ANATOMY OF 4 contributions to legal points, to particular structuring or : cal problems, and to bridging communications gaps. My re, ing on this is twofold: first, the usual topics of discussion at he outset are generally basic business areas, on which att 4 should defer to their clients in any event; and second, this ig = good time for the clients to feel each other as out, to form Personal judgments, to sense whether they will be compatible over Ca term. the long Let's turn now to the subject of purchase price,’ obviously the single most important aspect of any acquisition transaction. Iam _ not going to attempt to answer the question of how one arrives at_ the “right” price, which is essentially a business matter ade- quately treated in merger literature.* Nevertheless, it behooves you to have a passing knowledge of such tools of the trade as mul- tiples of earnings, discounted cash flow, book value and other — methods for evaluating businesses, if only to be able to follow the discussions. : No legal mystique surrounds the subject of price, and the ma- jority of businessmen are generally quite able to handle the matter on their own, without any intervention from the legal profession. This is particularly true of the conglomerateur, who has developed a feel not only for the price itself, but also for the best route to get there. In such a case, the lawyer’s primary impact on the price lies in his ability to identify for his client those risks inherent in the transaction which the client may otherwise overlook; bringing these out in the open can lead toa reduction in the price (if pur- chaser accepts them) or possibly a price increase (if purchaser re- fuses to take them on), while inadequate risk identification may 2 mean that the price being paid is too high. The lawyer is more é price considerations are treated in Chapter v1, pas Pipex Business or Acouisrrions aD Mencens (C, Hutchin. ‘son ed. 1968).PRELIMINARY NEGOTIATIONS 57 likely to be actively involved when he represents a seller who is getting his feet wet for the first time. If you can’t convince him to retain an investment banker or other financial counselor,” you may find yourself smack in the middle of the price negotiations. 3.2.1. Alphonse and Gaston Revisited Typically, the first purchase price offer is made by the acquiring company. Businesses, unlike merchandise in a store, do not gen- erally carry a specific price tag. Representing the seller, my usual preference is for the buyer to kick off the bartering. It just might be that his price is higher than your client would have been bold enough to demand. Naturally, it won't do for the buyer to know this, so you must steel your client to produce a poker face and an essentially constructive-negative reaction such as: “Well, I'm not insulted by that offer, but I think it overlooks some rather sub- stantial elements of value in my company. . . .” Conversely, it is to the purchaser’s advantage to know what price the seller has in mind before making an offer, especially if the seller's expectations are more modest than what the purchaser is willing to pay. There are various techniques that canny pur- chasers employ to smoke out this information. For example, I've heard several variations on the following theme: [Purchaser, speaking in his most sincere tones, evidenc- ing genuine concern]: “I would like to buy your company. It’s well-run and a good fit for us. My problem is that you've obviously kept your earnings down by running the show as a private company, taking out whopping salaries and a whole bunch of fringes; and I just have no idea what your real value may be. Did you have an asking price in mind?” 7. If the seller is receiving the purchaser's securities in exchange for his business, he may need an “offeree representative” to advise him on price and other business and financial matters, in order for the transac. tion to qualify for the private offering exemption under the Securities Act of 1933. See Section 4.7.3.58 ANATOMY OF A MB} 3.2.2. Digging That Well-known Hole The danger to the purchaser from inviting the seller to state hig price is the possibility that the seller will announce an inflat figure, much larger than what the purchaser had in mind, H, once taken the plunge, the seller may then be unable to e: gracefully and without loss of face to a negotiated price in buyer's range.