Last week when Salesforce announced it was buying ClickSoftware for $1.35 billion you might not have realized it, but the law firm Shearman & Sterling was advising Salesforce throughout the deal. In fact, there are lawyers involved in every transaction of this sort, from the initial call to the closing.
As you would expect, there are hundreds of tiny details involved in bringing a deal to fruition, from checking the validity of the offer to checking the financial health of the target company, negotiating a price and terms and clearing it with the boards/stockholders. Even after the deal is signed and agreed upon by both companies, the lawyers often have to ease it through the regulatory process before it finally closes.
The attorneys act as project managers, working with company executives and boards of directors, guiding them through the lengthy transaction process, advising them on the legal side of the equation — all while working with the investment banks to make sure everything goes as smoothly as possible.
Looking for a target
A company like Salesforce doesn’t go out and buy ClickSoftware randomly. There is in fact a method to its M&A madness. As I wrote in an article describing the process in 2016:
They have a methodology and a list of companies they could be interested in at any given time, one which they are constantly updating. To get on the list, they look at a number of different criteria and balance what the target company could bring to Salesforce (and its customers), and the possible risk of buying the company.
Attorney Brandon Parris from Morrison & Foerster, a firm that helps guide companies through the M&A process, says most sophisticated acquirers have an internal development team, like the one at Salesforce, charged with looking for companies they want to target.
“Most of the legwork is done internally, where business development will have initial conversations. They may bring in internal counsel to think through a particular issue that exists, but once that has occurred, and they’ve gotten comfortable that they’ve identified the [right] target, then they usually bring in legal counsel to help pull together a term sheet and start on the diligence process,” Parris explained.
So the work begins
Every deal begins with a phone call expressing interest. Once the parties agree to discuss a deal, the legal legwork really kicks in.
Parris says it involves a lot of due diligence to find any issues that could affect the pricing or the terms of the deal. “The acquiring company is offering to pay a certain amount for the business, and they want to know if there are any issues that they aren’t aware of that would impact that value,” he said. This part of the process is really meant to surface those issues.
This could involve pending litigation, tax issues, a technology and patents review, human resources problems, finding environmental issues and a host of other details that the law firm is charged with checking out.
Once they determine an offer is legitimate, the target company has a different set of responsibilities, says Alan Smith, an attorney at Fenwick and West. “An offer triggers an obligation, usually a CEO, a chief business officer or someone who’s had that communication [with the buyer]. They’re going to want to know, how quickly do I need to tell my board? How do I tell my board? And they need to immediately start thinking carefully about doing the right thing, and making sure they’re making a record that they’re doing the right thing in terms of being responsive in a way that’s designed to maximize value for shareholders,” Smith explained.
Coming to terms
Once the ball gets rolling, there is often a term sheet. The banks/financial advisors would be heavily involved at this point, working with the lawyers on the financial aspects of the deal. Parris says this helps for a couple of reasons. “One is that they’re making sure that the acquiring company and their advisors are getting the right information from an evaluation perspective. That they’re understanding it correctly and that they’re putting it in the right context as they’re building their model. They are also really helping the target company navigate that discussion,” he said.
The beauty of a term sheet is that it clearly outlines expectations and understandings for both parties before hashing out a more detailed agreement. “Oftentimes companies find value in having a term sheet because you can identify larger issues early and figure out if there’s going to be a sticking point, such that the deal can’t happen. Other times, it’s putting out the summary of terms so that everybody’s on the same page, and then when you go into agreement, it’s less of an issue to negotiate.”
Smith says that whether there is a term sheet depends primarily on the nature of the companies involved in the deal. “Typically, what happens is when people agree on a price, if they’re a private company, there’s usually a term sheet with an exclusivity period in it. In a public company, there’s not usually a term sheet. There’s just a price,” Smith explained.
He adds that increasingly there’s an exclusivity agreement, stipulating that you’re not going to negotiate with someone else for a better deal. Conversely, a deal may have a “go-shop” provision, where they are allowed to look for a better deal for a given time window. That happened with the huge $67 billion Dell-EMC deal in 2015. It was a pretty safe bet for Dell to allow that, as the chances of anyone outbidding them were pretty slim, and the provision expired without another offer.
Do we have an agreement?
Smith says once you have agreed upon price and basic terms, the next step is to generate a definitive agreement. “We’re going to spend the next 30 to 90 days, depending on how long you think it’s going to take, doing our confirmatory legal due diligence and negotiating a contract and getting everything on paper so we can find a definitive agreement,” he said.
In cases where a term sheet is generated, the definitive agreement is being crafted in the background, says Parris. “The definitive agreement is usually anywhere between 45 and 70 pages and it really gets into the details of everything that was discussed at a very high-level in the term sheet,” he said.
Smith says once the parties agree to the deal, the lawyers take on an even larger role. “We’ll have a structuring discussion. There are multiple ways you can buy a company. As a public company, it could be a tender offer or a merger. As a private company, it can be a share purchase, a merger or an asset sale. There could be tax, shareholder approval and contract consent issues that go along with all of those structures. So you’ll have trade-offs about which one might be optimal, and we’re heavily involved in advising and negotiating with the buyer around what they want to do,” he said.
One example he points out is when a company may want to do an asset deal because they’re able to exclude certain liabilities and they get a step up in tax basis, or do a stock deal as it will save money on taxes because it involves capital gains rather than ordinary income.
Crossing the Ts
Trying to hammer out the final details can be challenging, but the idea is to get to the finish line and close the deal, and that’s what lawyers on both sides of the table are trying to do. That doesn’t mean there won’t be complications, but they are trying to reach an equitable agreement.
“It can be very challenging where you’re trying to find a middle ground solution to bridge the differences and where your client feels they are getting the benefit of the bargain they are negotiating for, while the other side is not giving up more than it wants to get the transaction done,” Parris said.
Once that is finally done and both sides sign off, it may have to go through regulatory and shareholder approval processes, depending on the company. Once completed, the deal closes and the two companies combine. But it’s a long road to the final sale, and a law firm, specializing in M&A, is helping every step of the way.
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