One of the best things about a career in law is the opportunity to work with extremely gifted and experienced attorneys. I have had the great fortune to learn from many such individuals, but none have been as influential in my life over the years as George P. Shenas here in San Diego.
Although I left George’s firm in 2009 in order to pursue a start-up venture as co-founder, our relationship endured… so that I now have the pleasure of collaborating with him on occasion as co-counsel on certain corporate matters. We recently worked together on an M&A transaction which did not close, but that collaboration inspired me to post this three-part video series capturing an in-depth conversation we had on the importance of due diligence. I trust it will be of interest to any readers contemplating the sale of their company or the acquisition of another company.
For more informative videos that feature other guests, please visit GPS INC
- Marcus Klebe
Part 1 Information as Currency – Why a Seller Short-changes Due Diligence at its own Peril
George P. Shenas, Esq. hosts Marcus H. Klebe, Esq.
George asks Marcus about the importance of due diligence in M&A transactions, and Marcus begins by defining “due diligence” and then explaining how undertaking a systematic review of one’s own enterprise gives a seller leverage during subsequent negotiations. Marcus and George encourage the full and honest disclosure of facts, even unfavorable ones, as part of the process – the key is placing all facts in their proper context, and painting a comprehensive picture of the enterprise that will hold up under close scrutiny and yet secure the highest possible purchase price. Marcus emphasizes the need to maintain the buyer’s confidence throughout the due diligence process, because trust is an essential component to speedy and mutually-favorable negotiations. George and Marcus agree that any financial or other projections relayed by the seller at the outset of the M&A negotiations must be met, or preferably exceeded, during the weeks and months leading up to closing in order to avoid the risk of significant price erosion.
Part 2 Managing the M&A Process before the Process Manages You – Assembling the Data Room
George P. Shenas, Esq. hosts Marcus H. Klebe, Esq.
George engages Marcus in a detailed discussion of the use of virtual and physical data rooms to facilitate sophisticated M&A transactions. Marcus describes the nuts and bolts of the M&A due diligence process, specifically describing the way our law firm organizes information and manages disclosure of that information to the seller. George asks Marcus to explain why it might be in a company’s interest to compile the same information before even engaging in formal merger discussions with a third party. To illustrate better the practical application of due diligence principles, Marcus, speaking from experience, gives several concrete examples involving three different subject areas: intellectual property, material contracts, and financial data. By the time a seller gets to the stage of actually negotiating the purchase agreement, the parties have largely formalized their relative positions; accordingly, a savvy seller can stake out a much more favorable position as the formal document begins to take shape by understanding these due diligence principles and working with legal counsel from the very beginning. George emphasizes that a company’s financial data should be presented in a way that comports with industry-wide best practices, including compliance with accounting standards that are defensible when scrutinized by a buyer and their advisors.
Part 3 The Law Firm’s Critical M&A Role in Reducing the Seller’s Exposure to Liability
George P. Shenas, Esq. hosts Marcus H. Klebe, Esq.
George asks Marcus to describe, in concrete terms, the way that facts and circumstances which are revealed as a part of the due diligence process make their way into the definitive purchase agreement. Marcus explains the representation and warranties section of the purchase agreement, starting with a definition of “representation and warranties,” generally. George and Marcus discuss the practical ways that our law firm tries to reduce the overall exposure to liability on the part of the seller either on the closing date or after the transaction has fully consummated, including the use of qualifiers to the representations and warranties or the use of survival periods. The discussion concludes with advice gleaned from many successful M&A transactions: playing ‘hide and seek’ during the due diligence process doesn’t work – an honest, transparent and complete representation of the company’s condition, one which nevertheless aggressively presents the seller’s point of view, best preserves enterprise value and resists post-closing disputes. Good legal counsel is therefore critical to obtaining the right purchase price from the seller’s perspective.
Over the years, I have become friendly with most of my professional contacts and enjoy the benefits of exchanging perspectives over the phone or over lunch. These friends (many current or former clients numbering among them) often ask me for my assessment of the economy, in part because corporate attorneys have a unique vantage point from which to survey the landscape. Motivations matter in assessing the market; for example, M&A activity that is being driven by operating losses on the part of acquirees is qualitatively very different from M&A activity that is being driven by stock-for-stock deals during a bull market. By leveraging knowledge of these motivations, one can often get an accurate sense of the bigger picture. Read more…
I was honored to be interviewed recently by Ryon Harms, Director of the McDermott & Bull Executive Network. In the video, I discuss my background and the genesis of San Diego Legal Strategy, as well as offer some thoughts to other members of the Executive Network.
Please return often to this “News & Discussion” section of the website, as I will be offering not only general commentary on important legal developments, but also observations on business, the state of the economy and executive decision-making. I emphasize honesty and communication in my law practice, which is why this section endeavors to reveal significant aspects of my thought process and beliefs. Since I also believe that dialogue is an integral part of effective communication, I welcome comments from members of the business community and other attorneys, no matter where they might find themselves geographically.
If readers find the commentary thought-provoking and of some benefit to them, then I will have achieved two of my key objectives in creating this section.
