Drafting & Negotiating “the Deal”-Module 2 of 6
Module II. Drafting & Negotiating “the Deal”
Based on your frame of reference (your experience as a lawyer/negotiator and businessperson, your knowledge of and relationship with your employer, your cultural background, etc.), here is the outline you might follow as you prepare for and step into a particular negotiation (any actual negotiation will not be nearly so orderly…).
I. Pre-negotiation Preparation
A. Information gathering.
B. Assessing bargaining strength.
C. Determining objectives. What do you really want? What is your bottom line? Preliminary assessment of reality.
D. Likely sticking points.
E. Concessions you are prepared to make and your strategies concerning how to make them.
F. Negotiation style (including environment if negotiation sessions are at your place) and psychology to be employed (at least initially).
II. Negotiating the Negotiation
A. Where will it be? Your place? Their place? Neutral site? Web-based? Other?
B. When will it occur? Will more than one session be scheduled in advance?
C. How long will the (or each) negotiation session last? Policy on taking breaks (biological, food, private discussions…).
D. Order of negotiation. Most difficult issues first? Least difficult issues first? Business terms first? Legal issues first? Some combination?
E. Who will be the negotiators? Will they have ultimate decision-making authority?
F. Will written proposals (term sheets, deal memos, etc.) be exchanged prior to the first live negotiation?
III. It Begins
A. Small talk or no?
B. Opening statement.
C. Substantive exchanges.
D. Further due diligence.
E. Handling conflict.
F. Collaboration versus competition.
H. Reassessing everything (and reassessing and reassessing).
IV. Negotiating from Contract Drafts
A. Which lawyer will write and submit the first draft?
B. How will the “back and forth” process work?
C. Degree of CEO involvement.
D. Getting to “yes” or concluding with “no.”
V. Execution of document(s) or return of materials per nondisclosure agreement.
You are the CLO on the buying end. What do you want to know? First, you want to know as much about the other company as reasonably can be learned. Much of this will have been learned in the due diligence process you have conducted. But there is more to due diligence than what the other party has formally disclosed to you. You will want to make as many telephone calls (or send as many emails, texts, etc.) as you can to see what others (their customers, their vendors, their former employees, other relationships) in your industry think of the other party. Reputation is very important. You will want to surf the Internet as deeply as possible. You will want to pick the brains of your own company’s employees who may have relevant information to share. You will want to acquire any public documents (such as from government agencies) concerning the other party as you can. Even after your initial investigation, you always want to be in information-gathering mode. Information can mean everything. Additionally, you will want to know as much about the individual person you will be negotiating with as possible. How old is she? What is her life background? Where did she go to law school? What has been her legal career? How much significant negotiating experience does she have? You will want essentially these same questions answered about the other party’s CEO, as obviously he will be an integral part of the negotiation as well.
Assessing relative bargaining strength.
You will want to begin the process of assessing your relative bargaining strength; that is, your bargaining strength relative to that of the other party. This assessment, which is fluid and may well change during the course of the negotiation, may be the most important bargaining chip of all. Bargaining strength is the relative ability of a party in a negotiation to exert influence over the other party. If both parties are on an equal footing they have equal bargaining strength (whether it is exercised in that way is a different question), but where one party has a huge bargaining-strength advantage, the negotiation, for that reason alone, may turn out to be rather lopsided. In a business-to-business transaction, the greatest difference in bargaining strength usually has to do with sheer size. There are many other factors, however, that contribute to the idea of bargaining strength, such as the “need” one side may have (or not have, as the case may be) in consummating the transaction, the number and quality of alternatives to the proposed transaction one side has that the other side does not or may not have, and the current state of the market or industry to which the proposed transaction relates.
Determining objectives. What do you really want?
What is your bottom line? Preliminary assessment of reality.
It is a very serious mistake not to know what you want, what your bottom line is, and how you think you might end up in the actual negotiation before the negotiation begins. Based on serious research, you should set a goal that is probably slightly too high to reach (in the case of buying, usually meaning a relatively low purchase price). You also should firmly set a purchase price that you would not exceed under any circumstances. Finally, you should give considerable thought to what reasonably could be considered a “fair” price given all the circumstances. “Fair market value,” by the way, is defined simply as the price one will pay that the other side will accept (or vice versa).
