ENGAGING LAWYERS EARLY

Posted by Jessica Belgrave on March 31 2021 in News

Because lawyers are perceived as being expensive, they are often brought into transactions late in the piece to avoid ‘unnecessary’ costs. However engaging lawyers early will ultimately save you time, money and help prevent unforeseen consequences.

In the early stages of any transaction, whether it be the acquisition or disposal of property, assets, or shares, it is important to consider the following:

Undertake pre-contract planning

Both Vendors and Purchasers:

• Know what you are buying/selling and why. What are the outcomes that you are trying to achieve?
• Be bound by the transaction only when you want to be. Are there any conditions or pre-contract requirements that need to be met prior to being locked into the transaction?
• Understand and manage key milestone outcomes
• Have a budget, noting that the transaction may not proceed if conditions are not met
• Consider how the deposit is held. How is it released? What is the default interest rate?

Vendors:

• Prepare to sell. Consider what vendor due diligence needs to be undertaken prior to marketing the sale.
• Understand legacy liabilities and warranties.

Purchasers:

• Consider what due diligence is required in order to satisfy yourself as to the merits of the transaction, how the asset is to be used, and in order to obtain funding to complete the transaction.
• Include appropriate conditions to allow you to assess and obtain the information you need, in a timeframe that is achievable.
• Understand vendor warranties – what will you not be able to check during the due diligence period? What vendor warranties are available? What resources does the vendor have if the warranties need to be relied upon? Consider security for those purposes.

Undertake a thorough due diligence investigation

This is key to stress-test the strengths and weaknesses of the target assets and whether it will achieve the outcomes you want. It also allows you to better understand the potential pricing/value leakages and any contingent exposure post transaction.

Choose the right business structure to manage your risk and minimise your tax exposure

It is not a case of one-size-fits-all. It is important not only to understand the asset being acquired, but to look forward and consider the future business risk. This will allow you to put in place appropriate structures, systems, and insurance to manage and minimise the risk, liabilities and potential exposure. You should also plan for succession and exit strategies/options.

Get the ‘rules’ of the transaction right through the contracting process

• Understand the operation of conditions
• Consider how to manage key risk exposure areas
• Understand any statutory rights that might override the terms of the contract, for example cooling off periods and Resource Management Act requirements
• Understand the events of default. What happens in the event of default? Cancellation? Mediation? Arbitration? Specific Performance? Default Interest? Damages? What are the consequences of each?

Lawyers can assist with all legal aspects of the pre-contract planning, due diligence process, business structure establishment and drafting the terms of the contracts. The key thing is to see us before you contract. The contract forms the platform for all else, pre-settlement, settlement, and post settlement obligations.

Not only is it important that your lawyer has a thorough understanding of the project and your intended outcomes at the outset to assist with the transaction establishment, but it allows you to draw on their advice during the term of the project when quick decisions need to be made. Engaging lawyers early allows you to get the best value out of your advisor.

It is not uncommon for advice to be sought when the project is well advanced and/or when issues have arisen due to the lack of understanding of contract terms and the consequences arising from the same. In such circumstances, the client’s options are usually limited to renegotiating terms that had not correctly documented the parties’ intentions (not always possible), pursuing less favourable options, or in more serious situations, engaging in litigation. These options can be costly and, more often than not, could have been avoided if correct advice had been sought from the outset.

If you are in the inception phase of a project and you would like our advice in relation to the legal aspects of the transaction, please get in touch.

Deanna Clark | Partner | Deanna.Clark@shieffangland.co.nz

Jessica Belgrave | Associate | Jessica.Belgrave@shieffangland.co.nz