Transactional Talk: The road to completion - episode five

Alex Farrow: Hi everybody and welcome to what is now episode five of our podcast and today we are going to be discussing about the road to completion so what happens once you have agreed the documents and how you actually make it so the deal happens. 

We have got some special guests with us again today.  We have got Chelsie, Maya and Ruairi.  We will just let them introduce themselves so hi Chelsie.

Chelsie Taylor: Hi Alex thanks for having us.  I am Chelsie a senior member of the M&A Private Equity Team in London and I have spent a fair amount of time at the firm I have been here for 14 years now.  I work across a whole range of general corporate and M&A matters but have a particular experience in private equity.

Alex: Thanks Chelsie and hi Maya.

Maya Thompson: Hi Alex thanks for having me.  I am Maya I am a solicitor apprentice in the M&A Private Equity Team in London.  I have been at the firm for about seven years now.  I work broadly across the team really both M&A and private equity work and I also study part time getting my LLB law degree, yeah and I hope qualify soon.

Alex: Yeah near the end, well done Maya and then lastly but not least Ruairi, the newest member of our team.

Ruairi O'Grady: Hi Alex, yeah thanks for having me.  Yeah I joined Gowling six months ago so I started in January.  I am two years qualified so the majority of my experience so far was at a previous firm but also doing M&A and BE work although largely M&A work and like Chelsie and I have worked on international and national deals across a range of sectors.

Alex: Great thank you.  So obviously yeah today we are going to discuss how we get to completion really so you know we have done the main transaction documents, they are all agreed and how we are not going to get to where we can get the deal done. 

So just to pick up to start with I think we touched on it briefly in other specialisms around the SPA but it will be good to understand a bit more about the concept of the simultaneous and versus a split kind of signing in completions and maybe Chelsie if I throw that to you and you can kind of talk us through?

Chelsie: Yes sure, thanks Alex.  So a split exchange and completion is really common where there is third party involvement required to do the deal.  So for example regulatory consents are required or there is bank debt that needs to be procured for the deal and it affords affectively a period of time to enable those third parties' consents or you know provision of debt to be made available prior to completion.  But what it does do from a sale side perspective is it provides some commercial certainty because they have got to sign documents on commercial terms and are obviously then waiting for a long period of time before they are sure that they got their commercial deal under their belt. 

For a buyer obviously it does also provide the certainty before they put themselves out there from a regulatory perspective or before they end up with a large amount of debt.  What it does do is add a lot of complexity to the deal both from a time and cost perspective because there is a gap period between the signing and the completion of the deal.  There is various things you need to think about around that gap so effectively pricing the gap, ensuring that there is….or thinking about whether you need warranty protection both at the time you sign the deal and the time that you close a transaction preserving values so making sure or thinking about whether a seller needs to provide certain covenants and certain information rights to the buyer in the gap period and what that looks like you know sometimes you see things like you know making sure the business is running the ordinary course in good faith, MAC clauses and conditions and also from a W&I perspective as well ensuring that whatever repetition of warranties is included is going to be reflected in any W&I policy.

Alex: I guess like we both have seen a broad range of what split selling completion is, right?

Chelsie: Yeah course.

Alex: …so at the start you have got….I do not know sometimes you need a gap at the funding gap, something to go away and they just need a few days to go and drawdown the money to get it done but two-way you have got complicated regulatory or anti-trust kind of considerations to do and it is a whole raft of documents and perhaps like walk away rights and things like that so it really is like a broad range of this.

Chelsie: Yes absolutely and as you said you know funding gap could easily be a five day period.  I have had you know experience of split exchange and completion deals where you are looking at six months gap and you know maybe it is not just one regulatory condition we could be three or four in different jurisdictions, could be for listed companies so yes and all of those considerations I mentioned in terms of the SPA and what is required to govern the gap is affectively driven by you know the length of time and the complexity of the conditions that are required for that deal.

Alex: I guess when there is a split obviously there is a split of the work as well isn't there so I mean we will talk about simultaneous in a minute but when you have got split or when you have got simultaneous everything is done at the same time…

Chelsie: Yes.

Alex: …whereas like we are not really in that territory.

