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.
G.
Bargaining.
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.
Pre-negotiation Preparation
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.
It Begins
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.
Opening statement?
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.
Substantive exchanges.
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.
Handling conflict.
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.
Bargaining.
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).