We asked one of our business lawyers, David Watson, to share some thoughts and observations, general and specific, on transactions that he had worked on in the last year. These are his comments:

  1. You cannot solve the problem of circumvention of contractual intent with more elaborate protective provisions.   If someone is willing to act in bad faith, he or she is probably also willing to breach the contract.   At some point it may be better to just walk away from the deal.
  2. More parties to deal increase the complexity of the deal, particularly if all negotiations are done on a one-on-one basis.   Some parties will try to slow down the negotiation process to try to extract concessions from the other parties.    You can solve this problem with a locked room or a series of marathon, all-hands conference calls.
  3. Be careful with parties who can’t be bothered to read draft contracts.   Sometimes this is tactical, so that they can claim ignorance of deal terms later.    Sometimes they don’t intend to honor their obligations anyway.  
  4. Better to strive for maximal clarity and simplicity in deal terms.   Design principles also apply to documents.
  5. Remember that disclosure schedules are also – are primarily – schedules of exceptions.    (The representations and the exceptions are an allocation of risk.)  Buyers do not necessarily need to agree that a disclosure should be an exception from the representations. 
  6. Indemnification provisions are only as good as the indemnitor.   Note that there are circumstances under which indemnification obligations can be discharged, including bankruptcy, dissolutions or the closing of an estate.  And one should bear in mind that the indemnified party still bears the primary burden of dealing with whatever the liability is.
  7. Cash at closing beats an escrow.  An escrow beats an earn-out.  An earn-out beats no consideration at all.
  8. The difference between participating and nonparticipating liquidation preferences significantly impacts the valuation of an investment in a private company.   Remember that investors who get participating LPs will take some percentage of the “pre-money” valuation on day one after closing.
  9. The selling corporation after an asset sale can, under certain circumstances, be deemed a “personal holding company.”  
  10. Good recitals, with an outline of facts and objectives, can really aid the reader’s understanding of the relevant facts and intents after the transaction closes, whether the reader is the draftsman, the client, the opposing party or the court.