Tuesday, 14 May 2013
We'll kick off with this posting a new blog series on M&A and how to negotiate M&A deals in practice. This one will be done in collaboration with my good old friend and Oxonian colleague Mika J. Lehtimäki. What we aim to achieve is to provide an overview of all the terms of a typical share purchase agreement, the typical negotiation points and illustrate also some common compromises and tactics. So this is the outlook what is about to follow (our target is to post new material bi-weekly):
1. PARTIES, DEFINITIONS AND INTERPRETATION
2. SALE AND PURCHASE OF SHARES
3. PURCHASE PRICE, EARN-OUTS AND ADJUSTMENTS
5. BUYER'S WARRANTIES
6. SELLER'S WARRANTIES
7. LIMITATIONS OF LIABILITY
8. POST-COMPLETION OBLIGATIONS
9. CONFIDENTIAL INFORMATION
10. ASSIGNMENT PROHIBITED
12. CO-OPERATION AND COMPETITION
13. THIRD PARTY CLAIMS
16. CUMULATIVE REMEDIES
18. EFFECT OF COMPLETION
19. ENTIRE AGREEMENT
21. THIRD PARTY RIGHTS
22. GOVERNING LAW AND DISPUTES
25. DISCLOSURE LETTER AND SOME WORDS ON OTHER SCHEDULES
26. SOME ADVICE ON "BOILERPLATE CLAUSES"
Some sections will be divided in subsections as it may be too difficult to fit all information on warranties, for example, to a reasonable size of one blog. Another theme that is divided to several smaller subsections will be purchase price, which is naturally needed to go through different variations from locked-box to earn-outs.
We decided to start the blog to share experiences of seasoned M&A lawyers. Both me, being very active in technology, outsourcing and intellectual property deals and Mika J. Lehtimäki, who is a very well-known figure in banking & finance, have led several domestic and cross-border transactions and during our careers we have learned most tricks and intricacies from practice. There has not been a single book or guide which could assist a young lawyer in his or her journey to the wonderful world of M&A which is an issue we wanted to fix. It is not so long ago (most likely 2001) I was doing my first seed investment to a small technology-based company and I went to the chamber of my tutor just to ask what an earth is a disclosure letter and how should I “qualify warranties”. The small but invaluable piece of advise I received then was still valid last year when I was leading a large financing round relating to a contemplated green technology or should I say cleantech production facility, or representing a Finnish company in the divestment of their operations abroad. As for Mika, he still remembers his first M&A deal in 1999 negotiating against one of the grand-old-men of Finnish corporate law. Although not a pleasant lesson, something that put him first in the deep end of the world of M&A tactics and trickery.
We will focus in our posts also on the negotiation process as it is one of the most critical issues in any M&A deal. It is young lawyer’s typical problem that one too easily sabotages the deal while experienced negotiator may come up with excellent workarounds that still lead to win-win deal for both parties.
Main target audience of this blog series is those already having experience on M&A and perhaps have participated negotiations already. Legal education is not necessary so we also think that our thoughts could be useful for financial advisors, CFOs and management in general involved in these kinds of cases.
Finally before we start it is important to note that contract language used in this blog is mainly intended to illustrate the point in question so we have not tried to formulate bullet-proof language in that respect. It should be noted that precise drafting is one of the most important issues in particular in cross-border deals where contractual interpretation is not necessarily based on “intention of the parties”.
Any questions and comments are warmly welcome and if you wish to submit particular comments to any specific topic or you have been wondering some point raised in a previous case, let us know and hopefully we are able to provide guidance on those as well.
Monday, 13 May 2013
I was presented this question some time ago, i.e., when it is beneficial for the owner to use a holding company "as a middle company" in joint venture context. Just to illustrate this idea I drafted a slide on both of these structures in connection with one of my forthcoming M&A lectures and I thought that I could share this with you as well.