* The scenario is all too familiar: the seller sets exorbitant price; the purchaser balks; the seller attempts to de. _| fend it; the more he’s pressed, the more tenacious his defense. _ and finally, he digs himself into a hole from which extrication be. come impossible. Let me suggest one technique for handling this problem. sume the purchaser is seeking to buy X company for around 000,000, give or take a few hundred thousand dollars. He maneu- vers the seller into stating a price first, but to the buyer’s astonis ment the seller asks for $4,000,000. Without missing a beat, purchaser replies (in a decidedly facetious vein, but from the seller can infer a vein of serious purpose): “Okay, that's good asking price. Now, our offer is zero. Why don’t we split the difference?” Everyone chuckles, the air clears, and the buy promptly suggests that they set aside the question of pi price for the moment and talk about other important matt Later on, with the transition eased, the buyer says: “We've gi $1,600,000.” What he has done is to treat the $4,000,000 ne as a joke,® but with a tacit acknowledgment that it was clever 0 the seller to ask for more than twice the real value of his ¢ pany. This assists seller’s withdrawal from the $4,000,000 lev —now a much easier journey than if the buyer had termed. figure “ridiculous,” which would have required the seller tify it. The seller has a similar, but lesser, concern if he anticip: the purchaser's first offer will be so low that its elevation 8. See Section 2.2.5. for additional discussion on “face.” 9. The use of humor in negotiating is discussed in Section 2.9.1.PRELIMINARY NEGOTIATIONS 59 reasonable area will prove impossible. In that case, the seller might want to indicate the price range that he has in mind for his company before the purchaser utters his rockbottom number. 3.2.3. A Deal Does Not Live by Price Alone Keep in mind, even when your client forgets it, that there are a number of other factors which enter into an evaluation of the pur- chase price besides the figure itself. These include the form in which the price is to be paid (restricted stock, for example, is not an equivalent commodity to cash), the time period over which it is to be paid, the ability to set off claims against the price, and so on. If you represent the seller, it is often prudent to counsel your client not to agree on the purchase price, even if the negotiations have reached that point, until the other material terms of the deal have been settled.” I feel that once the seller agrees to the price, the buyer often believes (rightly or wrongly) that he has the seller wrapped up and delivered—which inspires the buyer to take a tough line on the rest of the points. So long as the seller has not signed off on the price, however, he retains a certain leverage: and a purchaser who really wants the deal may be more apt to make major concessions on other matters. 3.3. THE AGREEMENT IN PRINCIPLE Before turning to the points other than purchase price which are usually resolved during the preliminary stage, I would like to discuss in general terms the written agreement in principle (some- times referred to as a letter of intent or a memorandum of under- standing) that often results from the successful completion of this first phase of negotiations. 10. This general subject of premature handshaking i : ig is furth in Section 3.3.6. An example of using leverage prior to ay sal contained in Section 6.3.4. greement isa ANATOMY OF A Mg} 3.3.1. Is This Document Necessary? There is no absolute rule as to whether or not there should be q letter of intent'in each deal. More often than not, I find it pref. erable to have the agreement in principle reduced to writing, for at least two reasons: first, although not usually legally binding the letter of intent does represent an explicit moral obligation of the parties, which reasonably principled businessmen seem to take quite seriously; and second, it memorializes, the basic terms | of the understanding, which makes it more difficult for misunder- standings and convenient loss of memory to surface later on in the proceedings. In only slightly irreverent terms, it’s a form. of anti-renegotiation insurance. ; There are, however, certain negatives attaching to the written letter of intent. On some occasions, you may not want the agree- ment in principle formalized quite so speedily. Perhaps you are not ready for the public announcement which should follow on the heels of a meeting of the minds.** Or, the seller may be nego- tiating simultaneously with another potential buyer and not v to lose his back-up repository by announcing a deal with purch: mate agreement, rather than waste energies negotiating a rath specific agreement in principle. Often the key factor as to whether to have a letter of intent not is the length of time expected to elapse between the ag ment in principle and the definitive agreement. The longer 11. The non-binding (or occasionally binding) nature of this document is discussed in Section 3.3.3. 12. Other reasons to have a writing might be to provide a backup f press release (discussed in Section 3.4.1.) so as to rebut any chara you announced prematurely, and to convince a third party (such ie bank, where financing is required) that the transaction is viable 13. See Section 3.4. 