Storming the Castle
I’m walking through Times Square, glancing up at the flashing neon and tickers blaring stock prices. It’s my job to make one of those little symbols jump a bit. Orders from the client. “Go get us a billion, Climan,” the client told me, “more if you can. And a billion is nice, but even nicer is not giving any of it back. So be careful with those reps and warranties. And with those walk rights. “Not that we have to tell you that, Climan.” Caveat emptor. It was already hot as I arrived at Skadden Arps at 10 a.m., and it’s funny. I can still remember the smell of the hot dogs all along that block. There was no way in all of this world I could have known that mergers sometimes can smell like hot dogs. I’m a lawyer, in from Palo Alto. But I’ve been here plenty before, grew up listening to the Yankees on the radio in Jackson Heights, Queens. I run the deals for dozens of high-tech companies, biotech, software, semiconductors. You name it, I’ve dealt it. I live in a world of high-stakes poker, words upon words and phrases upon phrases that fly by in seemingly meaningless combinations. Oh yeah, I’ve heard all the jokes. If a materiality walks into a bar and meets another materiality, does that make two or none? Laugh if you will, fellas, but that’s where billions change hands. Deals succeed or fail on creative and careful lawyering; one card, one word, played the wrong way, in the wrong hands? Don’t even get me going. Today I’m on a sweetheart of a deal. My client, World Mover, a huge multinational transportation conglomerate, wants to unload TrainTyme, one of its most valuable subsidiaries. World Mover’s investment banker, Goldman Sachs, says now’s the right time to sell. TrainTyme is a hot property thanks to a network of large-rail operators, its customers worldwide, who rely on the company’s proprietary patented software technology to run their rail networks. As long as the trains run on time, the royalties pour in. “Ms. Nugent in?” I ask as the elevator doors of 4 Times Square slide open and I arrive at the reception area. Eileen Nugent is a big time dealmaker at Skadden Arps, one of the most fabled corporate law firms in the nation. Usually she represents big city fashionistas, Donna Karan, Saks Fifth Avenue. Today, though, her client is strictly bricks and mortar, a manufacturer of heavy-duty transportation equipment hoping to vertically integrate TrainTyme’s technology for a toehold in my world: Silicon Valley, epicenter of high-technology. “May I take your coat? And would you like some coffee? With cream?” Yeah, that’s right, honey. I hand off my trenchcoat to a nice-looking dame who puts it in a closet behind reception. I follow her down a long corridor. And then I’m standing in Nugent’s doorway, just shaking my head, contract in hand. “Eileen … 85 pages to buy this company? Do you think I’m selling Chernobyl?” I ask. “Rick, Rick, it’s not that bad. I just need to protect my client, you know how they can be,” she says before I even take a seat. Listen, I say, just be reasonable. “My associates have pared your draft to 45 pages that we can work from.” I hand her a copy of the revision. With her is her partner and husband, Lou Kling, who is also her co-author of the leading treatise on mergers and acquisitions. “So, Eileen, let me get this right, and then I’ll get out of you two’s hair,” Kling says, making for the door. “Defective chainsaws are not an undisclosed liability?” “Excuse us here, Rick,” she says, explaining that Kling is negotiating to sell a chainsaw manufacturer to an international tool maker, which had asked for a “no undisclosed liabilities” representation. “That’s right. The courts have said that potentially exploding chainsaws are not exploding chainsaws until they explode. So even though they may be accidents waiting to happen, they’re not liabilities – not even contingent liabilities – before they explode and hurt people. Hence, no need to disclose them as contingent liabilities on your disclosure schedule.” Got that? “Good, good,” says Kling, bundling away to broker more billions. “Now,” she turns to me, as she begins to flip through the newly toned document I’ve handed her. “What did you do to my no undisclosed liabilities representation?” “I fixed it,” I explain. “The way you drafted it, I’d have to disclose not only balance sheet liabilities, but also ‘contingent’ and ‘unmatured’ liabilities. Your litigators would have a field day with that. Because we both know any problem that arises after closing you’ll call an undisclosed liability that was ‘unmatured’ at the time of the deal.” “And why did you take out my 10b-5 representation?” she asks, the leading edge of indignation starting to appear. She had included what she considered a typical 10b-5 representation, stating that neither the representations and warranties in the agreement nor the related disclosure schedule contained any misstatement or omission of a material