Those "circles" on top illustrate owners and their share ownership in the company participating in the JV. Then the key issue is whether the JV partners directly own the target or whether there is a holding company in the middle which then owns the target. Taxation is naturally one crucial driver behind these corporate structures including debt push-down considerations and similar, but from the corporate governance point of view what the main questions for a lawyer or CFO responsible for the planning of this new venture would be?
- As a starting point, one should take into account what is the relevant jurisdiction and what is the maturity of its company and contract law regime?
- How can you generally enforce the agreements, e.g., can you use specific performance?
- Is it possible to limit directors' liability?
- Is 100% foreign ownership even possible under the applicable law?
- Have you considered investment control regulations, authorizations and permits?
- Finally, can a company operating in a target's jurisdiction own foreign HoldCo?
While joint ventures are somewhat more popular nowadays, e.g., as in many cases one needs local partnerships not only to meet local legal requirements but perhaps to establish the very business case in the target's jurisdiction or to secure funding. At the same time, these structures are also becoming much more complex in many fields, e.g., due to convergence. This is also very much true in IP-rich joint venture exercises where after the deal is done the licensing matrix is typically a map full of different arrows from one direction to another with an aim to ensure for all parties their own space or freedom to operate if you want to call it that, and at the same time, providing a commercially rational scope for the JV itself. While IP rights are not the core consideration in many JV exercises, it should also be noted that if there are disagreements between the owners or one of the parties wishes to create an exit, then the discussion often turns to ownership of intellectual assets and their valuation (of which the parties may at that point have very different views).
Hopefully this helps in your JV efforts and until next time!
Thursday, 18 April 2013
I know that I promised to write about M&A, but it is coming - be patient! I thought that I post this first on the above topic while my M&A blog is still "under construction" as I recently had an opportunity to participated in the panel discussion organised by the Finnish Industrial Property Association and the Finnish Competition Law Association.
Other panelist were top competition law experts in Finland and as I have been doing mainly other things like technology deals, investments and M&A, I must say that I also personally learned a lot and got some new brilliant ideas! Moreover, I must say that I was impressed by these fellow panelists including Mikko Huimala from Castrén & Snellman, Ilkka Leppihalme from Peltonen LMR and professor Petri Kuoppamäki from the University of Helsinki - they are truly in a league of their own!
According to the consultation:
"In the meaning of the EU competition rules, a technology transfer agreement is a licensing agreement where one party (the licensor) authorises another party or parties, the licensee(s), to use its technology (patent, know-how, software license) for the production of goods and services. The rules on how to assess technology transfer agreements are set out in two instruments, the technology transfer block exemption regulation ("TTBE") and accompanying Guidelines. The TTBE exempts certain categories of licensing agreements concluded between companies that have limited market power and that respect certain conditions set out in the TTBE. Such agreements are deemed to have no anticompetitive effects or, if they do, the positive effects outweigh the negative ones. The Guidelines provide guidance on the application of the TTBE as well as on the application of EU competition law to technology transfer agreements that fall outside the safe harbour of the TTBE."
So let's look at the changes from IP lawyer's perspective:
First, exclusive grant-backs (whether to severable or non-severable improvements like in the previous TTBE) are now on the "grey list". This is good issue in particular as the previous competition law-based distinction to severable and non-severable was very confusing in the first place. Remains to be seen what are the practical effects of this as it would seem to be relatively simple task to draft a license grant just a bit differently and get the same end result.
Second, market share thresholds are slightly modified, but as neither IP lawyers nor competition law lawyers, as Professor Kuoppamäki pointed out, review these in real-life licensing situations, these changes are not very relevant in practice. Still more attention should be paid to competitor and non-competitor definition in order to review the right list of clauses from the TTBE.
Third, non-challenge clauses are also now on the grey-list. Difficult issue, especially, if settlement agreements are considered. Also good point was raised in the discussion that this clause may be an issue from the "social contract law" perspective if you think, e.g., a case where an individual inventor who has just licensed his or her patent to a large international company faces with an invalidation procedure, does it sound fair?
