After many months, more than a few near-death experiences, and the usual bureaucratic hurdles and personality disorder symptoms, one of my clients is about to conclude a complete refinancing of its balance sheet -- paying off existing lenders, buying back the ownership of a departing minority shareholder, and replacing everything with new lenders, some new minority investors, and sufficient capital to continue a successful growth story. This should be the moment to take a breath and put the champagne on ice -- right?
Actually, this is the moment to read everything a second (or, better yet, third, or fourth) time, and trace every definition and capitalized term through every occurrence in every document, for at least two important reasons:
First, because even though the borrower and lender, or operator and investor, relationship generally starts out on a happy note, and all parties typically pledge their eternal intent to support the other and create a lasting financial partnership, the documents are there to provide a durable framework for the inevitable differences of opinion, divergences of strategy, or downright arguments. The better, and more clearly, they’re written, the more probable it is that lender and borrower, or investor and operator, will be able to overcome their differences and maintain a functional relationship for the life of the loan, or investment. While (almost) no one enters such a transaction intending to do financial damage to the counterparty, a poorly crafted, or vague, agreement can open the door for exactly that outcome -- and the only time such a problem is apparent is when there’s already an operational or financial shortfall putting pressure on the arrangements and stress on the contract parties.
Second, because the documents are almost certain to be written by attorneys who are extremely good at their craft, but who were brought into the process only after innumerable conversations between lenders, advisors, operators, and investors. Even (maybe especially) the best attorneys will acknowledge that there’s likely been a lot of informal context around the deal points which didn’t make it on to the financial models, proposals, or term sheets; therefore, the attorneys are not completely versed in the nuance of the deal. It’s up to the clients to be certain the attorneys are capturing the nebulous aspects. Sometimes this takes long attorney/client conversations during the document drafting sessions; sometimes it takes “all hands” calls in which the business people for each side discuss what they believe they meant, and agreed to, and then the attorneys chime in to say “if we write this, it’ll make that impossible, so how about if we do it the following way instead?” This give and take, coupled with scrutiny on everyone’s part, is the only way to turn a dry legal document into a functioning agreement. The operators, lenders, and investors I’ve encountered who “leave it in the attorneys’ hands” generally come to regret that lack of attention -- not through any failing by the attorneys, but because the clients didn’t hold up their end of the assignment.