Chaim Sapirman on the benefits of a trusted legal adviser in the early stages of the acquisition process

In the early stages of the acquisition process, a trusted legal adviser can play a vital role not only in helping companies evaluate the various aspects of the offer but also in facilitating the relationship between the seller and the prospective buyer, says Toronto corporate lawyer Chaim Sapirman.

In terms of first steps, explains Sapirman, partner with Torkin Manes LLP, a lawyer can work with clients to evaluate the structure of the transaction itself, such as whether the deal will be a share sale, an asset sale, a straight buyout, amalgamation/merger, or other type of arrangement done.

“Each one has its own pros and cons with its own set of tax considerations and consequences as well as implications for the operations of the business. The steps that have to be taken to complete a particular transaction will differ depending on the nature of the structure,” he tells AdvocateDaily.com.

Lawyers will also help the seller understand the scope of specific obligations that are going to be part of the transaction itself as well as any potential ongoing responsibilities or liabilities after the deal is completed.

Part of this, says Sapirman, involves giving the seller a sense of the legal parameters that will serve to value an offer — such as how and when the purchase price is going to be paid, the scope of the covenants contained in the agreements, the types of indemnification clauses the purchaser is requesting, et cetera.

For example, he says, will the purchaser be looking to hold back part of the purchase price at closing, whether in an escrow or as an earn-out that the seller will have to work to earn after closing, or is the purchaser willing to pay it all up front?

“All of those factors go into determining the value of an offer from a legal perspective and sometimes a seller may be willing to take a lower purchase price, with all of the cash paid up front, than accept a higher purchase price where it’s either paid out over time or will be paid based on the results of an earn-out formula.”

Even at the early offer stage, says Sapirman, a trusted legal adviser can identify third-party impediments to the deal, such as any governmental or third party approvals applicable to the particular businesses, such as third party consent under a contract, landlord consent to a change of control or perhaps notice to and/or approval from the Competition Bureau.

“These kinds of factors should be identified right at the beginning, so they don't become an impediment at a later stage,” he says.

A trusted legal adviser will also help protect the seller’s ability to exit the deal at either no or low cost, says Sapirman.

“That could come up for a variety of reasons — the relationship breaks down, the client just decides not to do the deal, or something comes up as part of the due diligence, and the client understands that it may be an obstacle to closing that cannot necessarily be overcome, and if they proceed to close the deal it may result in a significantly reduced purchase price, so it’s not worth it for them to continue the deal at this time.

“We want to give them the ability to get out of the deal but without it costing them too much by way of a penalty or break fee,” says Sapirman.

In the later stages of the deal, after the letter of intent is completed, parties may begin to misinterpret intentions or motivations, whether as a result of negotiations or delays; a lawyer can add significant value by helping the buyer and seller maintain their relationship.

“A trusted adviser can really help a client assess whether the posturing, negotiating and/or delay are pretty standard and expected, or whether there’s something a little bit deeper here that may or may not be concerning,” says Sapirman.

“It’s really about facilitating that relationship between the buyers and the sellers and almost acting as a filter — not letting the legal documents and the legal parameters dictate the nuances of how that relationship develops.”

Ultimately, says Sapirman, the deals that tend to get completed more successfully, efficiently and happily are those where all advisers are aligned sooner rather than later.

“When just the accountants and the investment bankers are finalizing an offer letter without the lawyer’s involvement, oftentimes, material components of what should have been agreed to up front are missed,” he says.

“Conversely, when a lawyer does it in the absence of any sort of financial or business advice from the other advisers, we may miss the financial or the valuation concepts or some nuance of how the company’s run or how the financial statements are prepared, and end up with the wrong terms in the offer letter or the term sheet, and then that only becomes an issue later on. Then, the parties are already deep in, and now there are mismatching expectations of how things are going to unfold,” adds Sapirman.

“Where we get aligned much earlier on in those transactions, you tend to weed out a lot of the problems that come up later.”