Chelsie: Yeah you are affectively doubling up the work because you are going to have two-sided processes, two lots of sort of searches that need to be done, two rounds of board meetings for example so yes there is a lot more to it and that is whether or not you have got a five day gap or a six month affectively there is always going to be double the work required and is often the case a lot of the work that needs to be done for completion is not done pre-signing because you have got that gap period so you know there is always an ongoing kind of requirement for legal work going forward within that gap period.

 

Alex: I guess it is those famous words agreed form documents that you have when you are signing is you know try and get as much done as you can but I guess that experience will tell us that a bit of gap between signing completion the more likely those agreed form documents are going to exchange at some point during the period aren’t they

Chelsie: Yeah exactly I mean the…with all the best intention and will in the world you know you always try and agree from both parties perspective obviously you want to have as much in agreed form as possible at exchange to have as much deal certainty but the longer the gap the more things change.  So you know this could be a really minor thing like a company name might change or you know a board of directors will slightly change or you know one of the signatories leaves the business.  For example, they might have signed up to an agreed form document so small changes that you know people on the ground might not think of all the time in terms of principles but they do have a knock on affect when you know without thinking about what might have been signed or might have been you know kind of agreed up front at the signing date.

Alex: Especially if they are repeating the warranties at completion because you know potentially talking about another disclosure, another disclosure process and making sure management team go back in and look at the warranties so.

Chelsie: Yeah, my advice to management team on the kind of sale side with you know repeated warranties is always that everything that you do in that gap period you have to have in mind the fact you have a signed deal so you have to think of the buyer as almost as if that the buyer is already the owner of the company.  So think about every time you sign a big contract does that need to be disclosed, do we need to tell me this.  Not only because you might have the kind of undertakings to provide certain information in the gap period but also from a disclosure process because then that makes that process a lot smoother when we get there and they do not feel like we are doing another whole really heavy round of disclosure which is never fun for any management team right so.

Alex: Especially one like you have pulled through you know potentially a couple of months of kind of hard work or long hours to get them to a point like the thought of them going back there is probably not too appealing.

Chelsie: Exactly so whatever you can do upfront to kind of manage that process early then you know that is for the benefit of everyone involved.

Alex: Thanks Chelsie.  Why don't you talk us through maybe simultaneous and how that happens kind of I guess the amount of work may not necessarily be different but it is different how it all plays out.

Chelsie: Yeah exactly, I mean simultaneous obviously a lot more simple signing and closing affectively in the same day and so there is all of the sort of things we have just discussed is just not relevant.  The way that would work you know I have said there is you know signing and completing on the same day, once the documents are agreed and we need to be signed, they are signed by you know the relevant parties and exchanged so that everyone can check each other's signatures but once that process is done and you complete on the transaction the SPA, investment documents, whatever is required for that particular deal become legally affective and any kind of ancillary moment to that in terms of share issuances, issuance of loan notes all become live at that point in time which would not be the case for a split exchange and completion.

Alex: So you touch on it there and like some of the stuff that is going on and I think like this podcast and probably like this episode is a good way of trying to lift the lid a little bit on what is going on behind the scenes at a law firm once we have a commercial agreement.

Chelsie: Yeah.

Alex: So kind of you know why don't we just tell everybody while they are all running around and why it is they are think it is taking so long to get things done like what is happening in that period between agreeing the documents and everybody jumping on a phone call or meeting to say "...it is all done, well done everybody..".

Chelsie: Yeah so there is probably four or five different kind of things that are going on in the background in terms of bucket.  So you have got the kind of legal considerations to you know there are ancillaries to the commercial deal right so the commercial deal is primarily in the main documentation that clients will be really familiar with SPAs, investment documents etc. but behind the scenes there are a lot of ancillary documentation that is required to implement that commercial deal and it is not just done by the main document. 

So you know taking an equity example you know if you have got a management buyer or rollover etc. there can easily be hundreds of documents that are required to then implement the structure that they are trying to achieve and that process in itself can only be done in another bucket is funds flow and managing the numbers so as often the case you know numbers are kind of the last thing to be agreed because there is other considerations around locked box, completion accounts and things like that need to be worked through before the numbers are finalised and all those numbers need to then be plugged through on the documents so that is always a kind of last minute.

