1. Goals of Your Transaction.
This Guide is written for those handling an important transaction, who will need to engage and direct one or more attorneys and other professionals in the process. It will also be useful for a junior person in a business who expects to have responsibilities in legal transactions. The goal of course in any legal transaction is to get the deal closed at minimum cost, not just in money and time, but also in mental energy, goodwill and risk.
The desire to save money and time are obvious; but a business person needs to focus his or her mental energy (a very finite resource) on many tasks and problems, and so should also manage transactions to avoid over-sized drains on themselves.
Additionally, businesses depend on the goodwill of many constituents. In a transaction, they need principally the goodwill of the other transaction party. But they need the goodwill also of any banker or finance source, landlord and government regulator too. Customers’ and employees’ goodwill are always critical. Transactions have potential to alienate any or all of these key players in your business life, and need to be handled with a view to avoiding unnecessary stress and inconvenience on them.
Attorneys and other transaction professionals charge by the hour, so managing your deal so it can close in less time is the obvious way to save money. But if attorneys’ work can be done in an orderly sequence employing some simple rules, they will inevitably be more thorough in their work, communicate their advice to you better, strengthen your bargaining position with the other parties, and avoid your having to accept adverse deal terms. The result is that you and your business bear less risk from the transaction, meaning there is a reduced probability that you or your business will lose money after the deal closes.
Management of an orderly and predictable legal process in a closing also reduces the irritation inflicted on others involved. It will head-off conflicts with the other transaction party, with whom in many cases you will be having business dealings for a substantial time to come. It also lets you obtain the cooperation needed from other players with minimum fuss and bother.
This Guide sets out a few key considerations, and some simple steps to take (or avoid), in managing the legal closing process of a transaction to achieve these goals. We will also try to demystify the closing process of transactions as well.
(a)Parts of the Deal Document and their Function. Most business transactions of significant size are governed by a set of transaction or "deal" documents consisting of multiple documents which each perform a narrow function, plus an "umbrella" agreement which governs the entire transaction and ties the other documents together. In an acquisition, for instance, the umbrella document will be the Asset Purchase Agreement, Stock Purchase Agreement or maybe Agreement and Plan of Merger. In a bank long it is usually a Loan Agreement. Normally 50% or more of the legal costs of a closing are spent on drafting and negotiationing this "umbrella" agreement, so must of this Guide should be understood as "How to Negotiate, Draft and Consummate Umbrella Agreements Efficiently."
Umbrella agreements necessarily address the same matters, and so tend to be organized in a predictable pattern, including:
Recitals. Umbrella agreements normally begin with recitals or Whereas clauses, which explain the background and circumstances of the transaction, and say Who we are and how we’ve come to be signing this document. On a 30,000 foot level they should explain what each party hopes to get out of the deal. While the rest of the agreement is written for the parties, recitals are addressed to a stranger coming onto the transaction cold. Any lawyer who has found himself in court trying to explain to a judge and jury why some particular wording in a contract was a vital part of his client’s bargain can attest to the importance of recitals. Nuances and circumstances that are obvious during a transaction are often very unobvious years later when an agreement gets enforced. Without a clear understanding of these things, however, a trier of fact will inevitably misunderstand the significance of many terms even in a simple deal. Recitals are the normal way to address this.
Definitions. One section contains definitions of words used repeatedly in the agreement. Often a word or term will become a shorthand expression for a complex process or concept, and can therefore control major deal terms. Definitions are always the focus of some negotiations.
Description of the Transaction Itself. The heart of the agreement describes the actual deal, such as exactly what is being bought and sold, or what moneys are being loaned or invested, and exactly what the money-provider is giving for it, and when. Some of this may require listing in attachments or "schedules" to prevent the document from getting too long.