fact. She shook her head. “You know you already have 10b-5 liability under the federal securities laws as a seller of TrainTyme’s shares. What’s the harm just confirming that in writing?” I was getting annoyed. “Eileen, you know damn well that liability under SEC rule 10b-5 is much tougher to establish than liability for breaching a contractual representation. Honestly, I’m a little surprised that you’re sitting here actually trying to justify these ridiculously overbroad reps.” Then I made her a proposal. “I’ll give you most of the reps you want, including your cherished 10b-5 rep, as long as you agree to two simple things: a five percent indemnity cap and a six-month survival limit on my reps.” “That’s a harsh proposal,” she says. “I think you’re rotten. Get out of here.” “You bet I will. You bet I’ll get out,” I say. “But you need to realize I’ve got a list of folks, including the private equity boys, whom I’ll be visiting in the next few days if your client doesn’t get serious.” I walk out into Times Square, grab a dog, mustard and onions. She wants this deal, I can feel that. The way you feel when the cards are falling right for you, with a nice pile of chips in the middle of the table. I’m holding pocket aces and Eileen has squat. I can smell it. I go back to the New York office of my firm, Cooley Godward, to wait for her call. In the meantime, I ring my client to check in. Nugent is being difficult, I say. Too bad, it would be such a good fit. The Goldman Sachs guys can’t wait to conduct a full-blown auction. So good night, Eileen. “Rick, I’ve got Goldman Sachs on line one like you asked,” my New York assistant, Jean, says, “But I’ve got Eileen Nugent on line two.” I take line two. “What can I do for you Eileen?” I inquire. “Listen, Climan. It’s against my advice, but my client really wants this deal,” she says. “I’ll accept your indemnity cap and your survival limitation if you’ll accept most of my reps and warranties.” Swell, I say, knowing this would be more than acceptable to my client. “Just to be clear, Eileen, if any reps made by my client turn out to be wrong, my client’s maximum liability will be limited to five percent of the deal price and you’ve only got six months from the closing to make a claim.” “Right,” she says curtly. “But Climan, there’s one more thing. Is there anything we can do about the MAC clause?” Oh yes. The MAC clause. I had inserted a slew of carve-outs to protect my client. One of them said that even if TrainTyme went bust between the time we signed and closed the deal, Eileen’s client would be stuck as long as the cause of the problem was something that impacted the entire U.S. rail sector. “You’re asking me to accept that if the trains stop running and the royalties stop, I can’t pull out of this deal,” she says. “That’s worse than what Strine handed Tyson in IBP!” “That’s the idea, Eileen,” I say. “You know TrainTyme will be damaged goods if we sign this agreement and the deal doesn’t close. Employees will flee, customers will cancel their orders and go elsewhere. You just can’t put that genie back in the bottle. It’s a risk my client is not prepared to take.” Nugent knows “industry condition” carve-outs are not all that unusual. “Your client is just going to have to live with that,” I say, hoping she knows this is her last bite at this apple. I head back down the street to Skadden and we hammer out the final deal terms. The price is $1.3 billion, and the MAC clause stays as I drafted it, carve-outs and all. Our clients show up to sign the documents just as the sun comes up over Manhattan. We expect the closing to take place in six weeks. The press release hits the wires before the market opens. Times Square is crisp and the air invigorating later that afternoon, as I stop for another dog after a few hours sleep. “Mustard and onions please,” I say, handing over $2 and catching the banner headline on the afternoon edition of the Post. “Chemical Threats and Security Breaches Halt Train Travel in California.” The story predicts the troubles will quickly spread throughout the nation. There are fears that unstable chemicals have made their way over the border and are being transported by rail to a deadly destination. By later that afternoon, train traffic throughout the country has come to a complete standstill. “Rick,” Jean says. “I got Nugent on line one.” “How can we possibly justify a $1.3 billion purchase when your product isn’t generating any revenue? Who knows if the trains will ever run again?” she nearly hollers. “If this isn’t a MAC, I don’t know what is!!” “Read the carve-out, Eileen,” I say. “It impacts the entire U.S. rail sector.” “We’re walking, Climan,” she says. “Go ahead and try,” I say. “We’ll see you in court.” I can just see Strine's opening salvo. “This deal was a train wreck waiting to happen …” Page: 3 of 5 pages for this article « First < 1 2 3 4 5 >
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