European General Counsel SeminarChampions in BusinessOlympic Museum, Lausanne24 January 2012
European General Counsel SeminarCross border post merger – winning goldRobin Johnson, Head of International M&A,Eversheds LLP24 January 2012
Cross border post merger Aim of today’s session– Focus on some examples of deal issues that can lead to value erosion post transaction– Look at ways to minimise risk and preserving value post deal and to share our top 10 tips for making your acquisition a success
Case Study One• Large corporate acquiring a group of businesses from private ownership• Limited diligence undertaken• No due diligence done of “minor” subsidiaries but buyer directors and officers appointed to the boards• The deal team was led by the division buying the business
Case Study One (Cont‟d)• Buyer officer appointed at closing to the boards of all acquired entities• Subsequent compliance issue and potential personal liability
Case Study OneIssues• Lack of focus to due diligence or rather too focused without overall leadership• Not understanding who the seller was and their approach to risk• Lack of internal controls as the business was run as a “family business”• Relied on the seller‟s suggestion of warranty and indemnity insurance without fully understanding the risk• Post deal issues that came out of this approach
Case Study OneIssues (Cont’d)• Lack of understanding of the entities acquired and potential liabilities for directors Key Lessons Learnt: Do not underestimate the importance of diligence and good governance.
Case Study Two• A large business acquiring a division of another large business• Thorough due diligence done but the pitfalls of buying out of a large business
Case Study TwoIssues• Transitional services issues• Tax and legal structuring issues• Hidden costs• Stock options and other labour law issues• Cultural costs• Ownership of assets Key Lesson Learnt: Importance of deal planning and realistic bid timetable. Focus on the carve out.
Case Study ThreeAcquisition by a large corporate of anentrepreneurial private business
Case Study ThreeIssues• Cultural• Understanding what made the target business “click”• The original owners role post deal• Employees view of becoming part of a large corporate and the organisational changes that resulted• Relationship with third party vendors Key Lesson Learnt: Integrating culture and incentivisation package
Case Study FourFixing the valuation “gap” on a technology
Case Study FourIssues• Earn out arrangements• Issues associated with earn out arrangements including short term focus of vendors against long term focus of buyers and what happens if the buyer changes their mind• What happens when the synergies aren‟t there
Top Tip 1 Culture• Do not underestimate the difference in lifestyle• Approach, compliance approach, business approach and history• Can you manage remotely?
Top Tip 2Process and Timetable• Scope• Control• Communication• Build in time to reflect distance/travel/time zones• Don‟t underestimate the need for physical meetings• Disproportionate amount of time and energy compared to a domestic deal
Top Tip 3Due Diligence• Don‟t be afraid to due diligence to death to replace contractual comfort• Use due diligence for your integration plan• The value of vendor due diligence• The difference to disclosure processes• Ensure you understand the characteristics of the individual entities acquired and the potential liabilities for your directors
Top Tip 4 The Gap between Buyer and Seller PriceExpectation• Issues with earn outs• Issues with deferred consideration• Issues with non-cash consideration
Top Tip 5Transactional Documentation Approach• Escrow Accounts• Completion accounts v locked box• Approach to disclosure• Approach to warranties and indemnities• Approach to financial and other limitations• Litigation v arbitration – the choice of law clause
Top Tip 6 Anti Trust• Build into the project plan time to assess anti trust• Different merger controls in each jurisdiction• Anti trust compliance going forward
Top Tip 7 Taxation• Structuring deals on tax efficient basis• Asset deals against share deals• Transaction costs associated with the deal• Future repatriation of profits• Transfer pricing• Stock options
Top Tip 8 Separation Issues• Issues of selling out of the group• Licences, permits, consents/real estate, IT pension plans• Employment benefits going forward
Top Tip 9The Compliance Programmes going forward• Bringing the employees into line• New divisional responsibilities
Top Tip 10Third Party Views• What do suppliers think?• What do customers think?• What does the market think?• Are synergies there?• Does the target have a particular style of being with customers and suppliers?
Eversheds ConsultingCreating a High Performance TeamPaul SmithEversheds Consulting
Agenda• A shift in the balance of power• Issues facing general counsel• Taking the health check to assess your readiness• Questions?
