Andrew Abramowitz

Ensuring that Clients Understand the Agreements they are Signing

We all know that most users of web-based products (which is to say everybody) do not read the lengthy terms of service that they are asked to accept with a click before proceeding. These users make a probably reasonable calculation that the stakes are pretty low given the nature of the transaction and that by clicking “accept,” they are not agreeing to bequeath their estate to Apple or Microsoft. But what about agreements that are more significant to the signer, like an agreement to sell one’s business to a buyer? Does the seller need to read every word and understand them before signing? Their lawyers will usually say yes, because after all, the seller is the one signing the agreement and giving up the business, not the lawyer. But like all experts, lawyers can sometimes forget how utterly foreign contractual language is to lay people and need to take steps to ensure actual comprehension beyond a mere CYA admonition to read every word. Of course, some clients have had long business experience and have seen many agreements of a particular type, so the need to hand-hold needs to be tailored depending on the client.

When people think of legalese, they primarily are concerned with arcane words such as “heretofore” or whatever. But a more significant factor in client incomprehension, I think, is that they don’t have the background knowledge with these agreements to know the purpose of various provisions and how they all interact. For example, in a typical agreement for acquisition of a business, there are provisions relating to the seller’s potential liability to buyer after the closing, including various defined terms such as Fundamental Representations, Cap, Basket and Survival Period. These concepts are, needless to say, not experienced by the average person in their lifetime, even if it’s a well-educated lifetime. But the idea behind all of it is not terribly complex and is very important to the parties in an M&A deal: The buyer should be compensated for damage that occurs after closing if the seller misrepresents facts about the business being purchased when the agreement is signed, but assuming this misrepresentation is not intentional/fraudulent, there should be reasonable limits placed on the amount of compensation and the length of time after closing during which the buyer can bring this up. So, while it’s unrealistic to expect clients to start using all of the contractual lingo in ordinary conversation, it is important for the lawyer to impress upon the client the importance of, to take the above example, ensuring that representations in the agreement are correct to avoid post-closing liability.

So, my message to fellow lawyers is to try to remember how clueless you were as a law student and junior associate and, accordingly, guide your clients with the goal of ensuring true comprehension of important concepts.

The Real Cause of Large Legal Bills

I was recently representing a seller in a proposed acquisition. The purchase price was under $20 million – in the context of M&A, a relatively small deal. The purchaser was represented by one of the top 10 most profitable law firms in the world. The firm organized a due diligence call, blocking off two hours for the attorneys to ask questions of the seller that related to legal matters. I was the sole attorney on the call for the seller. From the purchaser’s law firm, there were a couple of corporate/M&A attorneys, and then one representative from each of any applicable specialty practice area: tax, employee benefits, real estate, intellectual property, etc. As far as I could tell, each of these specialists spent the whole time on this long call, waiting their turn and then taking, like, five minutes to ask the specific questions applicable to their specialty. The presumptive cost of that call to the purchaser, aggregating all those high billing rates for a couple of hours each, was, to my boutique firm way of seeing things, completely unfathomable.

Clients assessing prospective law firms will often focus on a single number: the hourly rate of the highest-ranking partner assigned to the matter. Witness all the ink spilled in recent years on how rates for many partners at large firms have blown well past $1,000 per hour. (This helps my marketing efforts, frankly, as it’s easy for me to show that my firm’s rates are lower than those at large and mid-sized firms in New York.) After bills are rendered, clients will sometimes question the amount of time it took for a particular attorney to handle a particular task. But as my anecdote about the conference call illustrates, often the real driver of cost is the firm’s staffing practices and whether the firm will seek to prioritize efficiency. On most matters handled by my firm, I am the only person from the firm on any call. Other attorneys are very much involved in the matter, handling behind-the-scenes tasks such as drafting, but they will generally not spend those couple of hours on the call with me; rather, I briefly summarize for them the upshot of what they need to know. To the extent other specialty attorneys are involved on my team, they will also communicate with me separately and generally not participate in a group call unless it’s primarily about their area.

