Episode 2 of the Curious Kiwi Capitalist Podcast Show
9th August 2019
My guest for this show is David Quigg. David is the head of Mergers & Acquisitions at Quigg Partners a boutique Wellington law firm specialising in M&A and a few other specialist areas.
In this show we’ll discuss M&A from a lawyer’s perspective including:
- publically listed company M&A process and the differences with private company M&A
- a practical approach to buying and selling a company including agreeing on key terms in an MOU (while being careful about what is binding)
- how a fixed auction process is unusual in a private M&A transaction unless it is a large transaction
- NDAs, key clauses and enforecement
- Earn-out briding a price gap but causing problem down the track
- the need for early OIA approval in the case of a foreign investor
- due diligence and retentions
- representations and warranties
- shareholders agreement, including drag-along carry-along and Russian Roulette clauses
- why asset sales (rather than share sales) are preferred by buyers even in larger transactions if possible
- net asset adjustments in a share sale
David Quigg has a LLM, was a member of the NZ Takeovers Panel for a decade and has an international reputation as one of New Zealand’s top M&A lawyers. Quigg Partners were established in 2000 and now have 17 lawyers. You’d recognise a number of famous international and local company names they have represented over the years.
Transcript: M&A and Business Sale Legal Process with David Quigg
Bruce: Welcome David to the podcast.
David: Thank you very much indeed Bruce.
Bruce: Thank you for doing this, it’s a complex area this particular part of the M&A process and I’m sure the law as well. What’s the process that you see and where do lawyers get involved in that M&A process?
David: The first one is probably to differentiate between public M&A and private M&A. Public M&A is a lot more in the public domain. It’s much more regulated by the Takeovers Act or if you’re doing a scheme of arrangement the rules that govern schemes and also you’ve got the factor in the stock exchange listing requirements, insider trading restrictions etc.
Yet private M&A is perhaps less of that regulatory regime and much more contractual and negotiation in private as well. So from a lawyer’s perspective differentiating between those two kinds of Alternatives is quite critical and you’d have to say in New Zealand we don’t have a huge amount of public M&A.
So the the public M&A amount perhaps our last involvement was for McDonald’s in respect of the investment and Plexure that is kind of one-and-twenty as in the public M&A space. Most of the New Zealand transactions is in the private M&A and its contractual based.
Bruce: Yes. Perhaps let’s talk about the simpler process first the private M&A and then at the end if we have time talk about the differences with public. When a client approaches you and they might be selling or acquiring, what’s the process that you see perhaps for a mid market size business, perhaps choose your figure choose your transaction time. And as you go through that process where do they ask for advice?
David: I think the earliest they get the lawyers involved the better. Now, that’s obviously a bit of a self-serving statement.
The beauty of getting the lawyers involved in particularly ones that do a lot of these transactions it is they get those milestones quickly and you make good progress and you can set a realistic timetable. The first one that normally comes up is the discussion about should we have a term sheet, heads of agreement etc?
In New Zealand would strongly recommend that you do because what that does do is get agreement on price. So that’s not legal agreement, that’s a commercial agreement. So all things being equal. I’m prepared to pay $20M say for the tech business that you’ve got. And so what that means is, well, If we’ve got a meeting of minds on that subject to due diligence subject to the documentation, let’s agree to that and let’s agree on confidentiality. So there will be a built-in confidentiality non-disclosure agreement, but also from a probably the purchasers point of view, exclusivity.
So unless you’re going out to Tender, because most of the transactions are private, negotiated transactions giving some form of reasonable exclusivity, 20 working days, whatever at to enable the documentation and the due diligence to proceed. I think that’s one thing that we would notice in New Zealand, our heads of agreement term sheet MOU whatever you want to call it, is generally a lot shorter than overseas.
So we really do concentrate on confidentiality that commitment from both sides, commercial agreement that’s non-binding commercial agreement and respect the price or a formula for how you deal with price and then a binding commitment in respect of exclusivity access to due diligence etc.
And that we would say you can do in two pages. Often if you’re dealing with American experience or Australian that will be up to 10 pages or more. We personally generally New Zealand prefers it shorter because it’s less involves the lawyers. It’s more likely to be able to be negotiated in a week point of view, and enables the clients to get on with the business.
And so that’s the first step.
Bruce: It’s interesting isn’t it, there is many people who only know about a fixed process, so you have rounds or fixed dates as you go through and essentially an auction process, with a group being taken out in the first round, another group taking out the second round, leaving the the first successful possible buyer, and yet that really happens. Perhaps it happens in the public stock market but really it is trying to get, from a sell-side perspective, trying to get the buyers to actually make an offer perhaps at the same time and comparing different offers.
David: I agree that you know, sometimes you get that competitive process that’s generally in the bigger range of the assets.
I mean a recent one was Tip Top obviously was sold in the public M&A space you get that partly depends on whether it’s a buyers’ market or vendors’ market, obviously at the moment, you know, the private equity are significant players in the bigger size transaction.
In New Zealand, that’s great. We just don’t have that many big transactions that can normally justify the tender process or auction process. So most of them particularly in the tech space which we involved in a lot. They are mid-market or at the lower end, you know, 25 million to 50 million and then they are normally negotiated transactions not tender. And therefore you go through the MOU heads of agreement as your first step.