Alex: And there is obviously like….I guess there is a whole team behind the scenes so it maybe that the client deals with kind of you Chelsie as the main contact point on like a share price agreement or investment agreement…

Chelsie: Yeah.

Alex: …like there is a whole team behind you that are doing other things and you know Maya, Ruairi are like your feverishly there trying to roll out another kind of hundred documents that people have to sign and you know and on the more complex transaction there is even more to do I guess.

Ruairi: Yes just feeding into that as well, I think you get to a stage where you have agreed form documents and they can be agreed quite far in advance but in my experience there is often one change and that one change can have a ripple affect through tens of documents and then you have to re-check it, check again so even a small change to one document or one part of the deal could have big ramifications across the document suite.

Chelsie: Yeah I think I had to ask recently on a deal that me and Ruairi worked on together where you know a whole suite of ancillary documentation was agreed and it was a vast amount of documentation as well in advance and then our client changed the names of the new close relatively close to completion so that change itself then required you know a whole change throughout a lot of the documentation which does obviously take up a fair amount of time.

Alex: And some of the deals that you have worked on Chelsie specifically there are a lot of like sellers or there is a lot of people involved.  So you are talking each person has a set of documents or each company has a set of documents and there can be like five documents but then there could be 50 people that you are dealing with.

Chelsie: Yeah exactly I mean the most recent example which was quite complex structuring I think there was 50 individual sellers, some of which were option holders, all rolling over a certain proportion into a triple new co-structure but everyone was receiving kind of different proportions of shares, loan notes, cash, all of which was confidential for the individual so every individual had their own short form shareholder agreements if you like so the number of documents exceeded like 600 for that one transaction and it was multi-jurisdictional too so not only were we managing like replicating out those documents but each of them was niche.  They all had to be signed in different jurisdictions with different time zones so when you are working on a transaction trying to get that signed there is kind of a lot to consider there and ensuring that everyone is available at the right time or you are preparing the documents for the right time for that person to be available to sign in advance of what is like an expected date of closing.

Alex: It is making me feel nervous just thinking about it.  And obviously like so that stuff is within our control there is also stuff that is not in our control as well but goes on as part of that process.  You know I am thinking increasing the things like W&I insurers are going to be involved in the process aren’t they and they are going to want to see the final form documents before they sign off.

Chelsie: Yeah exactly that is another one that is becoming as you know increasingly common for M&A deals right now and is a timing factor that everyone does need to consider.  I mean you do try and manage that W&I process alongside the main deal so that they have got you know the W&I insurers, the brokers have good visibility of the SPA warranty deed and the commercial terms of those like cut from but as we know no insurer will sign off on a policy until they have seen the final SPA, the final disclosure letter, you know the disclosure letter sometimes can be the factor because if that comes in late in time for them to review that can have a bit of a timely impact.  They also you know the W&I process also requires a final form DD reports time process for underwriting questions on those DD reports which you might need to get other advisors involved in you know if its questions on financial DD and get your financial advisor involved in that so there is a whole….it creates a whole new process to think about in terms of M&A transaction and as you say as you are running up to that completion process.

Alex: Yeah and there is just I have had the more admin things isn't there like what is going on with the money, like the banking, who is going to be paying who, who needs to transfer funds where and there is the organising the completion call and making sure that all of the steps that are required for completion which can be extensive sometimes can't they with part security and you have got pre-completion obligations and…

Chelsie: Yeah.

Alex: ….with things like that.

Chelsie: Yeah exactly I mean the ….making sure you have got cash in the right place is key and always is one of those ones that the worry right because you are going to get asked at some point to have funds in client account for example and you want to make sure that they are ready in advance so we are not scrambling up to the completion date without being in funds.  You know the funds value sheet comes out of where the numbers come from right and usually that is say corporate finance led with our input kind of document or spreadsheet that gets finalised but like you say that is always a last minute moment where you know the client might not know how much they are getting in until that kind of that moment closes.

