Negotiation Strategies

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This slide show outlines many of the common (and not so common) negotiation strategies used by my clients and me over the past 20 years.

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Negotiation Strategies

  1. 1. Negotiating Skills and Techniques Presented by Bart Greenberg Manatt, Phelps & Phillips, LLP Continuing Legal Education
  2. 2. Bridging the Gap . . . Business Issues
  3. 3. Can a “Simple” Solution Be Reached? <ul><li>Splitting the Pig </li></ul><ul><li>Trading Terms </li></ul><ul><li>One Side “Blinks” or “Caves” </li></ul><ul><li>“ Trust Me” or “Wink-Wink, Nudge, Nudge” </li></ul><ul><ul><li>Typical where one party does not want deal terms reduced to writing </li></ul></ul><ul><ul><li>Consider the “CYA” Letter </li></ul></ul>
  4. 4. “ Trust Me” Example 1: <ul><li>Merchant Banker Purchases Stock in Client with 50% Nonrecourse Note </li></ul><ul><li>“ Understanding” that Client Would Forgive Remaining 50% Recourse Portion of Note </li></ul><ul><li>Client Goes Bankrupt and Merchant Banker Sued by Trustee for Recourse Portion of Note </li></ul>
  5. 5. “ Trust Me” Example 2: <ul><li>To Accommodate Investor Tax Position, Documents Will Not Show That Shares Are Being Issued, in Part, for Services </li></ul><ul><li>Investor Breaches its Obligations Under Development Agreement </li></ul><ul><li>Client Unable to Claw Back the Shares </li></ul>
  6. 6. “ Trust Me” Example 3: <ul><li>In 1990, Client Agrees to Accept 49% of Shares In Order to Make Company Available for Minority Owned Status </li></ul><ul><li>From 1990 through 2003, K-1 Reports That Each Shareholder Has 50% Interest </li></ul><ul><li>Since 2004, K-1 Allocates Ownership 49% and 51% </li></ul>
  7. 7. Will More “Creative” Thinking Help? <ul><li>What is Creative Thinking? </li></ul><ul><ul><li>Getting from Point “A” to Point “B” by method not commonly used or known </li></ul></ul><ul><ul><li>Definition of Point “B” is key </li></ul></ul><ul><ul><li>Substantive knowledge must then be applied to determine the path </li></ul></ul>
  8. 8. Examples of “Creative” Thinking: <ul><li>Consider These Point “B”s: </li></ul><ul><ul><li>Getting shares to the CEO at no cost in order to start the capital gains clock but without causing a taxable event </li></ul></ul><ul><ul><li>Protecting Buyer with reasonable indemnification rights, but at the same time allowing Seller to sleep at night </li></ul></ul><ul><ul><li>Funding Target before Buyer has completed its due diligence </li></ul></ul>
  9. 9. If Creative Thinking Won’t Help . . . <ul><li>Reasonable Parties are Typically Able to Resolve Business Issues </li></ul><ul><li>If Parties are Not Able to Resolve Business Issues, Is Something Else Preventing Compromise? </li></ul>
  10. 10. Bridging the Gap . . . Unequal Bargaining Power
  11. 11. Unequal Bargaining Power <ul><li>Absence of Compromise May Be Attributable to a Party Believing That It Has Sufficient Leverage to Force its Position on Other Party </li></ul><ul><li>If so, and Negotiations Are Stalled, What Options Are Available? </li></ul>
  12. 12. Example of Unequal Bargaining Power <ul><li>Client Has First Use of Trademark </li></ul><ul><li>Multi-Billion Dollar Conglomerate Infringes on Client’s Trademark </li></ul><ul><li>Client’s Cease & Desist Letter to Conglomerate is Rejected </li></ul><ul><li>Client Unable to Devote Enough Resources to Maintain Fight </li></ul>