14. See Section 3.3.6. Sometimes, of course, the converse of this tion is true—the writing marking a commitment on the oppon that serves to buoy a party's confidence in the later 0 eePRELIMINARY NEGOTIATIONS 61 period, the more desirable it is to have some memorandum of the understanding in the interim. But if you anticipate wrappin, things up in a fortnight, then why bother. : 3.3.2. A Matter of Form The typical agreement in principle is in the form of a letter addressed to the seller, signed by the purchaser and then counter- signed by the seller. If the deal is with the stockholders of the seller, then they should be signatories. If there are a number of stockholders in addition to the principal owners, it is generally sufficient for purposes of the letter of intent that the principal owners go on the line—although if you anticipate any trouble from minority holders, it is certainly desirable to obtain their sig- natures, thereby avoiding subsequent whipsaw tactics.® On certain occasions when the purchaser desired something in writing to evidence the terms of the deal but preferred not to ask the sellers (who were unrepresented by counsel) to sign a legal- looking document, I have handwritten the basic terms on a yellow pad, read it to the parties for their concurrence, and given photo- copies to each side. If it seems appropriate, the parties can then be asked to initial the piece of paper. 3.3.3. To Bind or Not to Bind nt in principle should always contain language ot it is intended by the parties to con- There should be no ambiguity about t's not. There are certain in- The agreeme’ making it clear whether or ni stitute a binding agreement. s this point; either it’s a contract or its r I stances where a document, which acini is not a fulchlown isition agreement, is intended to serve as a binding formal See reason for this might be, tem} basis. The ; agreement on a tempore’) cer wants the seller to stop negotiat- fi le, that the purchaser ing with te potential buyers, while the seller feels he needs the the securities law problem that ce teed stockholders signing the 15. See Section 4.7.3. for a inting an offeree representative. may be caused by reason62 ANATOMY OF 4 assurance of a binding obligation to eliminate his alternative, so, this should be made explicit by a clause to the effect that, though the parties intend to enter into a more definitive contr the document being signed contains all the basic terms ne; for the acquisition and is understood to be binding upon the ties pending execution of the definitive contract (and even if never comes into existence )."° q Generally, however, this is not the case. The agreement jx principle usually contains a provision making the transaction sub. ject to the execution of a definitive contract between the partie containing terms, conditions, representations, and covenants propriate to an acquisition of the type involved. This makes clear that what has been signed is purely a letter of intent, no legally binding effect. Some purchaser's lawyers insist on ing the lily at this point, by the inclusion of language proclain that the document only expresses intention, has no binding effec should not be construed as any sort of obligation on the part the parties, and so forth. I find that most purchasers would ju as soon not include all that excess verbiage. The feeling seems | be that the principals of the seller, who are usually less soph cated in such matters, will somehow feel more bound without the caveats, even though they realize as an intellectual matter the agreement in principle is not definitive. 3.3.4. Points to be Covered What goes into the letter of intent? First, there should be some description of the form of the transaction ( acquisition of stocl 16. A mere recitation that a definitive agreement will be prepared and executed at a later time does not answer the question of whether # i first document is binding. For an example of the problems that ambiguity creates for both buyer and seller, see American C1 Co. v. Elizabeth Arden Sales Corp., 331 F. Supp. 597 ($.D.N.Y. 19 17. There is a discussion of certain possible legal consequences of a of intent in 1 Business AcgutstTions: PLANNING & PRACTICE (J. W. Herz and C. H. Baller, eds., 1971). This comprehensive volume work (cited on succeeding pages as BUSINESS Acguistrions) an extremely useful reference for lawyers in the merger and acq area.PRELIMINARY NEGOTIATIONS. 