The procurement of startups, the growing impact that data and technology are having on valuation and the changing norms of deal making are all current considerations for lawyers working in mergers and acquisitions (M&A).
These issues and the effect they can have on business were discussed extensively at the Canadian Corporate Counsel Association (CCCA) National Conference and In-House Counsel Worldwide Summit held in Toronto from April 19 to May 1 at a plenary session called "The Art of the Deal: M&A in the Global Village."
The panel was moderated by Michael Fekete, national innovation leader and co-chair of the technology group at Osler, Hoskin & Harcourt LLP (Osler). He led panelists Jeremy Fraiberg, co-chair of Osler's M&A group, Andrea Wood, senior vice president of legal services at Telus and Anthony Pagano, chief counsel of M&A for Royal Bank of Canada (RBC), in a discussion about trends in M&A and what the future might hold as technology advances.
All the panelists agreed that their companies were investing heavily in new technologies in an attempt to streamline work. However, acquiring this tech, or the startups that run it, can come with inherent risks.
"What does that mean for the legal department?" asked Wood. "It's a little bit scary, to be honest, but what it means is that we become a very key member of the team that helps to assess risk and that helps to define the risks that are acceptable and that are not acceptable. We're having to be very flexible because we're often performing M&A either in sectors that are new technologically or new to Telus."
Pagano added that the adoption of artificial intelligence (AI) and other machine learning tools are changing the landscape for RBC as a business and for its business partners. Fraiberg noted that, in the same vein, there have been overwhelming technological advances in diligence, which have helped Osler streamline its processes.
"I remember when I first started working as an associate, somebody said, 'what's [the] market for an indemnity in an M&A deal?' And you had to go around to different lawyers' offices and create a binder and do a chart. Now you can literally press a button and get a deal point study, or five deal point studies, so you can do things extremely quickly," he said.
"I think the challenge with technology, leaving aside the impact on how many people you need to do the work, is on diligence and cost and how do you use it appropriately in light of a client's objectives," he said.
Fraiberg said that one of the most important tasks in M&A is to have a senior person in the legal group invest an hour or two at the beginning to do diligence with the legal team.
"I've done deals where the CEO of a Canadian public company will spend two hours going through the data room with me. That is time extremely well spent. Regardless of whether you're using computers or not," he said.
Fekete added that technology is "only as good as its user," since you have to train the technology to generate meaningful reports.
"[There] may come a time down the road when AI is so much more advanced, but we're certainly not there right now. And so, the opportunity, I like to say, is about collaboration," he said.
Fekete also predicted that the other big change M&A lawyers can expect is in the delivery of legal products and services.
"This is the land of opportunity in that we now have tools that can be combined with legal expertise to deliver something that is much more powerful than it has been before. Where there can be a self-help tool that is hosted in the cloud, or on a service provider's data centre, and delivers a solution that gets you 80 per cent of the way there. So in-house departments may use these tools and then look to internal or external experts to enhance what is created through the use of tools," he explained, adding that the role of business integrators will grow as clients will increasingly begin to expect a "turn-key solution."
With all this emerging technology, the panel noted that a new dynamic is being created in the M&A market. Traditional businesses are competing with tech companies for the best and the brightest in the industry, which Fekete pointed out creates "sky high valuations that don't reflect revenue, they reflect promise."
Wood noted that the clear distinction between M&A teams and operational legal teams has begun to fade away.
"What I am seeing is, we may start with a discussion about an M&A deal, but it may evolve into more of a commercial deal or it may evolve into more of a joint venture. We're more typically now staffing our M&A teams with operational lawyers who know the business that they're operating within," she said.
Pagano added that as multi-party agreements become the norm, it's become even more important to protect your business by assessing the risks before getting into a venture with other parties.
"I think a big global M&A trend is, representation and warranties insurance have changed a lot recently. Leaving aside the insurability of cyber, I do think it can be awkward to sue the visionary founder for breach of reps if there's a problem with one of the reps that they [have]," Fraiberg said.
"If you have a representation and warranties policy, the vendor gets a clean exit and you, as the owner, subsequently, avoid the awkwardness of potentially suing the entrepreneur/founder if there's something wrong in the business. The rise of representation and warranties insurance makes things more attractive in bidding processes," he added.
Fekete asked the panel to consider the unique risks that come with data protection, privacy and reputational risks in the age of #MeToo.
Pagano explained that lawyers must structure the deal to protect the company as much as possible but admitted that it is difficult to avoid every risk.
"Hopefully, you've tried to mitigate it by buying the technology that comes with the talent," he said, referring to people acquired in an M&A that might cause problems for an organization.
"They don't own the technology any more. You bought it outright. You paid for it. And you've integrated it and have successors in your innovative labs to move it forward and provide the benefits," he said, adding that individuals can be let go.
Fekete said that in light of the #MeToo movement, he thinks there will be an increased emphasis on background checks.
"What certification do you want from an individual founder or other key members of the team that you want them to present to you [to prove] they have not engaged in inappropriate conduct? If they have, you have certain remedies. We're not saying this is common practice, but is this where we're heading?" he asked.
Wood added that there will soon be a need to bring in more young people with diverse backgrounds. She noted that skills in technology, cyber security, privacy, and project management will become even more important for M&A teams.
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