  13. 13. Example of Unequal Bargaining Power <ul><li>Negotiated Buy-Out of Stock Held By 44% Shareholder Fails </li></ul><ul><li>Shareholder Files for Dissolution and Shareholder’s Spouse Takes Active Role in Litigation </li></ul><ul><li>Spouse Unaware of the Nature of Certain Reimbursements </li></ul><ul><li>Shareholder Therefore Highly Motivated to Settle Litigation </li></ul>
  14. 14. Techniques to Level the Playing Field <ul><li>Outsmarting Your Opponent </li></ul><ul><li>Recognizing, and Negotiating Within, Your Means </li></ul><ul><li>Manipulating Your Opponent’s “Greed” </li></ul>
  15. 15. Outsmarting Your Opponent <ul><li>Your Opponent’s Position May Be Based on a Misunderstanding of Law </li></ul><ul><li>If so, and the Misunderstanding of Law Can Be Clearly Articulated to the Opponent, the Opponent May Be Forced to Moderate its Position </li></ul>
  16. 16. “ Outsmarting” Example 1: <ul><li>Negotiated Buy-Out of Stock Held By Holders of 49% of Stock (One of Which is a Public Figure) Fails </li></ul><ul><li>Bylaws Indicate that Acts of Board Must be Unanimous </li></ul><ul><li>Bylaws Also Indicate that Quorum for Shareholder Meetings is 54% </li></ul>
  17. 17. “ Outsmarting” Example 2: <ul><li>Start-Up Develops Supply Chain Software for Multi-Billion Dollar Conglomerate </li></ul><ul><li>Start-Up Wants to License Supply Chain Software to Third Parties </li></ul><ul><li>Counsel for Conglomerate Sends Cease & Desist Letter to Start-Up </li></ul>
  18. 18. Staying Within Your Means <ul><li>The Party With Less Negotiating Power Needs to Understand Its Limitations and Not Step Too Far Beyond the Point of Reason </li></ul><ul><li>This is Also Known as “Beggars Can’t Be Choosers” </li></ul>
  19. 19. “ Staying” Example 1: <ul><li>Unstable Target Terminates LOI Because It Does Not Like Price </li></ul><ul><li>Target Incurs a Material Adverse Change </li></ul><ul><li>Target Informs Buyer that It Has 48 Hours to Close Sale or Target Will File for Bankruptcy </li></ul><ul><li>Buyer Closes Sale Within 48 Hour Period at 1/3 LOI Purchase Price </li></ul>
  20. 20. “ Staying” Example 2: <ul><li>Diligence Reveals Outstanding Tax and Judgments Liens Against Target, But Target is Unwilling to Adjust Purchase Price </li></ul><ul><li>Target Breaches its Facility Lease, Landlord evicts Target and Enters Into New Lease with Buyer </li></ul><ul><li>Buyer Purchases Some of Target’s Assets at Fraction of LOI Price </li></ul>
  21. 21. “ Staying” Example 3: <ul><li>Client Settles Patent Infringement Suit in 2004 </li></ul><ul><li>Client Breaches Settlement in 2005. </li></ul><ul><li>Patent Holder Exacts “Pound of Flesh” in Connection with 2005 Settlement </li></ul>
  22. 22. Manipulating Your Opponents Greed <ul><li>Party With Greater Bargaining Power Must Recognize When Enough is Enough </li></ul><ul><li>In the Absence of Recognizing Such Limit, Excessive Greed on the Part of such Party May Serve to the Other Party’s Advantage </li></ul><ul><li>This is Also Known as “Pigs Get Fat, Hogs Get Slaughtered” </li></ul>
  23. 23. “ Hogs” Example 1: <ul><li>Client Focused on Revenue and Not Profitability </li></ul><ul><li>Customer Payable at $2 Million and No Written Contract in Place </li></ul><ul><li>Legal Counsel Advises Client to Stop Shipping Pending Agreement </li></ul><ul><li>Client Continues to Ship and Payable Reaches $4.5 million </li></ul><ul><li>Customer Files for Bankruptcy </li></ul>