63 purchase of assets, merger, etc.),}® if it is a > ete. ), is known at the ti document is signed. Since the form is often a funtion ee - considerations or other planning aspects which are brought to bear at a subsequent date, the precise configuration might not have been set at this preliminary stage. In that case, general phrases such as “acquisition,” “purchase of the business,” or “com- bination” can be used. The one distinction worth making to avoid a future fracas, however, is between an assets-type transaction in which less than all the seller's assets are to be acquired or less than all the seller's liabilities are to be assumed,” and a merger or stock transaction involving all the seller’s assets and liabilities. If the seller's business is in several different corporate entities, some of which may not be wholly-owned, the letter of intent should be clear as to whether any companies are excluded and should iden- tify any interests of less than 100% being acquired. If it is im- portant that the transaction be tax-free” or be treated as a pool- ing,” that fact can be indicated. The consideration for the deal ought to be spelled out with some specificity. If the price is payable in purchaser's stock, the ratio or other method of valuation should always be stated. If preferred stock or debt instruments are to be used, their basic terms must be described. The document should set forth the es- sential (as contrasted with mechanical) details of any deferred** or contingent™ payments. Other important provisions for the letter of intent include: the treatment of outstanding options, warrants and convertible se- curities of the seller; any significant protective provisions sua He an escrow or pledge;** special arrangements with the seller's di- 26 rectors, officers or employees, such as employment contracts, 18. See Section 4.2. 19. Assets transactions are 20. See Section 4.3.2. 21. See Section 4.4.2. discussed in Section 4.6.64 ANATOMY OF A stock options, and seats on the Board; brokers’ and finders’ payable; the bare bones of such registration rights! as may been discussed; any particular restrictions on seller's pending the closing, and conversely, any permitted dividend other disposition of seller’s assets before the purchaser takes 9 A letter of intent should always state the major conditi e consummation of the transaction. Start with the general ] guage referred to above, providing that everything is subje the execution of a definitive contract, approved by the Bo Directors of the purchaser,” which will contain represents warranties, covenants, conditions and indemnification appro to such an acquisition. Although this does not commit either to any particular terms, it does provide the basis for the p rc] submitting his usual form of acquisition agreement. The law should then insert any particular conditions that have beei cussed. For instance, if the purchaser has made the deal year ending prior to the closing,”® make sure this is mentio the seller is unwilling to proceed without a tax ruling,® if p lar agencies have to approve the transaction, if the c certain third parties are going to pose problems,” or if the subject to raising the necessary financing, the letter of should reflect the applicable situation. 4 27. See Chapter 9. 28. See Section 8.2.3. Other provisions that many lawyers like are a statement of intention to proceed promptly with the | transaction, an acknowledgment by the seller of the purcha to commence its investigation, and an undertaking by the to retum all documents and maintain confidentiality in the deal is not consummated. : In addition, if the approval of purchaser's stockholders this should be stated; and if the transaction is not dire stockholders of the seller, the requisite approval of stockholders should be mentioned. On the subject of provals, see Section 4.5.1. ‘ 30. On ae type of condition, see also Sections 2.3.8. and 5. ter 14. 31. See Section 4.3.4. 32. See Section 12.3. 29.PRELIMINARY NEGOTIATIONS 65 3.3.5. Points to be Uncovered There are certain issues which the purchaser rarely brings up voluntarily at the time o! ‘ ol common for there to be any dice aoe B It on for example; nobody wants to frighten the seller anh oe that he may have to refund part of the purchase te ieeepae careful. T find that some purchasers are loathe to mention fal as. nant against competition by the selling stockholders that ll eventually find its way into the acquisition agreement or their employment contracts. Seldom is there any talk about restrictions on the freedom of action of the seller pending the closing.*° The explanation for these and other omissions is the awareness of the purchaser (who usually sets the agenda for preliminary negotiations) that this is a very delicate period. The seller is take ing his first steps towards giving up his business, which generally involves a major psychic wrench. Many a seller, whose entire working life has revolved around his company, suddenly begins to suffer sleepless nights and have second thoughts. From the pur- chaser’s viewpoint, it seems best not to complicate the matter unduly at the outset.