KEEP YOUR HOUSE IN ORDER AND SAVE ON FEES
It really is worth stating the obvious: good information management and process management can help you save big bucks on legal fees for any transaction.
(first published in 2012)
In the Summer of 2011, I closed the easiest, most pleasant M&A deal in my career, not because the closing was in beautiful Québec City but because the client had maintained her house in order over the 20 years during which she had her business. I only had to do what lawyers should do, which is to manage my client’s legal risks in light of her business context and needs. I was in overdrive. No surprise then that the client was extremely pleased with the closing, although she could just not believe the amount of paper work that had to be done. Because of her great organizational skills and discipline in maintaining her house in order, because she was so responsive with my requests and those of the purchaser and because she stayed very involved in the closing process, the closing was unlike any other I had done and legal fees were kept very low.
Then, just a few months later, one of my partners and I had to deal with a completely different situation, this time for a reorg and financing transaction. The company’s books and files were a mess, management (which had changed in recent years) was unable to locate accurate information quickly, and was not sufficiently involved in the closing process. As a result, new information came up only once the deal was about to close (investors don’t like surprises), leading to several open issues just when people were looking to celebrate, and long hours of work were required to clean things up – all of which undermined the relationship between the company and its investors, made the closing documentation much more complex, delayed the closing and, you guessed it, substantially increased the legal fees.
Did you know that organization, responsiveness and close involvement with counsel could make you save 20–40% in legal fees associated with the due diligence and closing of a given transaction? I’m not kidding. Transactions costs will very often get out of hand when lawyers manage non-legal information or the closing process on your behalf (put together disclosure schedules or chase signatures for instance) or when new information comes up days or hours before closing. Lawyers who care about managing your legal fees will all tell you that they would rather not manage the closing process themselves, because we hate to charge you for it. To be honest, we would also rather not have to revise agreements and documents because we were initially provided with incorrect information, driving up bills and creating client frustration. Do also keep in mind that the more a deal drags along the way, the more expensive it will get. By being well organized, responsive with the disclosure of information, and proactive in enforcing deadlines internally, you can significantly reduce your fees.
To help you with this, here are some tips to get your house in order, from the legal point of view:
1. Maintain your minute books in order. Call your annual shareholders meeting on time or have written resolutions signed by all shareholders every year to receive financial statements, waive the requirement or appoint auditors and elect the directors. Ensure that your annual corporate returns are filed on time. Update your shareholders and share registers once new shares are issued or shares are transferred. Make sure that you get all the approvals you need (directors and, in some cases, shareholders resolutions most of the time) for the actions the company is taking. If you rely on your lawyers to do this, please keep them informed of what is happening in your company!
2. Put a shareholders agreement in place – this is a key agreement among founders and shareholders of a business. I was involved lately in a messy situation where a group of shareholders wants to sell the business and the other group doesn’t want to. There is no shareholders agreement in place. The two groups must have already spent over $15K in legal fees trying to figure out what the legal rights of each side are, and it will cost much more if this goes to court. With a well drafted agreement, chances are that you will not have to negotiate exit terms and hopefully never have to set foot in a court room – you don’t want that to happen. In upcoming columns we will deal with the topics that should be covered in a shareholders agreement.
3. Ask your lawyer to provide you with a form of employment and consulting agreement and have all of your employees and consultants sign those. Consultants must absolutely sign an IP (intellectual property) assignment if you want your start-up to retain the IP they’ve developed. Similar provisions dealing with IP should also be included in employment agreements.
4. Scan all of your agreements and legal documents and keep them well organized. A simple excel spreadsheet that indicates for each agreement the date of execution, the parties involved, the summary of terms and $ amounts involved with a link to the electronic copy of the doc is a simple way to keep track of your legal docs. You’ll be ready for a due diligence from day one.
5. Make sure you stick to this process and keep your information and documentation up to date.
And don’t forget to pop the champagne when you close a deal – a good lawyer will always have one ready for you at a non-virtual closing!
 What’s a minute book?, you say. A minute book is a book every company is required by law to keep. It does not have to be fancy – a simple binder will do – but it has to contain the articles of incorporation and any changes made to them, the by-laws, all the resolutions adopted by the directors and shareholders, and a register of directors, officers, shareholders and shares issued. Many of the things a company does have to be approved at least by a resolution of the directors of the company, and the minute book should contain all of these. These include issuing shares, options or other securities, repurchasing shares, declaring dividends, transfers of shares, etc.