Lawyer Client RelationsSummary of Developments• The power has shifted and In-house Counsel (IHC) are now at the helm• Firms less able to set direction of industry• New responsibility of market leadership presents new challenges for In-house Counsel
Law Firm of the 21st CenturyThe Client’s Revolution• In our recent report, Partners and In-house Counsel told us that:75% believe power has 73% of In-housemoved from Counsel have firms to changed or reduced client 78% believe the number of external legal that GFC advisors changes are permanent
Global Financial Crisis (GFC)Immediate Impact – Cost In the USA big firms alone 10,000 lawyers laid off in 6 months since GFC Media News Group Inc 1,000 lawyers laid off in USA in single day Bloomberg Inc Both in-house & firms have had budgets cut, salaries frozen and unnecessary costs removed Winmark Looking Glass Report
Global Financial CrisisStructural changes Clients take centre stage Legal services gear Law firm towards market in efficiency flux and value
Clients take centre stage The evolving role of the In-house Counsel1. Balance of power shifts to clients – Client rise to take the reigns as legal sector enters modern world – Change driven by client demand; law firms reactive to change2. Fee levels set for long term stagnation – Recession drives efficiency – Legal services are increasingly unbundled – Outsourcing and technology dramatically increased3. Large expansion in In-house Counsel status and role – 74% of IHCs report that they now occupy a far more senior role within the business – CSR increasingly the responsibility of the in-house team
Balance of power shifts to clientsThe rise of client power• In-house Counsel have taken the role of business advisor• Law firms aspire to this role, but are seen as service providers Over 50% of In-house Collaboration Counsels said as their Business in-house capabilities Advisor increased, they would look to external lawyers Expertise Trusted Insight as a source of highly Supplier specialised advice only Expert for hire Is this the best model? Task
Change in the balance of powerFrom firm to clientHow much negotiating power do In-house Counsel feelthey have when agreeing fee structures? Source: Winmark Looking Glass Report
Client led marketNew challenges confront the modern In-house Counsel In-house Counsel now have a new responsibility to lead market Many IHCs are unprepared for this new responsibility Law firms have their own agenda Managing law firms is like herding cats
IHC responsible for shaping industryOpportunity to lead market Unique opportunity to lead market But, are you ready and are you equipped to deal with the other major issues facing you? Risk and compliance, need to show value, decreasing budgets, globalisation, pressure to generate income
Taking a Health CheckAre you making the most of the new market dynamics? Taking you through a health check measuring your team performance Be honest in your appraisal – ensure you score „as- is‟ and not „hope-to-be‟ Score each step out of ten 0 5 10 I know we do I know we have I am positive not have some processes we have procedures in – but we could excellent place improve protocols in place
1) Legal Department StrategyThe plan to achieve your goal 0 5 10 • No defined strategy • Clearly defined and • No alignment to wider communicated strategy business strategy • Buy-in from team, • No communication buy-in wider business and from team senior management • Ad-hoc reactive - fire • Aligned to wider fighting business objectives • Regularly reviewed and progress measured
Strategy case studyMajor defense manufacturer Major defence organisation with no effective legal Strategy Maturity Model department strategy 3 year strategy development and Best in implementation program class Strategically Benefits: managed • Large improvement in Developing customer satisfaction • Substantial cost Ad-hoc reduction • Lower risk 3 year process • Early engagement
2) Insource versus OutsourceThe resource mix 0 5 10 • No processes for decision • Sophisticated decision making across teams tree • No decision criteria • Risk/quality/capacity • Ad hoc requirement for assessment applied to external counsel different work areas in different ways • Rigidly applied across business teams
Decision tree case study Major global bank Is the matter YES NO Business As Usual (BAU)? Is the matter Is the matter YES National BAU? NO strategic? Get estimate. Is the matter Is the fee BAU City? estimate < NO 25k? YES NO NO YES Get estimate. Is the matter Get estimate. Refer to Get estimate Instruct Is the fee strategic YES Is the fee department from another Eversheds estimate < estimate < headBAU panel firm 25k? 25k?Instruct lowest NO YES NO YES quote Get estimate Instruct Get estimate Instruct from another Eversheds from another Eversheds BAU panel firm strategic firm Instruct lowest Instruct lowest quote quote
3) Do you have a formal panel process?Who to engage 0 5 10 • Business units choose • Defined and structured law firms tendering process • Vast array of firms • Defined panel lifespan providing piecemeal • Tender process aligned advice with legal and wider • No consistent rationale business goals behind firm choice
Panel tender case studyTyco Old Panel Panel Strategy & Tender New panel General contractor model Implement internal engagement protocol Review historical work with non-panel firms New matters only to be instructed to panel firms by legal team Implement service level agreements Extract value add in line with organisational goals
Panel tender case studyMajor Automotive Manufacturer Old Panel Panel Strategy & Tender New panel General contractor model Implement internal engagement protocol Review historical work with non-panel firms New matters only to be instructed to panel firms by legal team Implement service level agreements Extract value add in line with organisational goals
4) How are external firms instructed?Method of engagement 0 5 10 • No process for selecting • Defined engagement which law firm protocol • Multiple ways of • Confirmed contact instructing points • Ad-hoc decisions on • Regularly reviewed and when and who to monitored engage?