** The danger of purposely glossing over an important point in the preliminary negotions is that, when you do bring the subject up later on, the seller may object vehemently: “If you wanted that provision, why didn’t you mention it at the time of the letter of intent!” In some cases, his ire might be justified; e.g., if your in- sistence on an employment contract with the key stockholder surfaces for the first time in the later negotiations. Even where the issue is not so clear-cut, the imputation of sharp practice a to put the purchaser on the defensive, relegated to weak a ee such as, “We insist on a non-competition covenant in every dea we do; T thought you understood that. is dis ir ic .3.1.—Indemni- 33. The subject of indemnification is discussed in Section 53. fication and Chapter 10. See Section 11.27. See Sections 5.3.1—Covenants, For an example of this strategy, see 8.1.1, and 8.2.3. Chapter 14, p- 491. BaeANATOMY OF 4 3.3.6. The Other Side of the Coin In the preceding sections, we have been viewing the a ment in principle mainly from the purchaser’s viewpoint Th ever, you represent the seller and are fortunate enough i a volved at this preliminary stage, you should probably sit dog an your client and enunciate some of the facts of acquis ife: Fact I: Even though the letter of intent is not a bindin A contract, the seller (like most of his ilk) will probably want to live up to its terms. i Fact I: The seller usually experiences a substantial change — of position upon signing an agreement in principle. His em- ployees are told about the deal; his suppliers and customers | may hear the news, especially if the public announcement — makes the papers; somehow his competitors always seem to get the word. The seller is then on the spot, because if the deal doesn’t go through, the suspicion will always exist (no matter what the actual or announced reason) that the pur- chaser found something wrong with the seller's business. Fact III: Perhaps as a result of Facts I and I, sellers tend to go through with their transactions; it is usually the buyers _ who get disenchanted and want to break off the deal. 4 Fact IV: It is precisely at this point early in the game~ before an agreement in principle has been reached, when the buyer is smacking his lips over his coup—that the seller is in his best bargaining position. In order to sew things up, bl buyer might be amenable to making concessions that he@ would not feel obligated e yield once the agreement in prin- ” i 1 announced. i be eg so, this is the time to sound out the payer a a number of matters that the seller will Poet, wil in the course of the contract nego! iati such as that non- ; competition covenant. 7 i id then jointly compile kes your advice, you shoul ae om ere would like clarified at the outset. The nego- aPRELIMINARY NEGOTIATIONS 67 tiations will then often take on the air of a stately Gavotte, with the seller inching into some areas that the buyer would marker save for later, and the buyer intervening with, “Oh, that’s some- thing the lawyers can take care of... .” or “We'll handle that during negotiations on the agreement.” But the seller should not Jet him. self be put off too easily. Raising these points at the outset will never sour a deal for him and might result in some extra benefits.7 3.4. FEDERAL DISCLOSURE REQUIREMENTS This is an appropriate point to discuss the interaction of the disclosure requirements under Federal securities law with the pre- liminary negotiations phase of an acquisition. There seems no end to the literature on the subject of when to announce material de- velopments such as a proposed acquisition.** Unfortunately, how- ever, the law is not a model of clarity. But every practitioner has to live by certain guidelines, and these are mine. 3.4.1. Some Guidelines for the Public Announcement If an acquisition is material to a publicly-owned purchaser, then at the point when agreement in principle has been reached (whether or not embodied in a written letter of intent), the deal must be publicly disclosed. If the transaction is not material to the For an example of such a benefit involving the problem of imputed Interest, see Section 6.3.4. This is precisely why attorneys should be brought into the picture at the earliest possible stage; see Section 3.1. . See, e.g. DiscLosune REQUIREMENTS oF PUBLIC CoMPANtES AND IN- SIERS, especially 29, 230-31 (J. Flom, B. Garfinkel & J. Freund, eds. (1967)); Fleischer, Mundheim & Murphy, “An Initial Inquiry into the Responsibility to Disclose Market Information,” 121 U. Pa. L. Rev. 798, 809-824 (1973); Hyman, “Disclosure Requirements—Timing and Preparation of News Announcements” in SALES, MERGERS AND ACQUISI- Tons (A. Kramer, chairman, 1969); New York Stock Exchange Com- 3 Manual § A2 at A-19; American Stock Exchange Comnany § 403 at 102; and Securities Exchange Act Release No. 8995 15, 1970).ANATOMY OF A rchaser, announcement of the acquisition may be deferred