Fourth, relationship between TTBE and other block exemptions are also clarified. However, this is still not "bullet-proof" distinction in particular when one needs to consider a distinction between licensing and R&D. In most of the ordinary technology deals in which I have been involved lately, R&D block exemption would seem to be applicable still.
Finally, technology pools and reverse payment settlements I leave outside this blog, but please tell your views on those and I promise to share my opinions.
In conclusion when thinking about Finnish industry in general, I would have hoped for more specific guidance on those contractual measures licensors can use to protect their technology (limitations to own use and R&D are hardcore between competitors and gre-listed between non-competitors). In many cases these agreements are in the grey-zone and I would argue that Finnish entities are typically more often on the licensee-side than licensor- side (some telecom manufacturers excluding) so in addition to market efficiency views typically emphasised by competition lawyers we could also consider freedom to operate view to ensure our domestic incentives to innovate. See more on the below link (unfortunately only in Finnish), and definitely this draft TTBE is worth reading: http://www.jdsupra.com/legalnews/ip-lawyers-practical-comments-on-the-dr-80086/
Wednesday, 27 March 2013
As a continuation of my last blog, I actually promised that I would write a few words about service integrators – those relatively new creatures at least for us lawyers (as there have not been that many “true” service integrator models available). So in brief about the background, multi-sourcing environments have been a very hot topic. Consequently, traditional system integrators have been playing an increasingly important role on the market. To me, it would seem that the main points that distinguish these former system integrators from the modern service integrators are: 1) supplier management; 2) contractual integration; and 3) overall level of responsibility; and finally 4) KPIs (also it should be noted that KPIs are different in this setup). As part of KPIs, service integrators would assume also part of the typical promises an IT department would need to give to their business units. Not necessarily uptimes or downtimes only, but also usability and quality promises.
But this is not all: are there different service integrators or does one size fit everyone? The right answer to this question is, “Of course there are many different varieties!”
First of all, a service integrator could operate as a sourcing strategist and, if that is the case, then an integrator would own and be accountable for the IT, they would govern the vendor relationships and generally be responsible for the governance and sourcing strategy.
An alternative model is that the service integrator acts as a vendor manager. In this case, it would have the E2E responsibility and even contracts with other vendors. The governance and sourcing strategy, on the other hand, would be shared between the integrator and the customer.
So, the terminology is not clear and I do not think that it will be any clearer at least in the near future. Perhaps it is also too optimistic to say that these models would become very popular with Finnish companies this year. While we are in a transitional stage towards something new, as general advice, the scope of an agreement for service integration needs to clearly specify the substance. I hope that this helps to you and next time I will speak about divestments.
Monday, 25 February 2013
I thought that this week I could look back at some IT issues as opposed to investments of which I wrote last time, as after all, this is one of my all-time favourite sectors. So nowadays big data, agile methods and cloud computing with all complexities relating to privacy and data transfers seem to reserve the largest amount of coverage in seminars and press (as some of you may now - we also had a fair share of privacy lectures and discussions last spring!). However, perhaps due to that I decided that I will not speak about these "trendy" themes, but rather focus on contract models and business case structuring which I claim is still slightly neglected area in business-critical IT procurements. So I tell you some background and what we have been doing recently:
In information technology sector, there has been a clear trend towards multi-sourcing environments which is naturally due to specialization and fragmentation trends (these trends can also be recognized to apply generally to the Finnish technology industry, see for example Tuotekehitysverkostojen-uudet-toimintamallit, slightly old but still relevant). While some years ago, most of the deals were carried out with one single vendor. Today, there are several parties involved, and now the focus in on integrators and developing business models of the service integrators.
So where's the beef? Companies use more and more multi-vendor models with the intent to access best-in-class capabilities and improve their negotiation position. Another obvious driver behind this trend is the fact that different IT service providers have different strengths, capabilities and cost structures. From the legal side, the critical challenge caused by this development is to ensure that all suppliers will work together on the arrangement.
