An inexperienced entrepreneur with a growing distribution network asked a simple question: “When do we hire a lawyer?” I quickly replied that once the other side employs one, then do the same unquestionably. And a corollary to that suggestion, I add that if that person loses from the attorney selection, then that failure stemmed from hiring the wrong attorney.
Since I rely on actual examples, let me recount what occurred to me some years back. A former colleague contacted me to tell me that a partner and he had traveled extensively to raise “blank check” financing in the amount of $150 million. His putative partner had worked in a NYC investment bank. A Connecticut hedge fund had identified the capital sources, some of which was raised from very well heeled individuals, and the closing would occur in a week. He reached out to me to see if he should execute the obfuscatingly, lengthy legal documents put together by a sizable Miami law firm representing the holding company as repository for the funds.
I read carefully the documents, and I asked what were his expectations from this deal. He attended a top tiered business school. And I incorrectly assumed that he should have been able to understand the paperwork. His reply indicated to me that he had no idea what the paperwork meant: he stated that he was entitled to 50% of the common equity as partner to the deal. He had shown me the various presentations and documents in which his name appeared with his partner, in which, under judicial precedence, any judge would assume that a partnership existed – even without the existence of a partnership document. But the drafted paperwork only revealed that he would be appointed as a board member and nothing else. He had no shares, no employment agreement.
I know that under corporate law that shareholders appoint the board member, maybe pay an honorarium. Yet, that board member’s role can be rescinded at any shareholder’s meeting afterward. In other words, his tenure was fragile and poorly compensated or protected in comparison to being a major shareholder and executing an employment agreement. And in no way he owned 50% of this deal.
From the perspective of the investors, an employment agreement is normally used to assure that the employee still works for the company for a pre-defined term. From the eyes of the employee, the employee is protected by the inherent economic value of the employment agreement for the full term of the agreement. In other words, if the employee is unjustly terminated before the agreement’s term, he can recover the balance of the contract. My friend did not have any executive position defined or an employment agreement.
Also, my friend had not defined his agreement with his partner in writing, although he had extensive prior presentations where his name and the partner were shown in the initial slides. In other words, there was sufficient evidence that he would be awarded a declaratory judgment designating that he was 50% owner of the deal. Well known common law and legal precedents would assume that his partner and he owned 50% of the revenues and the costs of the deal.
Still, my friend was in a pickle. He had a few days to resolve this problem prior to the closing. He failed to bring an attorney in the beginning or prior to the negotiations of the financing. In other words, when his partner hired counsel, he should have employed his own. And the opposing law firm must have realized that as well, since their payables could only be collected upon closing. And, if the potential investors became aware of the friction among the partners, they would walk away from the deal. That is to say, that my friend would have been better off employing an attorney from the beginning, not near the end.
After the his partner’s law firm did some strutting by claiming to sue if he did not sign off on the board role (which I thought that was simply grandstanding), I was able to repair that agreement for my friend by having a notable equity ownership in the deal. But I did tell him about getting an employment agreement for the reasons stated earlier. He demurred. He commented to me that the company’s other executives would support him. And, again, he paid for that mistake later on.
Some years later, he hired a Harvard lawyer to represent him against that same company. The second phase of his problems underscore that one employs attorneys with due diligence in mind. Credentials are not enough. Experience and expertise play an important driver to success. I noted that my friend might have been impressed by the lawyer’s credentials, without checking his experience. They initiated a complaint under securities law in the Second Circuit. I read the decision that dismissed my friend’s complaint, and I could tell that this lawyer had little or no experience in the securities and corporate law. That was his mistake number 2: not hiring the right kind of lawyer.
How is that important? There are several hundred law schools out there. I tend to look at the background and expertise of the opposing attorney before taking any kind of action, including hiring outside counsel. For example, I was tasked to handle a major multimillion dollar litigation in about 40 states with Verizon. I looked at the attorney’s name in the complaint, and checked out where he went to law school, undergrad. Then I asked around Washington DC about the reputation of the law firm. That alone determined the legal recourse I would have against the complaint, the opposing attorney, and the reputation and expertise of the adversarial law firm.
Is this situation fairly common? Must be. I just saw the “Right outta Compton” movie, where the auteurs were being ripped off by their managers – who had his own counsel. And, when they realized that they were being shortchanged by their managers, they broke off as a group to produce independently. Had I been in their shoes, I would have found a local lawyer representing my interests from day 1, and made sure that this counsel was an experienced entertainment attorney with a notable reputation. That was NWA’ s fatal mistake.
And this scenario applies to Tom Brady’s battle with the NFL. In his decision, Judge Berman noted that the so-called independent study had been authored by the Attorney Wells from Paul Weiss law firm, the very same law firm representing the NFL. The report was therefore biased. Why? NFL paid the fees to Wells. When the second arbitration hearing was raised, the Paul Weiss law firm determined the validity of the Wells report – and again Judge Berman questioned the impartiality of the proceedings. (Note: everywhere that Judge Berman mentioned the Wells report, he placed quotation marks and bolded the adjective “independent”. By implication, the judge knew that the Wells report was biased.) Brady did the right thing: hired his own counsel and challenged the NFL in an impartial forum, the Federal court. He won. Had he not done so, he would have been stuck with the NFL deliberations against his favor.
Now attorneys can be expensive. As I state in an earlier blog, I hire the lawyer based on his academic background and experience. I analyze the value or the risk to the transaction to determine what would be appropriate counsel and the potential billables. In international deals, I do weigh heavily for attorneys currently in that country with specific experience and education peculiar to that country. For example, when I sought a Chinese attorney, I needed someone who was previously in the Chinese government or army, since contacts weigh heavily in any Chinese legal proceeding. In Latin America, I look to see if the lawyer attended a Catholic law school – why? Because Catholic schools are costly and only the upper class can afford to send their children to that type of institution. And when the other side brings in a blue chip law firm like Verizon, I also would contract out to a law firm of the same caliber.
How did I get this experience? Having worked in startups, larger and smaller law firms, I endeavored to find efficient ways to achieve successful and least expensive outcomes in legal proceedings or business dealings. There times that I had coordinate legal issues stemming from over 40 states and from over 50 countries. For example, I had register an operating subsidiary in telecommunications in Argentina one day or find out why the company was being billed for franchise taxes in California. In the meantime, my international company did not have an unlimited budget. I would visit each country, meet with local counsel, and note how legal proceedings were handled in each country. Note that each country will have different ways of handling legal matters.
And legal bills for a multinational company can be expensive: both Citibank and Goldman Sachs have paid out fees over $1 billion dollars to law firms in 2014. And startups do not have the luxury to stretch proceedings as they have to fulfill marketing milestones regardless of the regulations. And, in the case of novel technologies, I found myself educating foreign counsel on the operations of the business in order to represent the company effectively. And this learning process is unique – I only know of a handful of lawyers who can handle such extensive legal operations. That is why I notice the pitfalls for companies such as AirBnB and Uber when they expand too quickly internationally without realizing the implications of their international operations. Too many mistakes and it will cost a lot of money to fix them.
Again, when your partner or other side employs, counsel, find a capable attorney. It can be expensive in the long run, so don’t be pennies wise, pounds foolish.