European General Counsel Seminar Presentation

European General Counsel SeminarChampions in Business

Olympic Museum, Lausanne

24 January 2012

European General Counsel Seminar

Cross border post merger – winning gold

Robin Johnson, Head of International M&A, Eversheds LLP

24 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

THE CASE STUDIES

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 One Issues

• 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 One

Issues (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 Two

Issues

• 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 an

entrepreneurial private business

Case Study Three

Issues

• 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 Four

Fixing the valuation “gap” on a technology

Case Study Four

Issues

• 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

THE TOP TEN TIPS

Top Tip 1

Culture

• Do not underestimate the difference in lifestyle

• Approach, compliance approach, business approach and history

• Can you manage remotely?

Top Tip 2

Process 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 3

Due 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 Price

Expectation

• Issues with earn outs

• Issues with deferred consideration

• Issues with non-cash consideration

Top Tip 5

Transactional 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 9

The Compliance Programmes going forward

• Bringing the employees into line

• New divisional responsibilities

Top Tip 10 Third 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?

Paul SmithEversheds Consulting

Eversheds Consulting

Creating a High Performance Team

Agenda

• A shift in the balance of power

• Issues facing general counsel

• Taking the health check to assess your readiness

• Questions?

Lawyer Client Relations

• 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

Summary of Developments

The Client’s RevolutionLaw Firm of the 21st Century

• In our recent report, Partners and In-house Counsel told us that:

75% believepower has

moved from firms to client

73% of In-house Counsel have

changed or reducedthe number of external legal

advisors

78% believe that GFC

changes are permanent

Immediate Impact – Cost Global Financial Crisis (GFC)

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 dayBloomberg Inc

Both in-house & firms have had budgets cut, salaries frozen and unnecessary costs removed

Winmark Looking Glass Report

Structural changesGlobal Financial Crisis

Clients take centre stage

Law firm market in

flux

Legal services gear

towards efficiency and value

The evolving role of the In-house Counsel Clients take centre stage

1. 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 change

2. Fee levels set for long term stagnation – Recession drives efficiency

– Legal services are increasingly unbundled

– Outsourcing and technology dramatically increased

3. 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 clients

• In-house Counsel have taken the role of business advisor

• Law firms aspire to this role, but are seen as service providers

The rise of client power

Expertise

Task

Collaboration

Insight

Expert

for hire

Trusted

Supplier

Business

Advisor

Over 50% of In-houseCounsels said as theirin-house capabilitiesincreased, they wouldlook to external lawyersas a source of highlyspecialised advice only

Is this the best model?

From firm to client Change in the balance of power

How much negotiating power do In-house Counsel feel they have when agreeing fee structures?

Source:

Winmark Looking Glass Report

Client led market New 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

Are you making the most of the new market dynamics?

Taking a Health Check

I know we do not have procedures in place

I know we have some processes – but we could improve

I am positive we have excellent protocols in place

0 105

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

The plan to achieve your goal

1) Legal Department Strategy

• No defined strategy

• No alignment to wider business strategy

• No communication buy-in from team

• Ad-hoc reactive - fire fighting

• Clearly defined and communicated strategy

• Buy-in from team, wider business and senior management

• Aligned to wider business objectives

• Regularly reviewed and progress measured

0 105

Major defence organisation with no effective legal department strategy

3 year strategy development and implementation program

Benefits:

• Large improvement in customer satisfaction

• Substantial cost reduction

• Lower risk

• Early engagement

Ad-hoc

Developing

Strategically managed

Best in class

3 year process

Major defense manufacturer

Strategy case study

Strategy Maturity Model

The resource mix

2) Insource versus Outsource

• No processes for decision making across teams

• No decision criteria

• Ad hoc requirement for external counsel

• Sophisticated decision tree

• Risk/quality/capacity assessment applied to different work areas in different ways

• Rigidly applied across business teams

0 105

Major global bank

Decision tree case study

Is the matter Business As Usual (BAU)?

Is the matter National BAU?

Is the matter BAU City?

Is the matter strategic?

Refer to department

head

Get estimate. Is the fee

estimate < 25k?

YES

Instruct Eversheds

NO

Get estimate from another strategic firm

Instruct lowest quote

Is the matter strategic


estimate < 25k?

YES

Instruct Eversheds

NO

Get estimate from another

BAU panel firm



estimate < 25k?

YES

Instruct Eversheds

NO

Get estimate from another

BAU panel firm


NOYES

YES NO

YES

NO

YES NO

Who to engage

3) Do you have a formal panel process?

• Business units choose law firms

• Vast array of firms providing piecemeal advice

• No consistent rationale behind firm choice

• Defined and structured tendering process

• Defined panel lifespan

• Tender process aligned with legal and wider business goals

0 105

Tyco Panel tender case study

Old 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 Strategy & Tender New panel

Major Automotive Manufacturer Panel tender case study

Old 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 Strategy & Tender New panel

Method of engagement

4) How are external firms instructed?

• No process for selecting which law firm

• Multiple ways of instructing

• Ad-hoc decisions on when and who to engage?

