If you're gonna dance with the Devil, make sure to wear sturdy shoes.
— Anonymous
In between reading every legal brief on Lexis/Nexis, parsing pending merger agreements into Esperanto and Swahili, and sleeping no more than two hours a day, hyper-prolific law professor and perennial Customer of the Month at the Wayne State University Starbucks Steven Davidoff has apparently found time to produce yet another comprehensive tome on merger practice.
This time, he addresses what he calls the "Do's and Don'ts of Private Equity," from the perspective of corporate executives and Board members, M&A lawyers, and public shareholders. It is a pretty good list, in my view, and worth a gander if you have a fresh Venti Caramel Macchiato and twenty minutes or so to spare. If not, just e-mail the link to your favorite corporate lawyer requesting that he or she read all the merger agreements Davidoff appends for private equity deals which have closed since August. (After all, what fun is it being a big shot corporate exec if you cannot torture your lawyer?)
I will not add overmuch to your Monday morning reading duties, but I do want to offer a few observations on a couple of Professor Davidoff's points.
In the first instance, he advises his fellow lawyers to eschew overly complex wordsmithing in merger agreements and their ancillary documents. He has railed against sloppy, careless, and unnecessarily (and counterproductively) obscure drafting in other contexts, and it is clear that he views an extra hour or so of a lawyer's time to be well spent in cleaning up such messes before they end up in court.
Surely, a great deal of such poor drafting can indeed be attributed to laziness, haste, or sheer incompetence, as Professor Davidoff implies. But I have another theory for you. Based on my experience, I believe a non-trivial amount of such obscure legal drafting is in fact intentional. I believe some lawyers draft clotted legalese or do not attempt to clarify others' scribblings because they realize, at a conscious or subconscious level, that the confusion in the text reflects a fundamental disagreement or misunderstanding between the parties to the agreement in question. Haste, pressure of time or events, or sheer wishful thinking encourages such lawyers to whistle past a particular graveyard, or let a particular sleeping dog lie. After all, virtually no-one—not even most lawyers—actually wants or expects an agreement to end up in litigation, and that is usually where the parties' differing intent and interpretations of sloppy contractual language is aired and ultimately resolved.
You can see this as cowardly, or lazy, but I prefer to view it as reasonably pragmatic. After all, the great majority of merger agreements do not end up in court, and you can bet that is not because they are all drafted to an ABA-approved level of clarity and precision. Furthermore, lawyers understand that they work for businessmen, who want to strike deals, but who themselves may not have a good understanding of all the risks and issues involved in a particular M&A transaction, much less how they feel about them. In such circumstances, is it really so bad to cross your fingers and whistle past that nasty contractual briar patch wherein lie all sorts of differing intentions and interpretations of, e.g., specific performance? Not only is the perfect the enemy of the good in contractual law, but arguably the bad is not necessarily the enemy of the good, either. The intent of M&A dealmaking, after all, is to make deals.
On a second note, Professor Davidoff recommends corporates involved in private equity deals get themselves a good independent financial advisor; that is, one not embedded within an investment or commercial bank which is also offering to finance the deal. This is indeed good advice, since no matter how trustworthy an individual banker may be at Goldman Sachs or Credit Suisse—and believe it or not there are still a few who make Mother Theresa look like a check kiter—the economics of banks with large leveraged finance businesses means that he or she simply cannot deliver the firm in all circumstances.
Even if your banker is working for you, the CEO, or the Special Committee of your Board, if his or her firm makes a lot of money lending to private equity, you're screwed. I don't care whether you run a Fortune 50 company or not, unless you are General Electric or Cisco, KKR, TPG, and Blackstone each pay more money to Wall Street in a year than you have done in a decade. And credit crisis or not, everyone expects that to continue for the indefinite future. Your banker Joe may be your old college pal and godfather to your daughter, but if his bank is not purely focused on M&A, your little old billion dollar buyout is just a sideshow.
So if you are the CEO or Chairman of the Board of a public company, no matter how large and well-banked by the cream of Wall Street, pick up the telephone and arrange to meet some of the independent M&A advisors out there. (Much to my anticompetitive chagrin, there are plenty of them.) It is definitely not stupid to have a few pure advisory bankers you know and trust in your rolodex before Henry Kravis comes knocking on your door.
© 2007 The Epicurean Dealmaker. All rights reserved.
