One of the most difficult situations a business lawyer encounters is when a client wants to enter into a deal or relationship that the lawyer believes is a bad one for more than purely legal reasons. After all, the most beneficial and rewarding attorney-client relationships are those where the client views the attorney as not only a legal advisor, but also as a member of the strategic/management team and a trusted confidante. As such, the lawyer is faced with a dilemma – advise the client of the concerns and the reasons for them (which can be risky for the relationship), or simply go along with the client’s wishes and execute the deal while, of course, protecting the client as much as possible. This situation is fresh in my mind, as I have dealt with it in the past week.
In reality, while I agree this is a challenging situation, the appropriate course of action is relatively clear. In my opinion, the lawyer should absolutely share his/her concerns with the client and the basis for them. This should not be done subtly or for the mere purpose of covering the lawyer’s backside in the event the deal or relationship ends badly – rather, it should be done so that the client is fully informed of the attorney’s concerns and can carefully consider them.
Once the attorney has advised the client of his concerns comes the next step – what if the client wants to proceed with the deal anyway? I’ve found that different lawyers take different positions in this situation, but my position is clear – so long as the client’s position is fully legal and ethical and the client is fully informed, my job is to make the deal happen and protect the client as much as possible. After all, it’s the client’s ideas, creativity, risk tolerance and ultimately money that have allowed the client to be successful and that are at risk in any business deal – not mine. Just like the customer is always right, the client is always the one who should make the final decision and bear the final responsibility for a business deal. My job is to advise, inform, protect and execute.
Part 1 discussed some general ways to avoid surprises in business transactions. Here, I’ll apply some of those principles to a hypothetical transaction.
Assume a longstanding attorney-client relationship – communication and trust are well established. Client plans an acquisition of a competitor. Here are some key steps to avoid surprises:
First – an initial discussion between attorney and client so that the attorney knows as much as possible about the target company and the desired deal terms. If there are other consultants involved (e.g., accountants, investment bankers, lenders, valuation experts, etc.), they may also participate, since communication among consultants may be just as important as communication between attorney and client.
This may be the most important step to avoid surprises – every deal is not the same, and all parties must understand this specific deal! Of course, this will be the attorney’s first opportunity to advise the client as to, e.g., recommended deal structure, risks, potential challenges, etc. – this type of advice should be ongoing throughout the deal.
Second – a discussion as to the likely stages and desired timing of the deal, which would typically (but not always) include:
Preliminary Due Diligence;
Initial discussions/negotiations between parties as to deal terms (will/should the attorney participate?);
Term Sheet or Letter of Intent;
In Depth Due Diligence (again, will/should the attorney participate?);
Negotiate/Execute Detailed Transaction Documents (attorney and client (other consultants?) should work closely here);
Pre-Closing Conditions and Contingencies;
Post-Closing Conditions and Follow-Up.
This discussion may be initiated by the attorney, but it must be interactive, and tailored to this specific deal. The key is for attorney and client to understand and expect these stages and to communicate any specific issues or concerns early in the process.
Third – the attorney should prepare a transaction outline or checklist, including responsible party, deadlines, status, etc. This should be continually updated by attorney, client and any other consultants to ensure that everyone knows where the deal is and who’s doing what at any given time.
Fourth – throughout the process any challenges, delays, unforeseen developments, etc. must be immediately communicated to the entire team, with an assessment of how they will affect the deal, and hopefully with a plan as to how they will be addressed.
While it may be obvious, the keys to avoiding surprises (and the related costs and consequences) in business transactions are planning and communication from the very beginning and throughout the process. Challenges will arise, but they should not be unforeseen.