• Defined engagement protocol

• Confirmed contact points

• Regularly reviewed and monitored

0 105

5) Managing internal teams

• No KPI’s

• No management information

• No regular meetings

• No clear strategy

• Ad hoc allocation of work

• KPI linked to objectives

• 1:1 and team meetings

• Monthly reporting

• Clear strategy –understood by business units

• Cross team business integration

0 105

The right price for the right service

6) Alternative fee arrangements

• No consideration of work types or fee structure

• All firms bill by the hour

• External work categorised into types

• 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

0 105

Eversheds LLP

Fee structures case study

Billable hour

Remains important

Fixed Fee

20% Revenue:

•Corporate

•Litigation

•Real Estate

Annual retainer

Major Utility

£800k – all work

Tyco / Eversheds Model

Sole EMEA supplier

Conditional Fee

Popular in Litigation

Major Bank

Review all leases and share any revenue from

findings

Custom models General fee structures

Effective supplier management

7) Managing External Firms

• No written protocols

• No regular meetings

• No minimum standards

• Written protocols

• Regularly reviewed and monitored

• Clear strategy –communicated and understood by firms

0 105

Driving competition

7a) Rank Review Survey

• No monitoring of out performance by firms

• No firm ranking

• Ranking solely by % of work won

• Regular survey of business units satisfaction with external firms

• Formal external firm scoring process

• Updated league tables

• Rank regularly discussed with firms

• Outperformance identified and acknowledged

0 105

Visibility over cost, quality and timeliness

8) Legal Spend Reporting

• No regular reporting from external firms

• Multiple report formats

• Multiple data entry systems for analysing spend

• Ad hoc reports

• Regular reports

• Easily collated (single format)

• Closely analysed and information used

• Feedback provided to firms

0 105

Reporting example

Easy, effective, and efficient oversight

$ Exposure $ Legal spend vs budget

Target

Leveraging value add offerings

9) Value add

• No value programme

• Different across business units

• Reactive approach

• No defined contact in external firm

• Free secondees

• Free training

• External lawyer report – value add

• Free advice

• Helplines

0 105

Creating a legally attune and assertive organisation

10) Recoveries Programme

• No proactive programme

• Legal and Business units not aligned

• Contract management lifecycle broken

• Audit completed –contracts and processes

• Established programme communicated to suppliers

• Generating recoveries

• In-house cultural change

0 105

DuPontRecoveries case study

Total Recoveries:

$1.577 billion

Driving innovation within

11) Compliance Innovation

• Regulation seen as rule compliance

• Ad-hoc response to new regulations

• No or unreliable management information on compliance

• Outcomes focused compliance

• Clear internal and external review process

• Value add compliance education from panel firms

• Strategic use of compliance technology / outsourcing

• Benchmarked and regularly reviewed KPIs

0 105

Leading UK retail bank

Compliance innovation case study

A. AML

B. Terrorism financing

C. Bribery

D. Antitrust

E. Capital adequacy

F. Health & safety

G. Reporting requirements

1 2 3 4 5

5

4

3

2

1

Probability of compliance failure

B

DE

F

Findings:

Reporting key regulatory area for this institution

Increasing complexity

Increasing impact from compliance failure

Driving innovation in service delivery

12) Optimising new legal models

• Traditional insource v outsource

• No use of alternatives to local law firms

• No categorisation of work

• National / international / specialist panels

• RAG rated work

• Law firm collaboration

• Use of LPO’s, BPO’s via law firm or direct

• Agile lawyers

• Secondments / Paralegals

0 105

Where do you stand relative to peers? Industry? World?

What did you score?

0 105

What is your score? Where do you want

to be?

Conclusion

• 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

The future

Questions?

Paul SmithPaul is a Partner, environmental lawyer and litigator and has defended a number of multinational companies over the years in relation to criminal investigations in the UK, Europe and North America. The investigations have ranged from chemical plant explosions, insider dealing, railway disasters and price-fixing to environmental incidents and other major crises.

Paul is a recognised expert on law firm partnering and convergence. He began developing this expertise as client partner for DuPont more than ten years ago. In recent years Paul has focused on how the law firm and the global corporate law department can work together effectively across multiple jurisdictions. Paul consults with many global corporate law departments on their structures, processes and practices to derive greater value from outside counsel. He is part of the Eversheds team involved in the Tyco convergence project in Europe, Middle East and Africa, where Tyco used its innovative 'SMARTER' model to consolidate most of its outside legal services from more than 250 law firms across 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 in delivering new approaches to global client relationship management. Paul was also included in 'The Lawyer' magazine's list of the 'Hot 100 Lawyers' for 2008.

Paul Smith+44 845 498 [email protected]

European General Counsel Seminar

Employee Incentives

Motivating Your Teams to Succeed

Mathew Gorringe, Partner, Eversheds LLP

Tel: 0845 498 4140

[email protected]

Employee Incentives


Winning teams are:

• highly motivated

• focussed on key objectives

• driven by success

Employee Incentives


An appropriate share incentive plan can assist 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 Incentives


It is important to get the design right in order to deliver the desired 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


These objectives are normally relatively easy to achieve in a single jurisdiction:

Only need to consider that jurisdictions:

• employment laws

• securities laws

• tax laws.

Employee Incentives


Implementation of a suitable incentive plan across borders presents 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 wanted to 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 Incentive

Bronze – Assembling the right team to deliver the design 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


Silver – 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


Issues

• 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 Study Global Incentive

Issues

• 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)


Gold - 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 Study

Global Incentive

Result

• 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

European General Counsel Seminar Presentation

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