5) Managing internal teams 0 5 10 • No KPI’s • KPI linked to objectives • No management • 1:1 and team meetings information • Monthly reporting • No regular meetings • Clear strategy – • No clear strategy understood by business • Ad hoc allocation of work units • Cross team business integration
6) Alternative fee arrangementsThe right price for the right service 0 5 10 • No consideration of work • External work types or fee structure categorised into types • All firms bill by the hour • Alternative fee arrangements used appropriately: o Fixed fee o Conditional fees o No win / No Fee o Single firm retainer o Billable hour o Volume work / LPO
Fee structures case studyEversheds LLP Custom models General fee structures Annual retainer Major Utility Billable hour Fixed Fee £800k – all work Remains 20% Revenue: important •Corporate •Litigation •Real Estate Major BankReview all leases and share any revenue from findings Tyco / Eversheds Conditional Fee Model Sole EMEA supplier Popular in Litigation
7) Managing External FirmsEffective supplier management 0 5 10 • No written protocols • Written protocols • No regular meetings • Regularly reviewed and • No minimum standards monitored • Clear strategy – communicated and understood by firms
7a) Rank Review SurveyDriving competition 0 5 10 • No monitoring of out • Regular survey of performance by firms business units • No firm ranking satisfaction with external firms • Ranking solely by % of work won • Formal external firm scoring process • Updated league tables • Rank regularly discussed with firms • Outperformance identified and acknowledged
8) Legal Spend ReportingVisibility over cost, quality and timeliness 0 5 10 • No regular reporting • Regular reports from external firms • Easily collated (single • Multiple report formats format) • Multiple data entry • Closely analysed and systems for analysing information used spend • Feedback provided to • Ad hoc reports firms
Reporting exampleEasy, effective, and efficient oversight Target $ Exposure $ Legal spend vs budget
9) Value addLeveraging value add offerings 0 5 10 • No value programme • Free secondees • Different across business • Free training units • External lawyer report • Reactive approach – value add • No defined contact in • Free advice external firm • Helplines
10) Recoveries ProgrammeCreating a legally attune and assertive organisation 0 5 10 • No proactive programme • Audit completed – • Legal and Business units contracts and processes not aligned • Established programme • Contract management communicated to lifecycle broken suppliers • Generating recoveries • In-house cultural change
Recoveries case studyDuPont Total Recoveries: $1.577 billion
11) Compliance InnovationDriving innovation within 0 5 10 • Regulation seen as rule • Outcomes focused compliance compliance • Ad-hoc response to new • Clear internal and regulations external review process • No or unreliable • Value add compliance management information education from panel on compliance firms • Strategic use of compliance technology / outsourcing • Benchmarked and regularly reviewed KPIs
Compliance innovation case study Leading UK retail bankA. AML Probability of complianceB. Terrorism financing failure 5 E DC. BriberyD. Antitrust 4 BE. Capital adequacyF. Health & safety 3G. Reporting requirementsFindings: 2 Reporting key regulatory area for this institution 1 F Increasing complexity Increasing impact from 1 2 3 4 5 compliance failure
12) Optimising new legal modelsDriving innovation in service delivery 0 5 10 • Traditional insource v • National / international outsource / specialist panels • No use of alternatives to • RAG rated work local law firms • Law firm collaboration • No categorisation of • Use of LPO’s, BPO’s via work law firm or direct • Agile lawyers • Secondments / Paralegals
What did you score?Where do you stand relative to peers? Industry? World? 0 5 10 What is your score? Where do you want to be?
