Counsel to Counsel Forum - Calgary

Managing complexity: Navigating across borders and constituencies to "Get the deal done"

Session co-chairs:
Keith R. Dolliver, associate general counsel, Microsoft Corporation
Graham Vanhegan, vice president legal, ConocoPhillips Canada
Hicks Morgan, general counsel, Morgan Building Systems

Session co-hosts:
Jack Thrasher, Pierre Magnan, Osler, Hoskin & Harcourt LLP
Miles Pittman, Michael Hurst, Fraser Milner Casgrain LLP

Session facilitator:
Aleen Bayard, principal, MarketZing

Cross-border acquisitions always add an extra layer of complexity to the management of complex transactions. This Counsel to Counsel forum in Calgary, Canada, examined possible best practices to ensure the deal-making process runs as smoothly as possible.

Stepping back

However valuable a resource they may be to a company, in-house legal functions are, in reality, a cost centre. As a result, there is often the temptation for counsel to try to be “all things to all men”, in order to justify their existence. On some occasions, this can lead the legal function to taking on tasks that are, in reality, best performed by other personnel. It therefore makes sense for in-house counsel to periodically review their workload, and make hard-headed decisions about which tasks they should – and should not – perform.

One company that has gone though this review process is Microsoft Corporation. Here, the legal function had historically taken the lead in nearly all aspects of M&A transactions, even though much of the preparatory work did not depend on legal issues. The decision was therefore taken to “push out” management of the M&A process to other individuals, particularly in relation to the initial information gathering and post-merger integration. By taking a “step back”, the legal function was instead able to focus on aspects of the deal where they could truly add value.

While the company lawyer admitted that it was hard to become a “contributor” rather than a “driver” of certain aspects of the M&A process, these changes made it far easier to ramp up the speed of the deal-making process. “When we started on the process, we were handing 5–6 transactions per year. Now, we’re handing more than 20,” said Keith R. Dolliver, associate general counsel, to the Microsoft Corporation. “Our programme managers are excellent at handling complex processes and organising large amounts of information.” Having these process management experts involved from the start also helps smooth the subsequent business integration process, where the real difficulties associated with corporate acquisitions typically take place.

The due diligence process

During the course of the debate, various counsels discussed unexpected problems they had encountered at the due diligence stage of a transaction, and tried to suggest practical ways they could overcome them. One speaker recalled how possible “defects in title” posed a real challenge in markets where property assets were a key part of a company’s valuation. Here, one solution may be to obtain “title insurance” from a specialist third party agent. Others spoke of the problems of dealing with companies that made extensive use of independent sub-contractors – a particular problem throughout the construction industry. Here, there is always the danger that a local tax authority may “deem” these independent contractors to be company employees, rendering the company liable for potentially huge amounts of employment taxes. In this situation, it was recommended that a thorough investigation into the contractors’ tax status should be an early priority for the counsel to the acquiring company.

During the course of his presentation, Microsoft’s Keith R. Dolliver discussed how his company had created a standardised due silence (diligence) checklist for handling all corporate takeovers. The checklist, which is fully scalable depending on the size of the target company and nature of the transaction, tries to ask all questions that may be pertinent to an acquisition. “When the telephone-directory-sized document lands on the desk of a 25-person company we plan to acquire, it does sometimes come as a shock to them,” he says. ”But not all aspects will apply to them. The purpose of the document is to elicit the information that allows us to understand their business and determine whether the proposed transaction will be successful.”

In addition to the “practical” integration issues, such as the target company’s IT infrastructure or staff incentive schemes, the Microsoft system also provides a standardised “pre” and “post” acquisition analytical framework. This allows executives both to review the fundamental business case for the takeover, and also to help ensure any subsequent acquisition runs smoothly. This is a three-stage process requiring management review and approval at each point. Stage one – strategy approval – involves determining whether the potential acquisition fits with the strategic objectives for both the business group and the overall company. This review is primarily led by business group managers. Stage two is transaction approval – at this stage, the legal department and other functional specialists will become involved. Finally comes the integration stage. This stage is largely run by the company’s process managers, and the legal M&A function transitions out.

This framework is extremely useful when dealing with senior level management tasked with reviewing the progress of the deal. Although each transaction is inevitably unique, the standard reporting scheme helps reassure them that no important issue has been missed. Finally, the Microsoft system also includes a “look back” set of metrics, which allows a standardised review of “lessons learned” from each deal that can be fed back to improve the M&A process.

Overcoming cultural differences

As the rights of indigenous peoples become ever more entrenched around the world, an increasing number of counsel are likely to find themselves negotiating with autonomous authorities within sovereign states. Of course, the powers of indigenous peoples to negotiate deals will vary greatly from country to country. In Canada, deals signed by “first nations” are subject to Canadian government oversight, whereas US “native American” governments tend to have full self-governing status. It is therefore essential that counsel who are involved in transactions involving indigenous people should familiarise themselves with the governance regime for those people.

In many situations, specialist law firms will be available to provide counsel with the legal expertise for dealing with indigenous peoples. However, counsel may also find it useful to put themselves – and other key member of the negotiating team – through a cultural awareness programme. This option was taken up by Hicks Morgan, general counsel to the Texan-based Morgan Building Systems. Not only did this training prove useful in negotiating terms, it also acted as signal of “good intentions” to the persons they were dealing with. “The fact that we were willing to take the training made a good impression on the first nation people we were dealing with,” says Mr Morgan.