To be clear, I am not saying that having multiple attorneys on a call is necessarily inappropriate or part of a conscious effort to jack up fees. But I do think that if clients are looking to exercise some oversight on legal costs, they would be better served by looking at a calendar invite for a Zoom meeting, seeing how many attorneys have been asked to join and inquiring about whether that is necessary, as opposed to arguing after a bill is rendered that a particular agreement should take three hours to draft, rather than five hours, without really knowing exactly what’s entailed in the process of drafting one.

Deciphering Real Estate Jargon for Corporate Attorneys

A small but significant part of my firm’s practice involves doing corporate and securities work on real estate development deals. I’m not a real estate lawyer (or, a “dirt lawyer” as they sometimes call themselves, in a bit of rather harsh-sounding self-deprecation), who handles core real estate transactions like purchases and leases of real estate, but I collaborate with those attorneys by forming entities and drafting their operating agreements, and ensure compliance with securities laws when there are outside investors helping to fund the projects.

The operating agreements for the entities formed for the project need to address the economics of the deal, including how any earnings from the project are divvied up between the developer (or, the “sponsor”) and the outside investors. These structures tend to be quite complex, and they have their own jargon that corporate attorneys who practice outside the real estate industry will find quite forbidding, even those who have plenty of experience with sophisticated transactions. Therefore, I thought it would be helpful to decipher a bit of that jargon as a service to the uninitiated among the corporate attorney community. I won’t address here the various other terms of art in real estate finance (cap rates, loan-to-value ratio, etc.) that aren’t directly relevant to the attorney needing to draft the operating agreement, nor will I address operating agreement concepts that are common outside the real estate context on the assumption that, if you’ve made it this far in this post, you know them already.

Business Divorces

Although the majority of the transactions I advise on can be described as additive – one company acquiring another one, a company selling newly-issued stock to a new investor – I do spend some time on subtractive (is that a word?) matters, including business divorces. In its simplest form, this term refers to a decision of two business partners to wind down a business, often because some tension has developed in the relationship, just like a personal divorce.

As a purely transactional lawyer, I would only get involved in a business divorce if the parties want to resolve it amicably, without bringing a claim in court, though it can be useful to get the parties moving toward a solution to raise the specter of litigation and its associated costs and delay. In the world of family law, there are attorneys who specialize in collaborative or cooperative divorces, and I try to play a similar role in business divorces by encouraging compromise, even though I’m clearly representing one side and looking out for that party’s interests. Any effort to achieve total victory in these situations is likely a fool’s errand, or at least a very stressful and expensive errand.

The SEC’s SPAC Proposal and Projections

The SEC has issued its long-expected proposed rules regarding SPACs. Here are the proposing rule release and the shorter press release. The SEC has always been skeptical of SPACs, and the rules are generally designed to impose new disclosure requirements on SPACs that make the rules more aligned with those applicable to traditional IPOs. One of the reasons SPACs had their moment in the sun recently is that they are easier to complete than IPOs, so the rules, if enacted, could have the effect of severely dampening the market for SPACs, even if they do nothing to directly restrict them from being done. In fact, the general expectation that rules like these were coming down the pike has, anecdotally, been a factor in the SPAC market slowing down recently.

One of the key areas in the proposed rules relates to projections. Under current rules, companies merging with a SPAC can include projections about the company’s future expected results and can benefit from a safe harbor protecting it from litigation if the projections don’t come to pass, as long as the projections are accompanied by a disclaimer and the companies don’t have actual knowledge that they won’t come true. In contrast, companies going public the traditional way don’t have the benefit of this safe harbor. The proposed rules would eliminate the safe harbor in the SPAC context, which would have the practical effect of precluding most projections from being presented.

The London Stock Exchange’s Proposal for Private Company Trading

The Wall Street Journal reported exclusively on plans by the London Stock Exchange to create a special market for the shares of private companies for limited public trading. The plan itself is not yet public, so the Journal was only able to report on limited aspects of what is contemplated. In the same way that U.S. private companies have increasingly been able to access public-like markets with new exemptions like Regulation CF, Rule 506(c) and Regulation A+ and the development of secondary trading markets for large private companies, this is an effort across the pond to provide some of the benefits of public market access to small and fast-growing companies.