Likely sticking points.
To the extent you can identify such issues preliminarily, they likely will be on your side of the equation — not theirs. For instance, for reasons the other side does not need to know, you may need to close this transaction, if it is to be closed at all, by a date certain (this may be because you no longer will have certain cash reserves available or for any number of reasons). One of the reasons you want likely sticking points to be preliminarily known to you is that you may need to address them as early as possible in the negotiation and obtain a commitment (whether contractual or not) that such issues have been agreed upon.
Concessions you are prepared to make and your strategies concerning how to make them.
One truism in negotiating is that never should you “give” on an issue in a negotiation unless you “get” something in return. Therefore, good negotiators always have a number of items in the proposed transaction that they are willing to bargain away because they know they are very unlikely to end up with them (these items should not be too ridiculous as the other side likely will not fall for that). So when the other side says “no” to a certain item you want, you can give that up but only in return for the other side giving up an item of relatively equal value or letting you have another controversial item you want (of course, if they are playing the same game, all of this may mean very little). Another value to this “game” of including such items in your original proposal is that you actually may end up obtaining one or more of these things….
Negotiation style (including environment if negotiation sessions are at your place)
and psychology to be employed (at least initially).
Based on your information gathering and on discussions with your CEO, you should have a negotiation style in mind before negotiations begin. The style might be downright hostile at the one extreme or extremely friendly and cooperative at the other extreme. Usually, you probably would want to be somewhere in between, say, friendly but firm. If the negotiation is to be conducted at your place (or at a place you control), do you want the other side to feel warm and fuzzy or at least slightly uncomfortable? There is a strategy to each — to be determined, again, by your information gathering. There are many “psychologies” to negotiating, such as playing on the other side’s emotions in various ways or engaging with your CEO in “good cop/bad cop” role playing or acting irrationally and abruptly (though temporarily) leaving the negotiation site or making yourself appear “dumb” to lead the other side to the false conclusion that they will be able to “get over on you” or using other psychological methods to lull the other side into a “false sense of security.” There are simply too many to mention, but the main caveat is that to engage in such game playing, the negotiator should be quite skilled lest she end up with that proverbial “egg” on her face.
Negotiating the Negotiation
Where will it be? Your place? Their place? Neutral site? Web-based? Other?
The site of the negotiation can be extremely important. In the modern electronic world and given the expense of travel, it is very common nowadays for the negotiation, especially if it involves a number of persons on each side (which is fairly common), to be conducted online. There are any number of services, such as “Go To Meeting,” that provide such “space.” These services are particularly useful where they include the ability to see one another (and not just see text or graphics) because body language can be very meaningful in the negotiation process. It should be noted that “reading” body language is an art in itself; one can be quite fooled by body language that one only thinks he understands or where the other side is purposefully displaying “false” body language. Where the negotiation is to be at a single physical location, neutral sites work well (bargaining position often dictates how the whole “site” issue is resolved).
When will it occur? Will more than one session be scheduled in advance?
Timing can be critical. If your side’s information gathering has resulted in your knowledge that the other party is in somewhat critical need of selling and by a certain time, then the strategy on your side would be to push the negotiation as far toward that date as possible. On the other hand, if your desire to buy is lower than the other party’s desire to sell (assuming you have no knowledge that the other party critically ay need to sell by a certain time), you might want to be ambivalent about setting the initial negotiation date. In any event, it is good to discuss at least some details of the negotiation sessions beyond the first one because it is a fairly rare occurrence for, say, a complex corporate buy-sell transaction to be consummated in a single session.
How long will the (or each) negotiation session last?
Policy on taking breaks (biological, food, private discussions…).
To avoid these ideas being used as negotiating weapons and just because it is reasonable to have these issues decided on a preliminary basis, it is good to know how long each negotiation session will last before some time intervenes. For example, some negotiations last half a day only with the other half-day used to prepare for the next session. At any rate, they should not last too many hours in a row for fear that bad decisions will be borne of fatigue. And there should be a negotiated policy on biological breaks and food breaks and short breaks simply for the purpose of each side being able to caucus with itself.