Bere avent, but I think the better practice i to make the ann is if there is no contrary countervailing conce; ae Berita preferable to avoid a determination of y something is material or not, on the related theories that one insignificance may be another's substantiality, and materia in the eye of the beholder (or worse, litigant). There are certain times when the existence of a pending ac, sition must be disclosed even prior to reaching an ay principle or executing a letter of intent. The New York Stock By change has expressed its view that once the negotiations haye broadened in scope to include persons other than top ma ment, and accordingly the risk of a leak or the misuse of information cannot be discounted, an announcement of the: istence of negotiations should be made. This might be apy te for certain major deals, but for the typical smaller aeqr is my experience that most attorneys honor the policy more breach. However, where rumors of the deal abound, the reacting and the Exchange calls up to find out what's then an announcement is proper—something to the effect that t identified parties are engaged in preliminary negotiations respect to a possible acquisition although no agreement in ciple has been reached at that point. ‘ Wherever possible, however, try to avoid this kind of ; ture disclosure. Announcing a deal before agreement in p has been reached is anathema to most professionals, prob cause so many of these have gone on to die of their own wi For one thing, the minute such an announcement is suitors get into line to outbid the purchaser, knowing that the seller is for sale and agreement has not yet b For another, the principals are besieged by analysts 4 holders, which can be very disconcerting. And you the meaning of trouble until the day when your clie lending bank reads abou p been consulted! z t @-deal in. the nesanazaa 68 39. N.Y.S.E. Company Manual § A2 at A-19.PRELIMINARY NEGOTIATIONS 6 Now let's look at this from the aa is a public company, the same rules apply as for the pur. chaser except that they are even more stringent. There can be no question about materiality, since being acquired (as contrasted with making an acquisition) is obviously the most significant pos- sible event in corporate life. If, on the other hand, the seller is a private company, there is no need from the seller’s viewpoint to make a public announcement at any point in the proceedings—at least prior to the ultimate consummation of the deal when the seller in the ordinary course would notify his suppliers and cus- tomers. There is one important caveat to this discussion. Regardless of the proper timing of the public announcement, as soon as a pur- chaser enters into serious negotiations for a material acquisition, or as soon as a seller enters into any negotiations looking toward its acquisition, the two companies and their insiders should get out of the market—absolutely no selling or buying of their own shares or those of the other company. This insider status should be extended, if practicable, to everyone within the companies who has wind of the acquisition, as well as outside professionals who are involved. Needless to say, the broad subject of insider trading is beyond the scope of this book.*° seller's point of view. If the 3.4.2. Content of the Press Release The next question is what the press release should ae other than the fact that an acquisition is proposed and the iden’ 40) Seale ‘ Secunmmes By _ Frome and V, Rosenzweig, SALES OF SECU 40. See general Fens (1972); Flom and Atkins, “The Eendng ope Cf SEG Duclogure Laws," 52 Horo, Bus Reo, 100 (1974); Se 2 te pitie 13e2, contained in SEC Securities Exchange 2 proposes "10509. (December 6, 1073) which sels forth Oe res, stances when issuers may repurchase theit, oy ding sci although not yet adopted, proposed Rule ee ane e Gta of the SEC. presently bases the Grant & Pech te prohibitions of Rule 10b-6 under the Becht aa mings from the ee eometines referred to as the “Exchange Oo Tt the paing applied by the Staff to purchases by individ trolling issuer.70 ANATOMY OF A ties of the acquiring and acquired corporations. [ firmly believe that it should include the amount of the consideration to be as well as the form (cash, stock or other) —not only when the seller is a public company (and this information is necessary for stockholders), but also when the seller is private. Without this quantification, it is impossible for analysts and investors to assess the acquisition. Even when this information cannot be direct] translated into potential earnings per share impact on the pur. chaser (as where, for example, the seller is privately-held and no reliable income figures are available), an indication of the price at least gives the reader some idea of the materiality of the acquisi- tion to the purchaser. Of course, it is