ConclusionThe future• The client is now at the centre of the relationship• Getting the most out of firm / client relationship is about deeper integration• Being ready to take advantage of the opportunity and meet other challenges
Paul SmithPaul is a Partner, environmental lawyer and litigator and has defended anumber of multinational companies over the years in relation to criminalinvestigations in the UK, Europe and North America. The investigations haveranged from chemical plant explosions, insider dealing, railway disasters and price-fixingto environmental incidents and other major crises.Paul is a recognised expert on law firm partnering and convergence. He began developingthis expertise as client partner for DuPont more than ten years ago. In recent years Paulhas focused on how the law firm and the global corporate law department can worktogether effectively across multiple jurisdictions. Paul consults with many global corporatelaw departments on their structures, processes and practices to derive greater value fromoutside counsel. He is part of the Eversheds team involved in the Tyco convergenceproject in Europe, Middle East and Africa, where Tyco used its innovative SMARTERmodel to consolidate most of its outside legal services from more than 250 law firmsacross 37 jurisdictions to one: Eversheds.In February 2008, Legal Business magazine honoured Paul Smith as Lawyer of the Year,one of the most prestigious awards in the UK. He was awarded for his pioneering work indelivering new approaches to global client relationship management. Paul was alsoincluded in The Lawyer magazines list of the Hot 100 Lawyers for 2008.Paul Smith+44 845 498 email@example.com
European General Counsel SeminarEmployee IncentivesMotivating Your Teams to SucceedMathew Gorringe, Partner, Eversheds LLPTel: 0845 498 firstname.lastname@example.org
Employee IncentivesMotivating Your Teams to SucceedWinning teams are:• highly motivated• focussed on key objectives• driven by success
Employee IncentivesMotivating Your Teams to SucceedAn appropriate share incentive plan canassist organisations:• drive the performance of employees towards a shared objective;• often in a tax efficient way for both employee and employer; and• retain employees
Employee IncentivesMotivating Your Teams to SucceedIt is important to get the design right in order to deliver thedesired results:• who should participate?• what level of award will deliver the appropriate incentive?• what are the principal objectives/behaviours the company wishes to motivate executives to deliver?• what performance measures should be used?• will participants understand the incentive being offered?• appropriate communication and explanation of the incentive
Employee Incentives Motivating Your Teams to SucceedThese objectives are normally relativelyeasy to achieve in a single jurisdiction:Only need to consider that jurisdictions:• employment laws• securities laws• tax laws.
Employee IncentivesMotivating Your Teams to SucceedImplementation of a suitable incentive plan across borderspresents a host of different challenges as:• the laws and tax rules of one jurisdiction are seldom the same as another‟s• the establishing company will need to take account of all these laws whilst creating an incentive scheme which is: – cohesive (similar treatment for employees to create a sense of “team”/“unity”) – administratively manageable (20 different schemes for 20 jurisdictions is “unworkable”) – capable of being understood by employees across the group, no matter where they reside
Recent Case StudyGlobal IncentiveLarge United States based industrial engineering company wantedto roll out an incentive arrangement in 26 different jurisdictions.Start the Race – Identify design objectives and parameters:• who would participate (key executives in each jurisdiction)• tax treatment was important, but not key driver• critical however that no tax suffered unless and until incentive actually paid to participant• avoiding multiple plans was absolutely critical (one plan for everyone)• shares or cash (key decision)• timing – legal advice/tax advice – drafting – communication
Recent Case StudyGlobal IncentiveBronze – Assembling the right team to deliver thedesign objectives• need a concrete place to start• need a nominated project manager• ensuring all advisers in each of the 26 jurisdictions – understand the project parameters, timings – are acting as one
Recent Case StudyGlobal IncentiveSilver – Avoiding pitfalls• Recognising what‟s at stake: – criminal liabilities for the company and its officers – fines/penalties – potential for expensive claims by employer – reputational damage• Focus on problem areas: – Security laws – Employment laws – Taxation – Exchange control – Data Protection
Recent Case Study Global IncentiveIssues• Choice of law provision in the rules in many jurisdictions, especially South America (Brazil/Mexico) obsolete - the employment laws of that jurisdiction prevailed.• Requirement for local law consultation to agree terms: – Germany (Works Counsel) – Netherlands (Works Counsel) – India (Collective Bargaining Agreement) – Russia (Collective Bargaining Agreement)• Implied rights to future entitlements if awards made on a regular basis, even if they are wholly discretionary.• Company‟s ability to stop making awards without employee consent comprised: – Mexico – Brazil – Germany – Canada
Recent Case StudyGlobal IncentiveIssues• Severance payment enhancements if benefits under the plan become part of an employees salary or are deemed to be part of it• Non-enforceability of forfeiture provisions – Brazil – Hungary – Spain• Discrimination/equality – Age – similar role/similar pay• Taxation – Canada (huge problems) – Spain – India – China (uncertainty)
Recent Case StudyGlobal IncentiveGold - A measure of compromise is required and objectives need to be prioritised – Canada – abandon the plan as it would simply not work (bespoke arrangement) – Germany – onerous employment laws avoided by structuring contract so that it did not involve the German subsidiary – Russia – give delegated authority to the Board of Russian subsidiary to avoid claims against the Parent – Brazil/Mexico – obtain separate agreements from employees giving advance permission for company to terminate the plan – Acceptance that there may be provisions of the global plan that would not be enforceable against the employee in the context of a claim – Removal of references to interest accrual for Saudi Arabia – Changing the language of the Plan so that the Severance Payment laws in the United Arab Emirates did not apply.
Recent Case StudyGlobal IncentiveResult• Out of 26 jurisdictions only one country (Canada) could not be covered by the global scheme rules• Easy for the company to administer• Easy for every executive wherever they are based to understand the incentive award granted to him and its value• Simple to communicate