George P. Shenas

The Role of Lead Corporate Counsel in M&A Transactions

One of the most challenging and interesting undertakings for a corporate lawyer is to act as lead counsel in connection with a merger, disposition or acquisition (M&A) transaction. From the corporate client's point of view, the transaction may well involve the most important financial transaction in the client's history. At the same time, the legal complexities which may be faced, depending on the facts, are very diverse, and in many cases require a sophisticated level of expertise. For these reasons, it is important for the client to retain corporate counsel which understands the nature of the task, has been down the road before, and is able to perform its various responsibilities effectively.

While the issues and problems faced in every M&A transaction are different, the central role played by lead corporate counsel is somewhat constant. The purpose of this article is to review the process and to summarize the responsibilities which must be assumed by lead counsel. Although the role may be somewhat affected by the division of responsibilities agreed upon at the outset as between lead counsel, the principal company officer marshalling the effort, and the investment banker, if any, involved in the transaction, the lead counsel usually performs the duties described below. For the purposes of this article, it is assumed that lead counsel represents the selling entity:

1. Negotiate Non-Disclosure Agreement, Letter of Intent and/or Bid Letters
After the preliminary planning is completed by the client, corporate counsel and the investment banker, if any, lead counsel will become directly involved in laying the foundation for going forward with the transaction. If a buyer has already been identified, the parties may elect to enter into a letter of intent to evidence their understanding of the terms of the deal in a non-binding way. Additionally, the letter of intent can be used by the buyer to secure assurances from the seller that the seller will not "shop" the deal during the due diligence and negotiation period between the parties. (See the article "Letter of Intent 'No Shop'" also under "Mergers & Acquisitions".) If the company elects to engage in a bidding procedure, lead counsel will work with the investment banker to put together the format by which interested companies can make their proposals to the seller. If this procedure is used, the seller may elect to draft a pro forma asset sale agreement or merger agreement which prospective buyers can use as a mark-up to reflect the terms of their preliminary proposals.

2. Data Room Formation
During the bidding phase, if one is employed, most prospective buyers will want to engage in preliminary due diligence to form a basis for their proposal. This will then require lead counsel to establish a data room of relevant due diligence documents which is made available to potential buyers. Before any access to the data room is permitted, a nondisclosure agreement must be drafted by lead counsel and signed by the interested parties. It is in the seller's best interests to provide comprehensive documentation at this early phase, in order to avoid a later claim by the prevailing bidder that relevant information was not made available at the time its initial proposal was made. Caution should be exercised, however, to avoid the premature disclosure of certain types of documents. In particular, the disclosure of sensitive documents relating to pricing, costs, and similar information could lead to potential claims by third parties or government authorities based on violation of antitrust laws. Also, confidential information relating to employees (including, among other things, medical information) must also be carefully guarded, as well as the disclosure of contracts which contain confidentiality clauses requiring the consent of the other contracting party before disclosure.

3. Assembling the Legal Team
Depending on the transaction, a variety of important issues may arise which will require expertise beyond that which is held by lead corporate counsel. One of the most important roles that will be played by lead counsel is to assemble a team of lawyers and other experts which can address these matters expertly and efficiently. The issues which typically require such attention include (a) intellectual property, (b) employee matters (including ERISA/ benefits law), 2/2 (c) environmental, (d) antitrust (both domestic and international), (e) tax and (f) securities law matters. Lead counsel should play an instrumental role in the selection of the team as soon as the key issues of the deal are identified.

4. Negotiate the Principal M&A Agreement
Lead counsel is principally responsible for the negotiation of the main agreement between the seller and buyer, whether it takes the form of a merger or the sale of assets or stock. Depending on the form of the transaction, essentially the same "shopping list" of issues must be resolved. Corporate counsel which is experienced in M&A transactions will be familiar with the issues and, importantly, will be able to counsel the client on "market" parameters, and the extent to which the client can or should attempt to maximize its position on each such issue. Counsel must be able to accurately assess its client's leverage and bargaining power, and advise the client accurately concerning its usage and limitations. Conversely, the client must be clearly advised of and agree to assume the risk factors associated with each significant decision made by counsel.

It is also very important that both the client and counsel rely heavily on the advice and experience of the investment banker, who will view the matter from a different angle. Counsel and the investment banker must work closely, along with the client, in the negotiation of certain issues which blend business, financial and legal considerations. Often, two channels of communications with the other side of the transaction can prove very useful, so long as counsel and banker, as well as the client, remain in close communication as the process continues.

5. Manage and Coordinate Entire Team Effort
It is important that the efforts of each member of the legal team be monitored so that the effect of each ancillary agreement can be considered in relation to the whole transaction. Often, a decision made in one agreement may have a significant impact on another part of the transaction, and it is the responsibility of lead counsel to keep abreast of the progress being made on all fronts and, where needed, help to move the process along where it may be bogged down. The importance of establishing and maintaining a schedule cannot be overemphasized in M&A transactions, and it is lead counsel's responsibility to assure that the team adheres to the schedule.

6. Manage the Environment of the Deal
One of the most critical roles played by lead counsel is to be able to sense the "temperature" of the deal and monitor swings in the attitudes and moods of the parties. Counsel must provide the ballast to keep the deal on an even keel, both with respect to his own client, but also with respect to the other party and its counsel. The most productive relationship which can be established with counsel for the other party to the transaction is one of cooperation, and, in a sense, collaboration to achieve a common goal. It is important to avoid an adversarial relationship at all costs, since it is likely to generate the same reaction. Counsel must establish that his representations can be relied upon and trusted by his counterpart, who will generally respond in kind.

7. Handle the Closing and Post-Closing Matters
Assuming that the deal has progressed well, the closing is the final step to consummation of the transaction. Lead counsel must see to it that all schedules and exhibits to the principal and ancillary agreements are prepared and reflect the understanding of the parties. Counsel must also see to it that all conditions to closing (such as consents to assignments of lease and contracts and governmental approvals such as Hart-Scott-Rodino and/or foreign antitrust approvals) are either satisfied or, where appropriate, waived by the party or parties for whose benefit the condition was established. It is important to confirm that any last minutes changes by either party to the transaction do not adversely affect the transaction for the client. This may include pre-closing changes in representations and warranties which could alter the benefits and risks of the transaction. All arrangements with the escrow agent, if one is involved, must be resolved prior to closing and necessary instructions must have been clearly transmitted to all parties for the wiring or other delivery of the proceeds of sale. Lead counsel must also coordinate with the company accountants regarding the completion of any post-closing purchase price adjustment calculations.

George P. Shenas