  24. 24. “ Hogs” Example 2: <ul><li>Buyer Intends to “Grind” Seller at Closing for Price Adjustment </li></ul><ul><li>Buyer Unloads “Bombshell” at Closing </li></ul><ul><li>Buyer Neglects to Realize That Exclusivity Has Expired </li></ul><ul><li>Seller Takes Opportunity to Get Out of Deal with Buyer and Sells to Third Party in 48 hours </li></ul>
  25. 25. Bridging the Gap . . . Personality Issues
  26. 26. The Unsophisticated Opponent <ul><li>Issue Mitigated by Competent Counsel </li></ul><ul><li>If No Counsel or Counsel Does Not Mitigate: </li></ul><ul><ul><li>Client Should Consider Offering to Pay Portion of Opponent’s Legal Fees if It Hires Acceptable Counsel </li></ul></ul>
  27. 27. The Unsophisticated Opponent ( cont .) <ul><li>If Opponent Does Not Hire Competent Counsel: </li></ul><ul><ul><li>Client Should Assist Opponent </li></ul></ul><ul><ul><li>Client Should Ask Its Counsel to Draft Opponent’s Deliverables </li></ul></ul><ul><ul><li>All Documents May Need to Be “Dumbed Down” </li></ul></ul><ul><ul><li>Client Counsel Needs to Deliver a CYA Letter </li></ul></ul>
  28. 28. “ Unsophisticated Opponent” Example 1: <ul><li>Sample Provision: </li></ul><ul><ul><li>Seller acknowledges and agrees that, although Buyer and its legal counsel have assisted Seller in its preparation of the Disclosure Schedules, Seller has provided Buyer with all documents, agreements and other instruments that are responsive to each of the items to be disclosed in the Disclosure Schedule, Seller has read all of the Disclosure Schedules and fully understand the nature and contents thereof, and has been provided with an opportunity to comment and revise each of the Disclosure Schedules as it deems appropriate. Seller further represents and warrants that each of the Disclosure Schedules fully and accurately discloses all of the information required to be disclosed thereunder in order to ensure that the foregoing statements are true and complete and not misleading. </li></ul></ul>
  29. 29. The Unfriendly Opponent <ul><li>Typically Arises in a Distressed Sale Situation ( i.e. , Not Voluntary) </li></ul><ul><li>Best Strategy Is To Communicate at the Attorney Level or Via E-Mail </li></ul><ul><li>If an “All-Hands” Meeting is Made Necessary, Consider Conference Call In Lieu of Physical Meeting </li></ul>
  30. 30. “ Unfriendly Opponent” Example 1: <ul><li>Closing Due Diligence Uncovers Significant Issue </li></ul><ul><li>Tension Already in Room Due to Prior Purchase Price Adjustments </li></ul><ul><li>Message Communicated Counsel to Counsel in “Side Bar” </li></ul><ul><li>Closing Occurs in Two Separate Conference Rooms </li></ul>
  31. 31. The “Difficult” Counsel <ul><li>Opposing Counsel May Be “Difficult” Due to Any of the Following: </li></ul><ul><ul><li>Counsel is Not Competent in the Relevant Field </li></ul></ul><ul><ul><li>Counsel is Overly Aggressive </li></ul></ul><ul><ul><li>Counsel Has Hidden Agenda ( e.g. , Does Not Want to Lose Client) or Is Otherwise Disinterested </li></ul></ul>
  32. 32. The “Difficult” Counsel ( cont .) <ul><li>Client May Want to Pay Portion of Opponent’s Legal Fees if It Hires Acceptable Counsel </li></ul><ul><li>If Not . . . : </li></ul><ul><ul><li>Encourage More Client to Opponent Conversations ( i.e. , Bypass Counsel) </li></ul></ul><ul><ul><li>Client May Want Its Counsel to Draft Opponent’s Deliverables </li></ul></ul><ul><ul><li>“ Dumb Down” Documents </li></ul></ul><ul><ul><li>Try All Hands Meeting so Client Counsel Can Interface with Opponent </li></ul></ul>