As a result, we have seen lots of talking and discussions on operational level agreements or OLAs trying to bind different suppliers participating in a single project to work together. For example, the following issues have been on the agenda:
- SLA sanction mechanism;
- Disaster recovery, testing and similar obligations;
- Creation of ”Fix it first, argue later” – approach across the suppliers;
- Intellectual property ownership questions;
- Escalations and disputes;
- Change management if more than one supplier is affected;
- IT standards;
- Exit; and
- Retendering procedures.
These OLAs have not really been very popular in the past and that is partly due to the fact that IT vendors are naturally not keen on taking liability on their co-vendors' act and omissions (outside ordinary subcontractors of course). However, one of my old friends had a saying that "...if I can get my opponent to accept my contract template, they have already swallowed 90% of my hooks". So we went to consider this further and perhaps one reason why these OLAs have not gained footing could also be that customers have not sufficiently consistently required these already in their RFP or RFQ documents and planned their contractual models accordingly. So we decided to test this and implement novel OLA-based RFP and RFQ templates to be used in connection with collaborative models among multiple vendors with lists of joint carrots to be achieved!
Another solution could also to be to develop service integrators, in other words, companies who will take part of the cost-savings if compared to the multi-sourcing environment in its pure form, but who will take wider role and contractual responsibility for the integration if compared to the earlier system-integrators. It should also be noted that in part of the outsourcing deals there have been discussions on right KPIs to be measured and here the trends has constantly been more towards quality and business related KPIs than slightly old-fashioned “uptime” or “restoration time”.
Next thing is to consider how service integrator models deviate from current existing system-integrator models, but in the meanwhile let's wait for lots of positive feedback from the vendors’ side from the first OLA-RFP/RFQ case!
Thursday, 14 February 2013
Approximately two years ago I was requested to write a column for the Finnish Tekniikka & Talous magazine on the cleantech sector in Finland. In the story, I highlighted some problematic aspects of public funding that are different in this business field compared, e.g., to the game or high-tech industries. Several developments have taken place since. For example, Finnish start-ups have received approximately €100M of funding from the so-called Vigo Accelerator Programme. In this blog, I wanted to share a lawyer’s experiences of deals with Vigo accelerators and why entrepreneurs should be careful with these deals despite the very high-level political support and popularity enjoyed by this programme.
The Vigo accelerator programme was launched in 2009 to address perceived gaps in the high-growth venturing ecosystem. According to a recent report published by the Ministry of Employment and the Economy (TEM), the programme "…has created a new channel that makes world-class competence and private funding available to growth companies, enabling the start-up of high potential growth companies and their entry into the international markets" (read publication from here). Vigo seeks to connect innovative business ideas that have international potential with internationally experienced business professional and private and public growth finance (TEM, 2012). According to TEM’s study, it has been “…designed to provide contributions to the Finnish entrepreneurship ecosystem:
- Accelerate growth and internationalization of new firm
- Help high-potential new firms attract equity funding, both from Finland and abroad
- Strengthen high-growth capability (both managerial and governance) in Finland
- Strengthen the links between the Finnish high-growth venturing community and its foreign equivalents
- Create a network of business accelerators in Finland to address growth bottlenecks in the post-incubator phase”
Thus, the programme has many objectives but what is unclear is whether it actually promotes more the interests of the accelerators or those of the entrepreneur. In many cases, start-ups are in need of funding and, naturally, in such case they may have to content with even very strict provisions from venture capital investors to ensure the ability to continue their business as there are limited funding possibilities available. Should Vigo be any different? To my view it should, because accelerators are working as instruments in public financing and what I consider problematic is that public funding seems to praise venture capital activity and fund formation while the core focus should be on the growth and internationalization of new firms. And if these companies are successful, they will certainly attract venture capital investments.
