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Sunday, September 24, 2017

Business Law-some finer points-Part 1

Below points basis general reading and the NUJS DEABL Course material/videos. Comments welcome
  1. Deadlock situations more common in JVs than in financial/strategic investments
  2. Strategic investor values business on a more long term basis than financial investor, and often enters at different life-cycle(angle-VC-PE-Distressed/Strategic) and pays a premium as they enter into established business
  3. For PIPE transaction, valuations usually predetermined due to pricing rules/formula, and better for foreign investors as helps them avoid issues in exchange purchase. Here however, no exit clause as listed shares already liquidity there. So enter in negotiated deals and exit on exchange, and less scope of reps/warranties as there is already greater scrutiny/compliance and lot more information enabling buyers to do their own diligence. Due diligence is an issue due to insider trading regulations and risk of triggering change of control norms(hence limited affirmative rights, and conservative view on negative rights). Also, mostly equity and no convertibles/warrants. 
  4. Picking up a block on the market is difficult since prices increase exponentially, hence it is better to purchase from the company. 
  5. However, new trend of complete buyouts of startups but this is not strategic investment per se.
  6. Commercial/Business law is complex, needs quick turnarounds(eg change agreements across multiple documents) and levels of understanding not available on Google. Long term solution is to follow a checklist approach and be through, till you develop your own framework. 
  7. NDA(Non disclosure agreement) may have non compete and non solicit provisions. So READ the agreement w/o presuming it is only NDA. Also, disclosing party usually wants broad scope , while receiving party wants narrow scope, and differ on wish to 'Mark' Documents as confidential which is usually difficult. Also, right/requirement to return/retain copies depends on form(physical/electronic) and also on need for referrals/retention rules. If really needed, then virtual cloud/data room is must with locked/monitored spreadsheets.
  8. Due diligence forms the bread and butter for transactional lawyers especially those representing the target. It is not a judgemental exercise it just brings the relevant('Material') facts to the table to draft representations and warranties, and proceed with txn in best tenable manner avoiding defects/deal killers and bad deals. Be prepared for the worst-due diligence helps you know the worst, and also confirm the business is what is appears to be.
  9. Business due diligence involves business experts(like AT Kearney/BCG), inventory physical checks, people due diligence especially key folks and change of control provisions in their contracts like gratuity, and legal/tax document review to examine present/threatened/potential risks, IPR ownership reviews(does company OWN the IPR part of deal,corporate History/Capitalization review-check for ROFR/lockups/agreements binding the shareholding, financial indebtedness review for mortgage/prior consent
  10. There are multiple procedural ways to frustrate the process(eg no consent for valuer, delay to submit bids) for mechanisms like Russian roulette, so in practice not done. However, this is having both parties submit sealed bids at which they will buy/sell stakes. Even if loan documentation/JV documentation for funding is clear, establishing default is very difficult in terms of choice of instrument, timing, valuation level etc. So to avoid bad blood, even if clause exists to buyout at discount due to failure to fund, done at negotiated deals typically. 
  11. Exit waterfall is usually IPO, strategic sale, put option to company/promoters. However, IPO cannot ever be forced upon on company and there are timing, economic and commercial factors to decide to do it, as also third party cooperation. Strategic sale needs promoter to dilute and share control, as also need for cooperation/continue at times. Drag Along rights are usually value destructive(PE/Fund need to exit at lifecycle end and may not care about IRR, also diversified, but promoter may believe value exists and would not want to take that decision) and hard to negotiate, contractually tough and unless escrow, impossible to enforce. Usually, company not doing well  hence no IPO/drag along works, so unlikely it will be able to buyback the stake
  12. The investor relies on the founder to manage the business and grow his money. Hence, clauses exist on founders such as full time, no competing business, tag along, anti dilution(unless ability to subscribe at same valuation)
  13. Usually, reserved matters consent given by nominee of investor, and meeting to vote needs the mandatory quorum of that representative. 
  14. M&A transactions usually have term sheet, due diligence, definitive agreements, signing and closing interposed by standstills/actions(operational surveillance in the meanwhile). 
  15. Inhouse counsels usually have a kickoff internal meeting, understand business thresholds and imperatives, and then take a look at the contract wrt allocation of risks, liabilities and responsibilities if it meets. This would then result in discussion points(key issues) which when resolved conceptually in meeting/call(eg payment terms, title, O&M) could then go to the wording. To cut the information asymmetry, identifying the deal team including correct persons who can take a CALL on that subject will be must. Also, need to balance timeliness(deal was needed yesterday!), cost and quality. 
  16. Usually, large groups have standard, non negotiable contracts for ordinary course of business, to manage legal risk, with some provisions negotiable. This makes in-house job easier. These depend on your bargaining power, nature and scope of contract and the perspective/importance of items(eg 1 issue with tender)
  17. Also, inhouse counsel not bound by billable hours need to rack up, and often wants to cut to the chase and focus on vital issues

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