  33. 33. “ Difficult Counsel” Example 1: <ul><li>“ Aint No Big City Lawyer Gonna Tell Me What to Do!” </li></ul><ul><li>Opponent Recognizes that Its Legal Counsel is an Impediment </li></ul><ul><li>Client and Opponent Engage in Very Detailed Discussions With Each Counsel Only Working in the Background </li></ul>
  34. 34. The Intermeddling Prima Donna <ul><li>Typically a Third Party to the Transaction, Such as a Minority Shareholder, a High Performing Sales Person or Developer of IP, Makes Demands on Seller </li></ul><ul><li>Critical Decision is When Client or Opponent Should Negotiate With the “Terrorist” </li></ul>
  35. 35. “ Intermeddling” Example 1: <ul><li>Minority Shareholder Develops and Hosts Client’s Web Site </li></ul><ul><li>Disgruntled Minority Shareholder Breaches Development Agreement and Alleges Misconduct on Part of Controlling Shareholder </li></ul><ul><li>Harassed Controlling Shareholder Puts Company Up for Sale </li></ul><ul><li>Minority Shareholder Extracts Unfair Share of Purchase Price </li></ul>
  36. 36. “ Intermeddling” Example 2: <ul><li>Seller’s Highest Performing Sales Person Is Encouraged by Wealthy Boyfriend to Renegotiate Comp. Package on Day of Closing </li></ul><ul><li>Buyer and Seller Each Contribute to Comp. Package to Get the Deal Done </li></ul>
  37. 37. “ Intermeddling” Example 3: <ul><li>Opponent, a 50% Shareholder, Seeks Unfair Reimbursements from Client, Who Is the Other 50% Shareholder </li></ul><ul><li>Opponent Shows No Flexibility, So Client Resigns as Employee, Officer and Director and then Establishes Competing Business </li></ul><ul><li>Parties Settle for $5,000 </li></ul>
  38. 38. Bridging the Gap . . . Communication Methods
  39. 39. E-Mail Correspondences <ul><li>Highly Efficient and User Friendly </li></ul><ul><li>Somewhat Impersonal and Tone is Capable of Being Misunderstood </li></ul><ul><li>Attachment Size and Filter Issues </li></ul><ul><li>Understand and Manage the Risks of “Reply All” and E-mail Cache </li></ul><ul><li>Confidentiality and Related Use of Document Protect and Encryption </li></ul><ul><li>Unwanted Metadata in Attachments </li></ul>
  40. 40. Conference Calls <ul><li>Most Typically Used as a Side Bar or Going Over Business Issues </li></ul><ul><li>E-Mail Communication Typically Used to Posture and Frame Issues to Be Discussed </li></ul><ul><li>Can’t See “Body Language” and “Multi-Tasking” May Affect Focus </li></ul><ul><li>Beware Side Bars Upon a Failure to Properly Disconnect </li></ul>
  41. 41. “ Face-to-Face” Meetings <ul><li>Time Consuming and Expensive </li></ul><ul><li>Typically Used as a Last Resort to Steer the Deal Back on Track </li></ul><ul><li>Consider Using a “Lock the Door and Nobody Leaves” Approach to Move the Deal More Quickly </li></ul><ul><li>Allows Client Counsel to “Bypass” Opponent’s Counsel </li></ul>
  42. 42. The “Formal” Letter <ul><li>Due to the Overwhelming Use of E-mail Correspondences, Reserve the Use of Formal Letter for High Impact Statements </li></ul>
  43. 43. “ Going Dark” <ul><li>Effective Tool for Determining How Badly Opposition Needs to do the Deal </li></ul><ul><li>Once Initiated, Essentially Turns Into a Game of Chicken </li></ul>
  44. 44. The Form and Timing of Response <ul><li>Response Time and Manner Need to Be Calculated In Order to Not Message to Opponent that Client Was Willing to Give Up More </li></ul>
  45. 45. Questions?
  46. 46. Negotiating Skills and Techniques Thank you! Presented by Bart Greenberg Manatt, Phelps & Phillips, LLP (714) 371-2518 [email_address]

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