Alex: Increasingly just the whole process of transferring funds is becoming well it is changing in the market place there used to be that you would always have the funds in your client account in view of the buyer and you would be completing on the basis of an undertaking.  Obviously you know for good reason it is becoming more and more stringent of whatever the clients might handle so there is actually quite a lot of law firms that won't handle client money.

Chelsie: Yeah and I think that has a ….it does have actually have a pretty big impact in terms of that closing moment because typically and historically you know when monies are held in a solicitor's client account completion can literally happen when you have the completion call on the back of a solicitor's undertaking but because if the ….as the market is moving into a you know a corporate sending like the buyer sending the seller money directly then completion does not actually occur until the money is received technically under an SPA.  So that means that there is a gap between having a completion call and agreeing everything is in order can be released subject to monies being received into an account and if you are dealing with an international deal you know where that money might take some time to move it can be quite tight.

Alex: Yeah I have been….well I have known that there are deals that happened in our team where people have tried to stay on the call…

Chelsie: Yeah.

Alex: …for the monies to arrive and like eventually everyone has to jump off the call and several hours it finally arrives and you know so it has kind of taken away that eureka moment that you have when you have got an undertaking.

Chelsie: Yes indeed.  I suppose it is one to think about where if you have got a….if you have an international deal where you know money might take more than you know a day to transfer where you have got a transaction that is very much the numbers are aligned on a particular day so if you are paying off bank debt for example out of proceeds that number always fixed at a certain date because interest accrues on a daily rate and cannot be….no security can be released until you have paid off so it is just another factor to consider in those circumstances where cash is moving directly between principles and not through client account.

Alex: Yeah and it is really like for the client to understand their internal processes of how they are getting the money and is their organisation happy that they are sending funds technically before they have completed a transaction I guess that they have got to satisfy themselves of that risk.

Chelsie: Yes, agreed.

Alex: So this is why if we can talk a bit more about mechanics it is kind of what have you seen and what have you observed that can help the process be a bit smoother.  So like everybody wants the documents to be agreed, like everybody is working towards this deadline the last thing you want is anything could be thrown like, thrown off course so like what is the some things that you've…

Ruairi: I think it is just kind of respecting the process so a lot of signing processes now are done on DocuSign so rather than in person which is kind of affect of Covid and that in itself is a process that you need to go through and if you are working on a big deal like the deal that Chelsie and I worked on recently that has hundreds of documents those will have to be loaded on to the system and you have to insert the execution docs yourself so it is a process that can take hours and hours and it is something that you do not want to rush but that is another thing that goes into why do these processes completions take so long.

Alex: What are some of the things you think that a client would do to kind of make sure that it goes smoothly like but the process goes smoothly I think.  We have all been there when we have sat with the documents to finalise…

Ruairi: Yeah.

Alex: ….and we think we are good to go probably later in the evening and then suddenly like something crops up so like what we think is the ….?

Ruairi: Ultimately if there is a document that needs to be executed as a deed you need the witness there to be physically present and you need that document in to complete and if there is any mistakes with it or if the witness goes to bed or they leave the client's property or wherever it is that they are signing you cannot complete without it.

Alex: I guess like it is the case of the lawyer and the client need to be kind of in contact with each other and they need to know what the process is from there to go to where they need to be.

Maya: Just to…sorry just to jump in there I think some signatories for example you have a witness, they need a witness, they sign themselves and they think 'oh that is it I am done I do not need to do anymore' especially if a deal is going late into the evening.  They might go to bed you know they have signed at midnight, they are done they can go to bed but actually we are waiting for their witness and there is a way of in DocuSign we can see who the witness but we might not have had any contact with them so the easiest way to get that witness you know to sign the document is for the signatory to chase them themselves so yeah like Ruairi was saying a lot of the time it is just waiting for people to actually sign.

Alex: Yeah especially like so you know the legal position is that the witness needs to be physically present with the signatory so it is very easy if the person is stood next to you whilst you are signing and watching you sign to then be like right 'now you need to do your bit and you are not going to go anywhere until we have done it' and that kind of would help them. 

I guess there is other things as well so a lot of the time depending on the organisation it might be an internal sign-off process so like once you have got into a position where you need something to be done, they are going to have go to X person in the company who is going to say "..right yeah that is fine, it is signed off, you know you can go ahead and get it signed..". 