Of course, cultural misunderstandings can take place between any parties involved in cross-border deal-making. Miles Pittman, a commercial and energy partner with national Canadian law firm Fraser Milner Casgrain LLP, recalled how the requirements of the US Foreign Corrupt Practices Act (FCPA) had the potential to cause a great deal of offence to non-US based companies. Non-US companies who find themselves subject to an FCPA compliance investigation – perhaps as a result of a potential acquisition by a US-based company – may feel insulted by the implicit accusation that they may be involved in bribery or corruption. Nevertheless, it may be incumbent on a US company to ask such questions – on pain of criminal sanction. The FCPA is particularly relevant if the potential target has operations in jurisdictions known to be corrupt. For him, the best piece of advice was for the target to get specialist FCPA advice early, before the “goodwill” surrounding the transaction begins to evaporate.

Maintaining internal and external relationships

The relationship between in-house lawyers and their co-workers has long been a popular topic for debate at Counsel to Counsel sessions. Indeed, at one point, one speaker suggested that company employees should be given cultural awareness training of what it meant to be a lawyer, since so many people appeared to have the wrong impression of their role within a company. It was also suggested that, the more remote the employees are from the “head office” environment, the greater the antagonism towards lawyers tends to become.

At this point, George Lepine, director of land and legal at Pearl Exploration and Production Ltd, asked the pertinent question about whether in-house lawyers regarded their fellow employees as “clients” rather than co-workers. This terminology, he suggested, ran the danger of fostering an artificial “them and us” mindset. Another speaker said it was down to the in-house lawyers themselves to break down this culture of separation. Corporate counsel, he suggested, should come down from their pedestals, be seen “out and about” in the office – and stop making everyone contact them via their secretaries.

Others though, appeared resigned to this internal dynamic, arguing that in-house lawyers would always be seen primarily as functional specialists. Indeed, in order to develop within the company, in-house lawyers were often required to move beyond dealing with purely legal matters and legal responsibilities. Marian De Souza noted that many lawyers work at First Canadian Title but not necessarily as legal counsel; in many cases leading a business division is an opportunity for advancement for in-house counsel.

The relationship between in-house lawyers and outside counsel was also discussed at length during the C2C debate. Here, one in-house lawyer complained about the quality of advice offered by external law firms. The advice, he said, was often too academic and not sufficiently “commercial” in its approach. To overcome this problem, one counsel recalled how he had decided to employ two separate law firms in on one jurisdiction. One firm, a local practice, provided him with an academic, “hard law” analysis of the situation, while a second, international firm was employed to “translate” this analysis into useful, commercially-focused, legal advice. In fact, this approach is not uncommon. Nevertheless, the fact that many in-house counsel accept the inevitably of instructing two different firms on one matter does not mean that they are happy to do so.

Negotiating in difficult markets

An inevitable consequence of working for a multinational corporation is that, at times, companies may have to withdraw from a particular market or jurisdiction. Of course, just because a company leaves a jurisdiction, it does not necessarily mean it will not come back. For in-house counsel, negotiating re-entry into a country may be just as complex and politically fraught as a new, greenfield, development. Will the original assets still be in place and functioning? Should pre-existing agreements be revived, or renegotiated in the light of new laws, technologies or working practices?

For one in-house lawyer involved in such a process, one of the key strategic decisions was to exercise extreme caution when negotiating the company’s legal position. The decision was made to try to revive existing contracts, rather than negotiating new ones. This tactic helped minimise the risk that the other side could also try to re-negotiate the terms of the contract – and possibly place the returning party in a less favourable position than before. Where changes to existing contacts were absolutely necessary and unavoidable, they were treated as correcting previous “drafting oversights”, rather than an attempt to fundamentally alter the key components of the business relationship.

During these negotiations, the decision was also made to join forces with other companies in a similar position, and negotiate re-entry using a joint co-ordinating team. For the in-house counsel advising on the re-entry, this approach was useful, if challenging. On the positive side, the group of companies were not “falling over each other” when negotiating with the host government – reducing the risk that the government would try to “play them off” against each other. However, this also meant that members of the team would invariably comprise representatives from different companies, who, in normal circumstances, would be in competition with each other. This process required the development of trust between the parties, and the acceptance that, in some circumstances, representatives from one company would be making legal or technical judgement about assets belonging to another.

Takeaways

■ In any M&A deal, it is always tempting for the legal department to try to run the deal. But are they always the most appropriate department to run all aspects of the transaction?

■ Dealing with indigenous populations always adds an extra layer of complexity to even the most straightforward of transactions. Cultural awareness training can help smooth the negotiating process.

■ Re-entry into abandoned markets will also be fraught with political and legal risks. Consider combining with others to strengthen your bargaining position – and be cautious about asking for too much, too soon.

■ All deals come with their own unique risk profiles. Ensure you are aware of those most pertinent to your business, and consider creating a transaction checklist to help ensure nothing is missed.<,/p>

■ All transactions are expensive, but sometimes it is worth spending a little more money upfront to ensure minor problems do not escalate.

Last updated - 23 April 09

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