In Part 1, we set the stage for a detailed story about how an issue might be negotiated. Part 2 showed what can happen as a bit of data about a possible environmental issue percolates through the deal team: negotiation actually starts long before the parties sit down in a conference room together. Part 3 starts with a generic overview of how buyer and seller interact over the issue, along with some of the internal interactions that continue at the same time (negotiation strategies are a separate topic!).
Negotiation: Exchanging Positions, Coming Up With Solutions
The senior corporate associate on the buyer’s side revises the draft merger agreement that had previously been prepared and sent to the seller while due diligence was happening, then gets approval of the text from the environmental lawyer and corporate partner, then includes both the CFO and the compliance director in the distribution of the draft, then hears back that all is ok to go to the seller. This takes a few days. She sends the document to seller’s counsel, where the process is repeated in reverse as seller’s team reviews the document. She sends it separately to the banking partner who send it to lender’s counsel, where a review process also takes place. Lender’s counsel says nothing pending review of the final resolution.
This phase of the negotiation is conducted by exchanging drafts containing positions: a similar process is repeated in reverse as seller’s counsel prepares a revision to the draft to send to buyer and buyer’s side reviews and discusses it. This iterative phase takes a couple of weeks. Eventually, a larger meeting takes place to go over a number of outstanding issues, involving a number of the business participants and lawyers on both sides of the transaction. At the meeting, the parties agree that a Phase II environmental survey will be done after the merger agreement is signed but before closing, at buyer’s cost. If it reveals soil contamination and the remediation costs are too high, there will be a purchase price adjustment with a continuing but capped indemnity; and if they are even higher, beyond a specified level, the buyer will have the right to walk away (seller thinks that once buyer makes makes a public announcement about signing the agreement, walking away from the deal would have such a negative impact on its stock price that it would be reluctant to pull the trigger). The law firm corporate partners on both sides are heavily involved in the meeting and this discussion in particular. After the meeting, buyer’s corporate partner, senior associate and environmental lawyer work together to draft the appropriate merger agreement language. Due to external time pressures, this takes place late in the evening after the meeting
Implementing the Solution on Paper and in the Real World
Seller’s senior corporate associate communicates the decision to the junior associate, who was not present at the meeting and whose job it becomes to add information about the contamination to the disclosure schedules.
The revised merger agreement and draft disclosure schedules get reviewed by seller’s general counsel and senior corporate attorney, then get sent to buyer’s counsel to repeat the review process in reverse. The parties sign off on the document.
The investment banker, who was not at the meeting, works with the CFO and controller to revise the financial models. The CFO runs them by the accounting firm for a reality check. He then confers with the VP about the financial parameters of a go/no go decision.
Before the signing, buyer’s environmental lawyer retains the consulting engineer to start the Phase II survey immediately after signing. He and an employee do the survey. They send a preliminary report to the environmental lawyer that they indeed found contamination. She forwards it to the compliance director. They discuss it, then report back to the senior corporate lawyer, CFO and general counsel. The CFO and general counsel then raise the issue with the CEO to assure him the findings were within the cushion they had built in and that no purchase price adjustment would be necessary. They tell outside counsel and the compliance director, who then arrange with the consultant for remediation after the closing. When the time comes for remediation, the manager of the facility is brought into the loop to make certain employees stay out of the area while three employees of the engineering firm do the work dressed in hazmat suits.
Before signing, the CFO, GC and VP make a presentation to the CEO. He decides the deal is a go, but believes that he needs board approval before signing. He gets it at a special board meeting at which he makes a short presentation, followed by detailed presentations by the VP. The CFO and GC are there to answer questions about risk allocation but not to advocate for the deal. Seller’s CEO can approve the deal on his own, but requires a similar set of presentations, as well as a presentation by the CDO about how the disposition fits in with corporate strategy.
At the end of the day, at least 32 people and nine organizations have touched the environmental issue. The pre-signing bursts of activity to address these issues take place on a compressed schedule over a couple of weeks.
Choreography
A process much like the one described in this and the previous installments is repeated for a number of issues over the course of the transaction. It seems chaotic but if choreographed well works to bring the deal to closing. That choreography comes down to a good business process, zealous and hands-on management or both. As a generalization, business organizations tend to focus more on process, while law firms tend to focus more on people.
In our next installment, we will take a closer look at some of the processes and the people who run them.