The other thing is like obviously you will need….we have spoken about needing a witness as sometimes it is the signatory himself so the person in the organisation that may be managing the transaction may not be the one that is signing the documents like there may be somebody else completely different, a director and nobody has told them like where they are with the transaction or whether it is lined up or what is going on and you know they have gone to bed or they are on holiday and you know everyone is rushed for pay dates that they want to complete at and then suddenly everyone remembers that no one has actually checked with the person to see if they are available to sign anything so.

Chelsie: Yeah I do find that upfront visibility in advance around signatories that you can provide to a client is key.  The one that I think often gets overlooked sometimes is where you need shareholder resolutions passed because everyone is thinking at the time and in the midst of the chaos of trying to get a deal over the line particularly for a client it is like 'okay well I am director of the seller or I am a director of the buyer or the target and so you know I can sign all this stuff' but then when you dig around the ancillaries what is needed to implement that deal sometimes the signatory base that you need is a lot wider than that.  So it includes you know shareholders, there might be a different group company where they are not a director and someone else needs to be signing so you need to….you know that is why we have a documents list and that kind of open management around parties of documents but it is something to really think about as early as possible to ensure that you know if they are not going to be around when you are planning on signing can we get that document agreed early and signed early so that it is in the bag ready and we are not sort of rushing for that the last minute.

Alex: There are things that we can do as their lawyer to help them having it.

Chelsie: Of course, absolutely.

Alex: We have mentioned one is like getting stuff signed early.  Another option is rather than having a board meeting if you cannot get all the members of the board together and they do not want to hold it at midnight is that you pick up to something like written resolutions where people just have to sign the document and it can be passed without a kind of meeting having to be held so yeah I guess it is again that constant communication between a client and kind of the legal team to make sure that they are signed up and kind of just assume issues as possible.

Ruairi: I have seen powers of attorney as well used particularly where there has been EMI schemes in place and they might have tens of shareholders and that always helps streamline the process if it can be done.  Again it just feeds back into the DocuSign packs at making sure that things are going to be done properly and you have set the attorney as the proper signatory and execution blocks are in place.

Alex: Yeah it can be helpful because you can get it signed weeks in advance right as a power of attorney so it can be ready to go. 

Maya I am keen to know a bit more about the change in how documents are likely getting signed nowadays.

Maya: Yeah.

Alex: So I think often we talk about like pre-Covid and post-Covid and we have touched on it briefly today but yeah maybe you can just talk us through like some of the changes that have happened.

Maya: Yeah so pre-Covid I think pretty much every completion all documents were signed in person so we had the client would come into our offices, we would have separate meeting rooms like buyer/seller and then yeah we would all sign in person.  I guess there is pros and cons because it kind of the atmosphere there was more you know build up to completion and there was more celebration when completion happened.  But it is the behind the scenes again like we have all our clients in our client meeting rooms but then us juniors having to go downstairs and actually witness every physical document so if you have like a hundred documents you are rushing around because you know your client is waiting upstairs for you to confirm that you can complete because you are having to check every physical signature, flipping through all the pages, ticking it off against the documents list and things like that. 

Whereas yeah post-Covid it has all shifted to DocuSign which it has saved the stress of you know the client is not in the room, breathing down your neck, you know "..can we complete, can we complete.." but yeah it has taken away from the completion celebration you do everything on DocuSign there is not much celebration but you know you can have.  We had a witness, a signatory sorry, recently who I think he signed on DocuSign when he was on a plane like on holiday like people can sign from wherever on DocuSign.

Alex: It is just….yeah…so it is convenient when like it is easy and you just need like a signature…

Maya: Yeah.

Alex: ….I think it is then harder to manage it when there are certain formalities that they have got to abide by so like we always stress like you know so if they need a witness they have got to be there, like we have got to be able to see it like to know that it is actually you that is signing. 

One thing I do not miss is when I was a junior in my career and having to go downstairs and photocopy like hundreds of pages…

Maya: All the documents.

Alex: ….yeah to then send over to the other side as PDFs so if anything like has improved like that was like the biggest one.

Ruairi: Just hearing the sound of the scanner every morning.

