Lessons Learned In The Trenches Of Two Big NYC Law Firms

by Scott Edward Walker on December 9th, 2009

Introduction

My blog post last week addressed angel financing and included five legal tips for entrepreneurs to help them through the angel financing process.  I had intended to post a part 2 (adding five more tips), but I thought I would try something different to break things up a little.  Accordingly, below is a brief video of three lessons that I learned in the big-firm trenches as a young corporate associate in New York City.

Oddly enough, I actually look back with fondness on those eight years (including all the all-nighters and weekends working on deals) because of the solid training that I received – which I can finally appreciate practicing law out here in California.  Here are the three lessons: (1) do your due diligence; (2) watch-out using forms from other deals or off the web; and (3) create a competitive environment.  This is part one of an ongoing series.  (Note: videos are tricky and can put some people off; thus, I have also included below the substance of the video in written format.)

Lesson #1 – The Importance of Due Diligence

Let me set the scene very quickly:  I’m a second-year associate, and my firm is representing Sony in connection with its acquisition of CBS Records (a $2 billion deal).   I’m spending 15+ hours a day at Blackrock, the CBS Building in New York City, reviewing corporate documents as part of a legal due-diligence team of six other corporate associates.  We’re all young and inexperienced — and we really don’t know what we’re looking for.  But then we found so-called “change of control” provisions in the contracts for Michael Jackson, Bruce Springsteen and some other major artists, which provided that if there were a change of control – e.g., if Sony bought CBS Records – the contracts would automatically terminate unless the artists consented in writing.  Obviously, these provisions were very important to Sony – and the value of CBS Records would be much less if those artists did not consent.  So there was my first lesson: the importance of legal due diligence. 

If you’re buying a company or investing in a company (or if you’re selling a company and getting stock as part of the purchase price), you have to get the lawyers and business guys (and gals) to review the material contracts.  Entrepreneurs must understand this – and they also must understand that if they’re trying to raise capital, the prospective investors (including angels and VC’s) are going to conduct legal due diligence, and thus all their papers need to be in order; and contracts (such as IP assignments and employment arrangements) need to be buttoned down.

Lesson #2 – Watch Out When You’re Using Forms from Other Deals

Here it is a couple of months after the Sony-CBS Records deal closed, and I get tapped for another major acquisition; and the senior associate on the deal instructs me to take the first crack at the acquisition agreement.  Being a clever guy, I figured – OK, I’ll just take the agreement from the Sony-CBS deal I just worked on, and mark it up, plug in the new deal terms and change the names.  So I got a copy of the executed agreement, I mark it up, I give it my secretary and then send it to the senior associate for her review.  Little did I realize that I had included a number of pro-seller provisions that had been negotiated by Cravath, which is the prestigious law firm in New York City that represented CBS, the seller.  Boy did I get a chewing-out from the associate (luckily it wasn’t a partner).  The lesson, of course, is that you have to be very careful when you take agreements from other deals and start using them for your deal.  So when you are playing lawyer and pulling forms off of the Web, you better remember that the agreements are final, executed agreements, which have been negotiated often over many months and reflect input from both sides of the table.

Lesson #3 – Create a Competive Environment

Now I’m a third-year associate and I have two deals on my plate: one is a divestiture – the sale of a division of a multinational corporation being auctioned by an investment bank – and the other is the sale of a private company to a competitor (with no bankers involved).  In both deals, my firm is representing the sellers, but as we worked our way through the negotiation process of each deal, we ended-up with two completely different agreements with respect to the material legal provisions.  In the auctioned deal, because the ibanker was able to play the prospective buyers off of each other and create a competitive environment, the final agreement was extremely seller friendly (including broad materiality qualifications, a huge basket and a cap on liability of 10% of the purchase price).  In the private-company transaction, there was only one prospective buyer, and he knew the seller was anxious to sell and thus was playing hardball.  Accordingly, in that deal, the deals terms ended-up being extremely buyer friendly, including a big escrow of the purchase price and a cap on the seller’s liability equal to 100% of the purchase price.

The lesson I learned here, of course – which applies to all deals – is that you must create a competitive environment (or the perception of same) in order to have strong negotiating leverage.  (See tip #3 of my post “Doing Deals with the Big Boys: Ten Tips for Entrepreneurs.”)

Tags: acquisition, angel financing, big firm, change of control, divestiture, due diligence, law firm, Lessons Learned, tips