Order of negotiation. Most difficult issues first? Least difficult issues first?
Business terms first? Legal issues first? Some combination?
There are varying philosophies on whether first to discuss the likely “sticking points” and more difficult issues or whether to start off with the successes of negotiating items that will be much easier to decide. Both business terms and legal issues can be quite difficult or quite easy. Some negotiators favor trying to get past the tough part first because if that cannot be accomplished, having negotiated the less difficult issues will have been for naught and, therefore, a waste of everyone’s time. On the other hand, some negotiators believe that negotiating the “easy” part first can create such goodwill that the difficult issues will be easier to surmount. Often, the best answer to these questions is the nature of the individual negotiation.
Who will be the negotiators? Will they have ultimate decision-making authority?
Not much is worse in a negotiation than to think you have reached agreement only to discover that the person you are negotiating against does not have the ultimate authority to make the deal. What that means, of course, is that the other side’s negotiator(s) must go back to the company and get the ultimate decision maker to agree with what they already have “agreed” to. Most negotiators believe it is folly to negotiate in this manner. If the ultimate-authority person cannot be there, the thinking goes, there is no need to negotiate.
Will written proposals (term sheets, deal memos, etc.)
be exchanged prior to the first live negotiation?
Generally, it is quite useful for some written information to be exchanged before the live negotiation begins so that each side will have a starting point both in terms of what it wants to negotiate for itself and what it does not want to accept that the other side has proposed. The term sheet, as previously discussed, clearly should have been agreed to preliminarily by the parties; short of that, there may not be much need to negotiate, especially where the parties are extremely far apart on price. Sometimes, a preliminary draft of a contract may have been written by one side and passed along to the other side.
Small talk or no?
The tenor of the negotiation is important. First impressions, as the saying goes, cannot be taken back. Some negotiators believe it is to their advantage to shake hands and start negotiating with great formality and little or no exchange of pleasantries. Others, however, firmly believe that it is very helpful to spend a fair amount of time in the very beginning getting to know the other side just a bit and even ingratiating one’s self to the other side to the extent possible in such a context.
Sometimes, perhaps after some “small talk,” each side will deliver what might be called an “opening statement,” not to be confused with the opening statement in a trial. This is just a way for each party to set forth to the other side, in very broad terms, what it hopes to accomplish and perhaps even why it is interested in consummating the potential transaction. This, too, could be thought of as small talk because generally it is not meant to be substantive as to the transaction itself.
Everything to this point has led us to the real meat of the situation: the discussion of the substantive issues. If the “tough” one are to be discussed first, often one side will bring one up and then the other side will bring one up, going back and forth through such issues. It is very unlikely that all these issues will be decided the first time they are discussed. Someone on both sides is tasked with note taking. In some situations, the parties agree to the recording of each negotiation session so that, in addition to preservation, reference can be made to the recorded discussions in coming back to a particular issue not actually agreed upon the first time through. As discussed below, at some point, the proposed transaction will begin to be reduced to writing.
Further due diligence.
Assuming that the proposed transaction is negotiated over several negotiating sessions, information gleaned in the first sessions can lead the party receiving the information to desire to engage in further due diligence, whether that means independent research or asking the other side to divulge more information. Due diligence is a very fluid process.
While some negotiations are conducted with very little attendant conflict, others can get out of hand. There are various ways to handle such conflict. Depending on its nature, it can be sloughed off and paid little or no attention to or it could demand a strong response up to and including concluding that negotiation session or withdrawing from the proposed transaction altogether. Except in the lamest of negotiations, some posturing is very likely to occur. Of course, who is to say the conflict may not be initiated by your side.
Collaboration versus competition.
If the value of the proposed transaction is relatively minor, the negotiation process often is quite collaborative and, therefore, relatively easily accomplished. As the value of the proposed transaction rises, the negotiation usually becomes far less collaborative and far more competitive; i.e., where the stakes are high, so is the difficulty of getting a deal done.