Alex: And getting jammed and then you are having to like clear the scanner because like it has kind of swallowed a page.

Chelsie: I think you know what I enjoyed so much about physical completions is when we did have like everyone was in one place so you know i.e. around a seller etc. and their lawyers and us were all in the same room kind of managing that signing process.  As Maya said it obviously does create a lovely atmosphere and it is nice to see people you know like who have you know owned a business for a long time, finally complete and stuff it can be you know well it can be rewarding. 

The…but like you say Alex the problem is what I found is that DocuSign now streamlines actually the completion process.  So like Ruairi says you do have to respect the process in the fact that it does not take five minutes to upload all those documents to DocuSign but it provides the client with a lot more flexibility and you know they are not sitting in a room like Maya said waiting around all that time whilst we you know check every single signature because they can be off doing what they need to do i.e. on holiday, go to bed, you know provided they have signed what they needed to sign so I do think that the DocuSign process has saved a lot of time it would have saved a lot of client time at the very least and has enabled us to complete maybe quicker than we would have had we been doing a physical signing.

Alex: Yeah because this sort of time does not have now is that kind of pressure point it used to when everyone was there and they had to get it done then because everyone was there like you kind of do not…I guess there is probably more of a risk that it just like flips into the day after I guess.

Chelsie: Yeah I mean it is alright it could have well…sometimes have been useful for negotiation purposes in terms of when you have got some sticking points and everyone wants to get a deal closed you throw everyone in a room you know it gets…

Alex: Or go to bed.

Chelsie: Yeah exactly it gets stuff done a lot quicker but you know it is not a nice place for a client to be in when you are stuck in a law firm overnight and it was ….there was one deal I did a few years back now where you know it was an overnight completion, I had clients who was expecting to close or like get everything signed like by midnight.  It was rolling through the night and the seller…no the buyer sorry was listed and it was going out on the market in the morning at like 7 am so everything had to be signed and ready and at seven and we were at our desks all through the night trying to get this agreed and it got to like half five and we agreed everything and the guy who I was working with at the time it was like "..oh right let us go up and take the documents upstairs.." and we got up there and they had gone.

Alex: Oh no.

Chelsie: And they had just left a note they had gone for a walk but it was like we only have an hour to get these documents, signed, scanned in and so I was out here in More London running up and down the fields and all around the shops and trying to find all the coffee shops were open just trying to hunt them down because we needed…like we…and we were just running out of time for the announcement to go out at seven so…at least we have not got that anymore.

Alex: No I guess it does answer the question about why things go late really doesn't it because like there is that pressure point like you want to get it done and to get it done sometimes you just have to carry on until it kind of gets to that point that it's done.

Chelsie: Yeah absolutely I mean look you need some deals just need that pressure, particularly you know for clients that have spent months negotiating you know and they have had to wait you know another week or two whilst all these legal considerations were discussed the day of being like tied up and there is a date in mind like a Friday for example where if stuff needs to be done you know it is that moment where everyone is kind of is motivated to get it done because everyone has been working on it for such a long time. 

I think the other thing around working late I mean this is not so much through the night but I mentioned it earlier that a lot of the time the numbers are all based on like a particular date that you need to close on and we had the list me and Ruairi on the deal we did recently where if we had slipped passed midnight all the numbers would have changed so every document would have had to be updated and we would have had to have a whole new resigning process and we actually closed at 11:56.

Alex: Well done.

Chelsie: I mean was quite pleased but you know it is a….it is always dictated by motivation and wanting to get something done sometime as there is a kind of a legal or commercial principle where a deal needs to get done by a certain time and you know it is our job to make sure it gets done for that time which can take a lot of overnight and late night working.

Alex: That is right.

Ruairi: I think you get to point don't you where you are kind of ready for the to be now if I have to work for 24 hours or I have to work for however long you are ready for it to be done and everyone kind of just groups in don’t they?

Alex: Yeah thanks everybody, thanks for your time and thanks for being with us today for as I have to say it is has been a very insightful conversation and yeah and we will speak to our listeners again soon.

Chelsie: Thanks Alex, cheers.

Ruairi: Thanks Alex, cheers.