In several cases where we have been involved with Vigo accelerators, the term sheet proposals received by the entrepreneurs have systematically failed to reflect the public-funding rationale behind the program.When a promising, in our opinion at least, start-up commented on an accelerator's term sheet, the feedback was, "we know it [that our proposal is completely unreasonable] but we’ll give to you access to public funding". I wanted to give six real-life points that at least should be recognized and considered by entrepreneurs:
First, if the entrepreneur has not done "everything possible" to secure the subsequent funding, the accelerator will get additional X % ownership of the entrepreneur's company – we will all know what to think about this kind of requirement;
Second, the entrepreneur must commit to a monthly management fee that varies from one to several hundreds of thousands of euros depending on the contract term (How much services from different top-level experts from different sectors could one buy with this amount of money as opposed to support from one VC? Just a thought and personally I am pleased to see that restrictions are recommended...);
Third, in addition to the management fee (and ignoring that it is already very significant), there have been cases of free-of-charge "sweat equity", typically 10% or higher or in tranches;
Fourth, anti-dilution protection has systematically been full ratchet (e.g., an investor who pays €2 per share for a 10% stake would get more shares (or conversion rate would be adjusted) in order to maintain that stake if a subsequent round of financing were to pass at 1€ per share and, as a result, the early round investor's price is actually reduced to the price of the new issuance).
Fifth, existing owners are required to work in the company if they wish to retain their share ownership;
Sixth, owners give accelerators normal reps and warranties without limitations or up to the investment amount.
I do not say that all Vigo accelerators have the same principles, but I call for discussion on whether the personal role of the accelerators in these companies should significantly be more restricted or controlled, as otherwise there seems to be conflicting interests between their personal benefits on the one hand and the interests of the entrepreneurs on the other. If we want to support the Finnish venture capital industry, then there should, in my opinion, be a direct public support mechanism available and not one that facilitates the venture capital industry at the expense of the entrepreneurs. As one solution, I would also continue to support an idea that we introduce a mandatory standard agreement model for accelerator-entrepreneur relationships that would equally take into account the interests of both sides.
Monday, 4 February 2013
I have recently been engaged in discussions on the proper way of drafting contracts. As I personally have been engaged in patent and technology litigations, I often tend to take a dispute-oriented approach to contract drafting. For example, I consider the ramifications of the contract being argued in court, who would have the burden of proof, whether I make a legal compromise by inserting intentionally vague provisions (would it be interpreted to our benefit or not), and so forth.
However, there is also another realm, which can be qualified as a “deal-lawyer-type” of contract drafting, where the main focus is to get the deal through one way or another. Here the issue is already somewhat different: you may be limited by time or expenses or you may have an opportunity to identify only some of the issues that you consider as the greatest deal-breakers in the deal.
An excellent example of these distinctions between different drafting types can be found in patent licensing with its carrot and stick licensing approaches. In the former the licensor voluntarily grants a license and enters into a commercial relationship while, in the latter, the patent holder threatens to sue the licensee for patent infringement if the licensee does not pay for a license. It is very likely that in the latter case, the agreement would, at some point, be tested in court so you should be careful when drafting, keeping the forthcoming litigation constantly in mind.
However, when talking about handling an assignment it is not only about how we draft agreements but what is our scope and role as advisors in overall. Steven M. Davidoff, professor at the Michael E. Moritz College of Law at Ohio State University, recently posted lessons from a collapsed deal involving Goldman Sachs, which was in a legal dispute over its role as the advisor in the sale of the speech recognition company Dragon System.
While I fully agree with what one commentator said, that there is only one thing that is more dangerous to an M&A client than inexperienced bankers and lawyers and that is “...if the client reckons himself smarter or better at doing deals than the bankers and lawyers who are being paid to advise him/her.” It is not very often than people with legal education do have the business acumen to create also “commercial win-win deals” for their clients. That “weak spot” should perhaps be the target of the personal development of all us lawyers to make us also more solution-oriented and to make the claim “if the world were full of lawyers, there would be no deals executed” less true.
Take a couple of minutes and read this through as this outlines the importance communicating the working methods and scope clearly – to ensure that the clients’ expectations are met. And yet, in this case, it still might not have been enough…