precisely for this reason that a some buyers do not like to mention the consideration (preferring — T also feel that an attempt should be made to give some indica- tion of the size and operations of the seller. This is usually done by including the seller’s sales and net earnings for the most re- cent fiscal year (and perhaps interim periods since that time) and the seller’s net worth as of a recent date. Certainly, if anyone is properly to evaluate the acquisition, the purchase price alone does not give sufficient information, 41. There is also a practical consideration at work here. Some media (such as The Wall Street Journal) have a policy not to print wos uch 4Gauistions under a certain dollar level (currently $8,000,000 forse WS). Sometimes, however, they will give you space qf oo eae included and the purchaser is newsworthy, 42. This is especially important when the seller is a Public company, If the announcement makes the deal look too firm, and arbitrageurs Bo in and start buying the stock, they might possibly have piesPRELIMINARY NEGOTIATIONS n specifically in the announcement; for example, the specific earn- ings figure that must be attained by a non-public seller can gen- erally be omitted (unless the purchaser affirmatively wants that information disclosed, to show that he has negotiated a good deal!), in order to maintain maximum flexibility for anticipated renegotiation. 3.4.3. Interaction with the Negotiating Process The principal manner in which the press release enters into the negotiating process is as a device used by one party to lock the other party into the deal with more certainty. Upon announcement ‘of the transaction, both parties experience some change of posi- tion, the seller a good deal more. So, with a wavering seller, the buyer has a real interest in seeing the announcement made; and I have the distinct feeling that attorneys representing purchasers in that sort of situation, especially with unsophisticated sellers, be- come rather over-zealous disciples of the principles of prompt and timely disclosure.** _ On the other hand, if in representing the seller you experience oncern that the buyer with whom you have been negotiating nay not be serious (despite all his protestations to the contrary), you can put him to the test by saying: “Okay, I think we have an greement in principle; let’s announce it.” If his reaction is nega- , no matter what the seeming rationale, you know the deal is yet firm. _ Another reason why purchasers are generally anxious to an- unce acquisitions is the supposed favorable impact the an- suncement will have on the market price of their stock. In fact, purchaser of a private seller for stock will often prefer not to alize the valuation of his shares at the time of the agreement in hoping that disclosure of the deal will improve the ies if the deal is terminated for failure to i i ti action against the Pavmdisclosed condition which existed from the ill an important but undi point is illustrated in Chapter 14, p. 488.72 ANATOMY OF 4 market price.** Even if the pricing is fixed at the time ment in principle, buyers enjoy hearing the favorable reag sellers to an immediate market rise: “Look, fellows, only 9 has passed and we've already made money... .” 3.4.4, The Non-Agreement in Principle On occasion, I have been involved in situations where parties make it clear that they do not wish to announce a another week or so. The purchaser's reason might be wants to clear the necessary financing with his bank. The might want to consult his minority stockholders. When this pens, you have to be careful to prevent the deal from progr to the stage of a complete meeting of the minds, at which the obligation to make public disclosure becomes fixed. I of course, suggesting that an actual agreement in princi be made to appear as something less definite (although men often seem to have the idea that this is a relatively si of legalistic alchemy). What I do mean is that if you are aw of this announcement problem, you should require the break off their negotiations prior to reaching the point handshake can be said to have occurred. In a few such cases, just so that the record would be have adopted the expedient of having the parties sign a “non-agreement in principle”—a document which that the parties have been discussing a deal but have any meeting of the minds as yet. The document then list the open points. These should not be the kind of as the approval of a public seller’s stockholders) that ea cally be handled after agreement in principle is al thinking rather of such threshhold issues as the or Executive Committee of the purchaser taking at the deal; or the purchaser’s bank consenting necessary funds; or seller's tax counsel advising action will be tax-free; or purchaser's counsel co 44. Pricing is discussed in more detail in Section 6.2.