Currently on my nighttable is Gods at War: Shotgun Takeovers, Government by Deal, and the Private Equity Implosion
, by Steven Davidoff.
Steven is a professor at the University of Connecticut Law School (click here for his faculty bio page) and is the New York Times’s “Deal Professor.” Before teaching, he practiced for ten years with Shearman & Sterling in its New York and London offices and with Freshfields Bruckhaus Deringer in its London office. As a result, he understands the M&A bar and has their ear, but he also demonstrates the sort of critical thinking that is essential in a field where so much is done by rote.
I’m enjoying the book sufficiently that I asked Steven if he’d do a Q&A with me. He kindly agreed; our Q&A follows.
Basics
Q: What was it like writing a book?
A: Writing a book can be an isolating experience. I actually did my best writing in hotels, with room service and no distractions. There were also times when I questioned whether I would complete it or even wanted too. The reward, of course, is walking into a book store and seeing your book—that made it all worthwhile.
Q: Why did you write this book?
A: People kept asking me if I could recommend a book that describes, in depth, how the takeover market works; I found that no such book existed, so I decided to take a crack at writing one myself. I also wanted to explain how the takeover market has changed so much over the past five years. And I wanted my account to be concise enough that a partner could hand it to an associate with some confidence that the associate would be able to read it and understand it. I’d like to think that the book fulfills those goals.
Q: What’s the book about?
A: It’s about the takeover wave of 2004–2007 and the fate of M&A and deal-making during the financial crisis. I examine the deals made during this period, as well as those that collapsed. The main point of the book is the important role of lawyering and dealmaking in takeovers. Among other topics, I trace the evolution of private-equity deals and “material adverse change” clauses. I also discuss in detail the role of hedge funds and sovereign wealth funds, as well as the differences between, and changing nature of, hostile and strategic transactions.
Q: Who would benefit from reading your book, and why?
A: I wrote it for all those who read about deals in the news and are left wanting to know more. But corporate lawyers and students who aspire to join their ranks will particularly benefit, as it delves into the details of reverse termination fees, MACs, the tactics and strategy of hostile takeovers, and other topics that are the day-to-day stuff of dealmaking.
Drafting
Q: As you say, your book highlights the importance of lawyering as part of the M&A process. What role do lawyers play and is that role more or less important these days than previously?
A: Now more than previously, it’s recognized that lawyers have an important role to play. Before the financial crisis, investment bankers would often complain that lawyers were holding up deals with legal technicalities. In fact, if you look at the depositions from the litigation between Cerberus and United Rentals—the result of big private-equity deal that imploded—a Cerberus principal made exactly that complaint during the negotiations for Cerberus to acquire United Rentals. He wanted the lawyers to speed up their work on the documents. And that deal ended in litigation over sloppy contract drafting. Now, everyone recognizes the need to pay attention to detail, to avoid mistakes, and to allocate closing risks appropriately. For lawyers, it’s like being at the dance and being noticed for the first time. Really, me? I’m important? Gee whiz!
Q: You also chronicle in your book many lawyer drafting errors that came to light in the financial crisis, most prominently in the litigation between Cerberus and United Rentals. What explains these errors?
A: Three things, I think. First, the lawyers didn’t have enough time to do draft the documents properly. Second, associates aren’t adequately trained—instead, everyone relies too much on form documents. Third, those doing a deal can get so carried away by the prospect of a glorious outcome that they can get to thinking that papering the deal is a formality; that only makes things worse if a deal goes south.
Q: What can law firms, and individual lawyers, do to improve the drafting of deal documents and lawyer understanding of deal mechanics?
A: Since we’re now in a slow period for deals, it would make sense for law firms to take advantage of the spare time by updating forms to reflect emerging private-equity and strategic-acquisition structures, as well as issues relating to credit documentation that cropped up in 2007 and 2008. And now would be a good time to train associates (and even some partners) in how to draft contracts and the importance of devoting an extra hour to actually reading the contract. Time and again during the financial crisis, simple drafting mistakes and avoidable ambiguity had a real impact. Lawyers should also heed the lessons of the crisis, as detailed in my book, and keep firmly in mind the interplay between deal terms and the immediate business climate.
Q: What role, if any, should law schools play?
A: That’s a tough question. I believe that doing deals and drafting contracts is something you learn by doing. And the more you do, the better you become. It follows that most of your training is going to come when you’re at a law firm. But the law schools that feed substantial numbers of students to corporate law firms can do more to prepare those students to be more valuable from the get-go. And an increasing number of law schools are adding transactional scholarship to their curriculum. “Deal” courses like those developed at Columbia Law School are probably the wave of the future, as are contract-drafting and other deal-related seminars and courses.
Sum-up
Q: What general lessons does your book have for deal lawyers?
A: Lawyers matter—the structures they create can radically affect the outcome of a deal. Remember that next time you’re at the office at 3:00 a.m., finalizing a deal.
Q: Steven, thank you very much.
Ken,
I have the following comments on Steven’s explanation for lawyer drafting errors in transaction documents.
While his 3 reasons all have some merit, I suggest that the primary problem is too many lawyers and poor project management. I always tried to minimize the legal “deal team” with abililty to modify any document to 2 or 3 lawyers. [Often, of course, I would have to consult a specialist in tax, IP, etc. But, I would always have the specialist explain the issues to me, and I would do the drafting. If I didn’t understand the issues well enough to do the necessary drafting, that simply highlighted another problem to be addressed (either a lack of clear agreement between the parties or insufficient understanding on my part).]
In fact, I primarily used the world-class law firms I engaged to assist on deals as a source of specialists. Drafting responsibility remained with in-house lawyers responsible to the business. They knew they were important, because their drafting quality was more likely to have a direct effect on their bonuses and continued engagement. Needless to say, I got a lot of push back from the firms on this practice. They were not happy about being relegated to the background.
As for project management, if I was the lead lawyer on the deal I read all revised drafts for consistency. [Which, as you’ve probably seen, is more than I do for my email traffic!] For my last in-house client, I developed and implemented an issue tracking system (Easy: Our Position, Their Position, Compromise Positions Under Consideration.) to make it easier for other lawyers and management to track negotiations and maintain consistency in the documents.
Bottom line: There is a lot of truth in the old adage about the correlation between an excessive number of cooks and poor quality broth.
Regards,
Mike