The Other Side Isn’t Always The Enemy; Sometimes, They’re Cleaning Up Your Messes

Think of this as part two of my prior posting on legal documents ...

In two transactions recently, I’ve had the following experience.  (In each case, it was an investor and an operator, but it could just as well have been lender and investor, or lender and operator.)  As the parties drew near to the final signing of documents and transferring of funds, an attorney raised a question regarding an old, innocuous agreement or governance document which no one thought applied or mattered to the business at hand.

In one instance, it was a no-longer-active development agreement which had never been properly cancelled; in the other, it was a document related to the fund’s governance which appeared to prohibit it making certain types of investments (my client’s deal among them!).  In both cases, the “opposing” counsel identified the language, brought it to their clients’ attention, and -- in the overly sensitive attitude which always prevails during the final days of any pending deal -- what should have been a minor issue became at least a momentary firestorm.  In both cases, the issue was cleared up, and all parties proceeded to fund, but neither issue need ever have appeared.

Let’s take the operator first: while she was properly focused on running her business, she’d been lax at times in reviewing old -- but still outstanding -- contracts to be certain that they didn’t interfere with current plans.  In recent months, her counsel and internal staff had caught a few such issues, as they prepared for a new partnership with an investor, but this agreement had slipped through the cracks.  Quite understandably, the new investor needed to be assured that a prior agreement wouldn’t jeopardize his ability to work with the operator and develop new units.

Now the investor: while the seemingly endless number of funds which have appeared over the past twenty-five years may seem indistinguishable to operators, some have very specific governance wrinkles, either because of their limited partners’ requirements or because they have access to state or federal funds (development agencies, SBA).  Sometimes these restrictions don’t get fleshed out in term sheets and proposals -- as in the case I cited above -- and cause last-minute reconfiguration of the investment instrument.  Is it preferred stock?  Does it have voting rights on board matters?  Are partnership instruments permitted?  Somewhat surprisingly, the investor’s requirement for additional warrants actually threatened its ability to hold voting stock, as the exercise of the warrants would have elevated its ownership beyond what its charter permitted.  The operator’s counsel caught the inconsistency, and at the (next-to-) last minute the equity investment was reconfigured in order to address the issue.

These things always happen, and there’s no way to avoid them entirely, but I draw three lessons.  First, it’s worthwhile for operators (and their boards, and their counsel) to periodically clean out the cupboard, making sure that old agreements aren’t adversely affecting new plans.  Second, it’s worthwhile for investors, lenders, and operators to focus attention on innocuous bits of language in term sheets early on, so they don’t become unintentional problems at the last minute.  Finally, for both “sides” it’s worth having all documents, contracts, governance agreements, and the like in good enough order that they can be supplied to the potential lender or partner early in the process, so that any potential glitches get discovered early and addressed before everyone’s nerves are frayed.

Views: 31

Tags: agreements, capital, financing

Comment

You need to be a member of FohBoh to add comments!

Join FohBoh

Advertisments

 

DEPARTMENTS

Social Wine Club for Craft Wineries

Smartbrief

Taco Bell takes on fast casual with U.S. Taco Co.

Taco Bell will test a new fast-casual concept called U.S. Taco Co.  -More

Avocados From Mexico: All New Recipe Brochure
Looking for the sweet spot between indulgence and fresh appeal? Say yes to fresh Avocados from Mexico, all year long. So rich and creamy, use them as a substitute for mayo to create a craveable crab salad sandwich that will make others green with envy. Discover more culinary inspirations and recipes here!

Ronald McDonald gets a makeover for social media debut

Ronald McDonald is giving off less of a clown vibe with a makeover that keeps the color scheme but adds a blazer, a yellow ve -More

Animal fats ramp up flavor

Chicago hot spots are serving up savory dishes flavored with animal fats such as Stephanie Izard's confit goat belly at Girl  -More

JOBS & CAREERS

Posting a job or finding a job starts here at FohBoh. Call us about special $25 posting packages to syndicate across all major jobs boards.

National News

Dunkin' Brands Reports First Quarter 2014 Results

Dunkin' Donuts U.S. comparable store sales growth of 1.2% - Added 96 net new restaurants worldwide including 69 net new Dunkin' Donuts in the U.S. - Revenue increased 6.2%

Hurricane Grill & Wings Signs Franchise And Multi-Unit Development Agreements For Additional 22 Units

Hurricane Grill & Wings, a restaurant franchise known for its never-frozen jumbo wings and more than 35 signature flavors, announced today the signing of five multi-unit development agreements, representing 22 new locations. The Florida-based brand opened two locations in early 2014, with plans for a total of 14 new units by the end of the year.

Dunkin' Donuts Announces Plans For 20 New Restaurants In South Orange County And The San Fernando Valley

Dunkin' Donuts announced today the signing of multi-unit store development agreements with two new franchise groups to develop 20 new restaurants in South Orange County and the San Fernando Valley area over the next several years.

Brinker International Reports Increases In Third Quarter Fiscal 2014 EPS And Comparable Restaurant Sales

Earnings per diluted share, excluding special items, increased 16.7 percent to $0.84 compared to $0.72 for the third quarter of fiscal 2013

Togo's Inks Deals In Idaho And Utah To Develop 13 New Restaurants

Togo's Eateries, Inc. announced it has signed franchise agreements to develop five restaurants in Eastern Idaho and eight locations in Salt Lake City, Utah. In 2014, the brand will also mark its entry into Colorado, Idaho, and Utah with restaurant openings planned over the next few months.

CROWD FUNDING

If you are looking for capital to start or grow your restaurant, create the next 501c3, develop and launch the next app for the restaurant industry,or want to help your peers in some meaningful way, we want to know about it.

TED TALKS VIDEO

TED: James Patten: The best computer interface? Maybe ... your hands - James Patten (2013)

"The computer is an incredibly powerful means of creative expression," says designer and TED Fellow James Patten. But right now, we interact with computers, mainly, by typing and tapping. In this nifty talk and demo, Patten imagines a more visceral, physical way to bring your thoughts and ideas to life in the digital world, taking the computer interface off the screen and putting it into your hands.

TED: Hamish Jolly: A shark-deterrent wetsuit (and it's not what you think) - Hamish Jolly (2013)

Hamish Jolly, an ocean swimmer in Australia, wanted a wetsuit that would deter a curious shark from mistaking him for a potential source of nourishment. (Which, statistically, is rare, but certainly a fate worth avoiding.) Working with a team of scientists, he and his friends came up with a fresh approach — not a shark cage, not a suit of chain-mail, but a sleek suit that taps our growing understanding of shark vision.

TED: Michel Laberge: How synchronized hammer strikes could generate nuclear fusion - Michel Laberge (2014)

Our energy future depends on nuclear fusion, says Michel Laberge. The plasma physicist runs a small company with a big idea for a new type of nuclear reactor that could produce clean, cheap energy. His secret recipe? High speeds, scorching temperatures and crushing pressure. In this hopeful talk, he explains how nuclear fusion might be just around the corner.

TED: Sarah Lewis: Embrace the near win - Sarah Lewis (2014)

At her first museum job, art historian Sarah Lewis noticed something important about an artist she was studying: Not every artwork was a total masterpiece. She asks us to consider the role of the almost-failure, the near win, in our own lives. In our pursuit of success and mastery, is it actually our near wins that push us forward?

© 2014   Created by FohBoh.

Badges  |  Report an Issue  |  Terms of Service