By Howard D. Scher
The pattern of events is classic: A large multifaceted company finds that your business is an attractive candidate for acquisition. You have what it wants: a different market, specific customers, a unique method of doing business, even some key management people. Conversely, you are reaching out for a suitor, to improve cash flow or capitalization or to gain management expertise. Or perhaps, there is no family successor, or you feel it is time to move on to other interests, and selling is the only way for you to cash out.
In any case, there comes a point when discussions become serious. Keen for an offer, you unveil all of what makes your company specialÑyour key people, your marketing plans, your business secretsÑwhatever it takes.
Then, without explanation, the other firm decides the deal is off. They simply say they are no longer interested and walk away. You are baffled. You wonder what was wrong with your company. Even more unnerving, though, you realize that during the discussions you had laid your company bare.
In one such case, a giftware distributor had given a marketing presentation to a manufacturer during a preliminary acquisition discussion; the distributor then heard nothing, only to find several months later that its ideas were being copied by the manufacturer. In another instance, a computer company had allowed a competitor interested in a merger to speak privately with personnel, only to find later that the competitor was hiring away its best people.
In recent years lawyers at our firm have represented a growing number of family businesses in disputes arising from acquisition discussions. At times, the disappointed family claims it had struck a deal with another company, which subsequently was trying to back out; it wants the courts to enforce the agreement. But even more often, a family finds it has been misled, and sues the other company on the grounds that the supposed suitor took part in preliminary talks for the sole purpose of stealing trade secrets, luring away key employees, or disrupting the business to gain a competitive edge.
Many of these claims have been upheld in court and the family has been awarded damages. But clearly a family business would rather avoid these kinds of problems to begin with. Unconsummated deals usually leave a family feeling vulnerable. The careful acquiree (and, for that matter, the well-intentioned acquirer) can greatly diminish the risk of devastating damage by planning and documenting the acquisition process according to the steps noted below. The disappointment may still result in a lawsuit, but at least you will go into that suit well prepared.
1. At the initial meeting there should be a thorough discussion of how the acquisition process will proceedÑthe various steps that will have to be taken before any agreement can be reached. One side might believe the process will consist of a single deliberation, while the other might expect it to involve numerous meetings and negotiations. To prevent either party from feeling misled and becoming suspicious, the process should be spelled out, even when the other sideÕs intentions are honorable; if you want to get the most you can in your deal, you want to prevent any mishaps. Knowing what the other party expects to happen can only strengthen your position.
Another function of spelling out the process is to give the participants the opportunity to become comfortable with each other. One party might find it simply cannot tolerate the other. Therefore, you should establish at the first meeting that either party can walk away from the negotiations at any time before a deal is actually struck.
2. At all meetings, someone should take notes and promptly produce minutes, in the form of a letter that is sent to all participants. Any inaccuracies in the minutes should be corrected immediately. This practice prevents parties from remembering only what is favorable and forgetting what is not favorable as the acquisition process proceeds.
3. When a price agreement is reachedÑthe actual cash price, the transfer of assets or shares, or whatever monetary form the deal takesÑit should be written out and followed by a letter of intent signed by both parties. In court, an oral agreement is interpreted only as an intention to make a deal. To be enforceable, a price must be detailed in writing. The family business that claims Òwe had a dealÓ will only be able to pursue legal action if the terms are in written form.
4. The letter of intent should include a statement of agreement that any information the seller designates in writing as a Òtrade secretÓ will be considered such by the prospective buyer. It should also stipulate that, should an acquisition not be consummated, the trade secret information will be returned.
An unscrupulous company posing as an acquirer can still go off and use your proprietary information. But if you want to sue the company, you must have designated in writing what information you had considered proprietary. Courts, and business people in general, assume some level of sensitive information will be shared during acquisition negotiations. The burden falls on the acquiree to show it attempted to protect sensitive information from being used improperly.
5. You should clearly establish whether a suitor can interview your employees. You can also stipulate that a suitor cannot attempt to hire any employee until negotiations are concluded, or even for a specified period after negotiations are formally broken off.
If a suitor is allowed to interview, or even hire, employees during or after the negotiating process, it is wise to demand beforehand that such employees will have to sign an acknowledgement that they do not possess documents or materials from the former employer, and that they have no knowledge of proprietary information. If certain employees are privy to such information, they should be expected to sign a document that says they will not use or disclose proprietary information to anyone, even the potential acquirer.
If the potential acquirer will be speaking with suppliers, the same stipulations should apply.
6. It should be agreed that no one involved in the negotiations will tell anyone else what is going on, including other employees at either company. If lower level employees at the acquirerÕs company are asked to verify information related to the proposed deal, they should be instructed to do so without being told why; otherwise, the potential for leaks grows exponentially. An employee of yours who finds out about a possible acquisition, or a supplier, can sabotage the deal, to protect their job or their business. It happens more times than you might imagine.
7. Finally, you should establish a Òdrop-dead date.Ó Negotiations can be dragged on and on, either by chance or on purpose. This can disrupt your business terribly. You should specify in the letter of intent that if a deal is not reached by a specific date, the negotiation will be ended.
Howard D. Scher is a partner in the law firm of Montgomery, McCracken, Walker & Rhoads, in Philadelphia. He has been litigating acquisition disputes for two decades.