Some say life is mostly about bargaining, and it may be. Offer, acceptance, and consideration flowing both ways is the norm from the young person promising her mother she will make straight A’s if she can just participate in extracurricular gymnastics to the salty negotiator exchanging something he wants for something the other side wants. Bargaining may have some science to it, but bargaining mainly is an art. Becoming a really good bargainer requires the acquisition of wisdom, and wisdom is acquired only though age and experience (often aided by education and mentoring).
Reassessing everything (and reassessing and reassessing).
As the negotiation continues, the negotiators should begin to get a “big picture” view. How are they doing? Is the negotiation coming out as they expected? Are they, say, not reaching the zenith of the transaction but achieving reasonably more than their bottom-line position? Or is that not the case at all. Under any circumstances, and especially before all the really important items are bargained for, negotiators should step back and look at how the negotiating has gone, how it is likely to go from there, and what can be done to reach desired goals. This must be done almost constantly.
Negotiating from Contract Drafts
Which lawyer will write and submit the first draft?
Though there is no hard and fast rule on when a proposed contract will be introduced into the negotiation process, a threshold question concerning it — and an extremely important question — is who will be the drafter. Unless a negotiator wants the initial drafting process to be at the financial expense of the other side, negotiators almost always want to author the agreement because there can be great advantage to that; e.g., some drafters are just hands-down better drafters than others. While there is well-settled law that posits that contracts are to be “strictly construed against the drafter,” virtually all sophisticated contracts either contain a provision to the effect that the agreement was mutually drafted (whether it actually was or not) or it is clear from the negotiation circumstances that the agreement was not drafted by a single party and then simply agreed to by the other side.
How will the “back and forth” process work?
Generally, the back and forth process works by electronic transmission of the draft agreement from the initial drafter to the other side with the receiving side then “marking it up” electronically. Given the sophistication of word processing software in this regard, this process has become the norm and it generally works very well. It is often the case that this process takes as long or longer than the live negotiation process. Very often, many of the provisions proposed by one side or the other to be in the final agreement never were discussed during the live negotiations. The drafting process is where the agreement goes from 60,000 feet into the weeds. It is true that “the devil is in the details.” It is not at all uncommon for protracted negotiations to completely fall apart over boilerplate issues such as where a lawsuit relating to or arising out of the transaction is required to be filed.
Degree of CEO involvement.
CEOs (or their designees) are, of course, integrally involved in the negotiation process, mostly in terms of the business side of the deal, leaving the legal side of the deal to the company’s attorney (or outside counsel as the case may be). But that is not at all to say that CEOs (assuming here that she is a non-lawyer) are not and should not be very involved in how the legal side of the contract finally is written. By no means is “law” only for lawyers. A highly experienced CEO is a thousand times better arbiter of the legal language (such as the boilerplate) than a lawyer with little experience; i.e., law school teaches a person how to think like a lawyer, but actually being a highly competent lawyer requires experience.
Getting to “yes” or concluding with “no.”
In the end, the transaction is either consummated or it is not. The longer the negotiations go on (at the live negotiation and drafting levels), the likelier it is that the proposed transaction will be successful. The truth is, the longer the negotiation, the more psychologically interested in ultimate success the players become. Virtually no negotiator wants to see all that work go down the drain of a failed negotiation. But, to be sure, sophisticated, complex, and long-term negotiations do fail — and for a myriad of reasons.
Execution of document(s) or return of materials per nondisclosure agreement.
Once the agreement is final, the various documents are executed and their performance begins. It is not at all uncommon for the performance of the contract to last over a considerable period. For instance, it is not at all unusual for such agreements to contain a “hold-back” provision under which a portion (say 10%) of the consideration to be paid by the buyer to the seller is held in reserve for a time (say a year) pending no material surprises and total contract performance by the seller. Should the proposed transaction fail, the parties then, pursuant to the nondisclosure document that started the entire process, must return (or sometimes destroy) all the documents it acquired through the due diligence process from the putative seller (keeping no copies) and otherwise, again pursuant to the agreement, refrain from disclosing to others or using to its competitive advantage information it acquired by virtue of the proposed transaction and the negotiation process (though, realistically, it is difficult for the putative buyer simply to forget everything that was learned).