POSTED IN CORPORATE/BUSINESS, TRANSACTIONS
One of the most
significant points in a transaction may be one of the most overlooked – the
question of who will prepare the first draft of the underlying agreement.
It is generally always a good strategic decision to prepare the first draft of
a purchase agreement, regardless of whether you are the buyer or the seller.
While on the surface,
many purchase agreements may look the same (they all contain basic deal terms,
representations and warranties, pre-closing covenants, closing conditions,
deliveries, and indemnification), good transactional attorneys have quite
different starting points to use if their client is the seller or the
buyer. A seller-favorable document approaches many provisions very
differently from a buyer-favorable document.
Using the right starting
point is a great way to put yourself in the strongest possible position at the
start of a deal. And who doesn’t want to start off a transaction in the
best position rather than from a weaker position?
When business points
come up during negotiations after drafts are exchanged, parties of course
understand they should negotiate to try to achieve the best terms they
can. The question of which party does the initial draft should be treated
no differently than any other business point in a transaction.
For example, if a party
is the seller, their attorneys can draft an appropriately limited set of reps
and warranties that cover the basics but without going too far. If a
buyer were to prepare that same first draft, the reps requested from the seller
would be far more extensive, opening the seller to a greater risk of breaches,
indemnification claims and more internal due diligence. Similarly, buyer
and seller positions on topics like environmental remediation, risk of loss and
scope of indemnification may be quite different. You may even be able get
certain provisions into a document in the first draft that you would never be
able to get if you were marking up someone else’s draft.
We also find it to be
more efficient for clients when we prepare the first draft. In the long
run, investing the time to put forth a first draft that best advances the
client’s position tends to be cheaper than reviewing and marking up someone
else’s draft who has different goals than you do.
So next time when you
are discussing with the counterparty to a proposed transaction the question of
who will prepare the first draft, bear in mind it’s not a throwaway
question. It’s a strategic decision that can have a significant impact on
the contract you ultimately sign.
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