BIZ BITS: Avoiding Foot-faults and Other Unnecessary Deal Risk
Miller & Martin PLLC Blog | December 05, 2018
Author: David Spiller
In this blog post, Miller & Martin attorney David Spiller addresses how seemingly minor deal faults have the potential to impact transaction outcomes in a major way.
As an avid “club” tennis player, meaning that when I play for money it’s for my local tennis club’s paltry $300 purse and not more, it frustrates me when my opponent foot faults – that is, drags his or her toe over the baseline before hitting the ball on the serve. If there were a line judge (there’s not) and the call was made, my opponent would lose that serve and possibly the point (because getting into the court faster provides an unfair advantage). In the high reaches of professional tennis, a foot fault call can cost a player hundreds of thousands of dollars, like it did Serena Williams in her loss at the 2009 U.S. Open Semifinals, which might not have happened but for such a call at 15-30, 5-6 in the second set.
In business deals, I’ve seen a number of foot-faults and near foot-faults by deal players – business persons, lawyers and other advisors – that, while minor in nature, had or could have had some not insignificant consequences. In tennis there’s a mantra – probably exemplified by Serena Williams or Rafael Nadal – that you always go the extra mile and play “one more ball.” Even if you barely get a ball back, your opponent may choke and hit an easy shot out. In business deals, the parallel is to care about the details and think about all the possibilities, even if risks seem remote. At least then you can act with an appropriate appreciation of what’s at stake.
A near foot-fault I saw several years ago was quite dramatic. My private equity sponsor client was acquiring a substantial business, with new equity and new debt on the business. Closing was set for a Friday, which was the end of the month, and had to be completed by the wire deadline that afternoon. Acquisition and debt documents, including prior debt payoffs, had all been prepared and dated for a closing that day. Seller counsel was supposed to send us, as buyer counsel, his client’s signatures to all documents electronically that morning first thing, so we could review them and also send them to the new lender for it to process in time for funding. But Seller decided to make a dramatic delivery – he signed his many signature pages, did not scan and email them as directed and then took off, alone, in his private plane on a rainy day to fly to the city where his attorneys officed. Ultimately, despite taking a few hours longer than anticipated (and being out of contact for that entire time), seller landed just in time to deliver his signature pages and for the deal to close on the day as planned. But if he hadn’t made it in time, there would have been many hours of attorney time to fix all the documents (i.e., additional cost) and other business complications (i.e., additional executive time) because the closing would not have happened at the end of a month when payroll and the books were closed. And if he had crashed and died, a remote possibility granted, the deal would not have closed and his family, who were not involved in the business, would have had to open and close out his estate (which takes time) and then possibly try again to sell the business; whether my client would have waited another six months for probate to finish is not clear. All the seller had to do to avoid these risks was send a PDF of his signature pages before flying – he could have still flown in the originals to enjoy the drama of the day.
A less dramatic, but material, foot-fault that I’ve witnessed was one of process. My client was buying a business being brokered by a sell-side investment banker and sold by a private equity fund. The banker was “running a process,” meaning it was soliciting bids from multiple potential buyers by stages – first, several potential buyers submitted indications of interest setting forth the purchase price range they envisioned for the business; second, after a financial diligence period, the banker invited a few of those interested to submit more refined letters of intent, with more detailed provisions about the purchase price and other terms; and third, the banker and seller negotiated a letter of intent with the winning bidder, my client. Interestingly, the private equity fund seller chose to negotiate the letter of intent by responsive letters, meaning that the final letter of intent consisted of my client’s proposed letter of intent, a response letter from the seller and a further response letter from my client. My client and I tracked how each deal term was negotiated through these three letters, including a contentious deal term regarding indemnification exposure of the seller.
While a letter of intent is not binding (other than with respect to confidentiality and sometimes exclusivity), its terms are generally followed unless new relevant facts make following such terms unreasonable. Here, when the contentious indemnification issue came to the fore in the negotiation of the full definitive documentation, the seller claimed it had not agreed to the exposure my client desired. My client and I responded by carefully laying out how that indemnification exposure had been discussed in the three letters and how seller had not objected to our last position, in our final response letter. Seller realized it had not been paying close enough attention to the process and was forced to acknowledge that refusing to agree to our position would be tantamount to renegotiating the deal agreed upon in the letter of intent. So, we won the point, a potentially crucial one if there was ever to be an indemnification claim against the seller. The foot-fault lied either in seller’s not requiring one final, cumulative letter of intent (which would have been much easier to read than three letters, but this was the seller’s “process” to run), or in the seller’s failure to fully read and understand the three letters together, or its advisors’ failure to advise in this regard. It’s hard to see how little details in non-binding LOIs matter until they do, just as losing your first or second serve in a point seems like no big deal until it costs you a crucial game.
Other examples abound, particularly in services agreements – e.g., confusing invoice dates with actual payment dates (important if you need payment by a certain date, but have only agreed you may invoice by that date); not getting permission ahead of time to use subcontractors where you are providing services, especially subcontractors in foreign locations; or failing to make expressly clear that a deal-specific term in a Statement of Work controls over a conflicting term in the general Master Agreement between the provider and the customer, especially where the latter says it controls over the former unless the former expressly says otherwise.
A particularly worrisome but typical foot-fault is having detailed provisions in an agreement be subject to only one party’s amendment of those provisions. For example, in the operating agreement of a LLC the majority in interest of the owners may have to get approval of some or all of the minority in interest of the owners for certain company actions; but if the former can freely amend the operating agreement without the approval of the latter, the latter’s veto rights are in practice not certain and possibly illusory.
These are all minor foot-faults in deal negotiation and document preparation that can have a real result in the final score. Each ball, each point and each game matters in tennis when the match is tight, and it can in deals too; even if you lose a point, don’t do it to yourself by ignoring the details and risks (even remote ones) and unnecessarily foot-faulting.
Tags: Deals, Deal Faults, Acquisitions, Indemnification Exposure, Provisions