Bruce: So the M&A advisor, the investment banker, has reached out to a foreign big tech company. I don’t know, you represent some big tech companies, they’ve asked the big tech company to sign a nondisclosure agreement.
What are the different clauses in that non-disclosure agreement that are key to negotiation?
David: Well a non-disclosure is mainly that you’ll keep the information confidential and that you’ll only use it for the purpose of assessing whether your bid or not. There’s not been in New Zealand any significant litigation that I’m aware of on confidentiality agreements, there has been overseas particularly in the US, but there again normally quite relatively standard documents these days that you’ll receive the information, you’ll keep it confidential, and you’ll only use it for that restricted use.
Sometimes, where you need to be careful, that there’s a restraint in the confidentiality agreement. That’s not the norm in New Zealand. That may be appropriate, if in fact they’re already a very strong competitor so you’re worried about that they could get that information, the transaction falls over and then they could use it against the vendor effectively or potential vendor.
Bruce: In terms of the term and the indemnity clause what do you find the normal term of the agreement is?
David: Normally now it’s two years. So that that it would apply for two years. It used to be open-ended 5-10 years ago, but there’s a norm that it’s now just two years. I think there’s…sometimes you’re going to have a fight about the indemnity provision. They’re probably in it 70 / 30 percent they’re included. The main thing that you’re looking there for is it’s limited to strict breach obligations. There’s a good argument some overseas parties make that they just don’t give indemnities. To be honest, it’s not a deal-breaker whether it includes a doesn’t include an indemnity. Kind of shifts the onus of proof a wee bit, but other than that, you’ve still got to litigate if in fact you’re looking to enforce them.
Bruce: It’s a key point that no one’s actually taken any action against someone has breached an NDA and, from afar, I think I have seen breaches and I think for more worldly clients understand that is only so much protection they have from an NDA regardless of the fact that it’s a legal agreement.
Okay. So both parties have signed an NDA. Information has been exchanged and then the the acquirer has decided to make an offer, I like to call those non-binding indicative offers NBIOs. I know they’ve got all different sorts of names and perhaps the form of the agreement rather than the name of the agreement what matters here.
What are the key terms in that NBIO we’ve covered some of those already?
David: Well again, it’s priced and is it formula-based, you know, is it structured as a upfront earn-out component?
Again, depending on where you want to see the debate or the time spent our one is to get the commercial agreement that you know, is it going to be all upfront or is it going to be an earn-out based? Earn-outs are an obvious way of trying to split the difference when there’s a vendor that wants you know $10 and the purchases offering $5. So you kind of split the difference and say well we’ll do an earn-out if x y&z happens.
Our word of caution on that is that earn-outs are very easy to say, they are incredibly difficult to document and then also they are significantly difficult to implement, because obviously for the period of the earn out the vendor is as interested in the business as is the purchaser. So there’s that period where the purchase is paid over the fixed amount, let’s say it’s 5 out of the 10 and there’s a two and a half on earn out and yet if it lasts or it’s complicated effectively the business is going to be run more by the vendor to the earn out result rather than to the purchaser who may want to rationalize it put it together with their other business, etc.
As much as a commercial bonus in terms of bridging the gap of price, there is a cost in terms of just how difficult that is how complicated you making it and it really for us as lawyers, it’s fantastic because we don’t shut the file, you know, the file is left open for the period of the earn out because you’re going to be lawyered up for that two-year period. That’s not necessarily good for a purchaser because they want to get on do things to it yet the vendor will want certain restrictions as to what you can do to operate the business during the period of the earn out.
Bruce: The incentives that earn-out creates versus the different outcomes that the two parties are looking for,it’s a good point.
The other issue we see is which line item has been used to drive that earn-out amount whether it’s volume, pretty simple, revenue probably reasonably simple, but earnings, EBITDA, by golly, they can be playing around with so why…
David: And then you get the accountants and you get the games that people play as you say if it’s if it’s a revenue figure turnover figure which is, you know, less likely to be played around with.
But as you say once you get into EBITDA it is so…in the accounting kind of debate on various things of obsolescence or whatever. Can be so variable.
Bruce: Yes. So we have that NBIO, what do you call the NBIO, what’s your standard?
David: Well, no, we we don’t really have a standard….
Bruce: Heads of Agreement
David: Or MOU, heads of agreement, term sheet. All of those are kind of a mixture of them.
Bruce: We’ve reached agreement, often by the way, also that agreement is between the lawyers isn’t it rather than between he vendor and the acquirer, the purchaser lawyers often play a part..
David: We would at that instance, we would hope that the clients are more driving that position because it effectively it isn’t intended that would be a binding arrangement. You’re trying to reach a commercial agreement and therefore our experiences would like to check that we’re not being set up or our client isn’t being set up by, you know, little wxpressions you can put in those clauses or in those agreements I should say.
We would see that as more client lead. When you doing the definitive agreement than the bigger document that’s much more lawyer lead. And would like to try and to get the client’s to hopefully build a wee bit of relationship at that stage because that builds momentum. And it also builds the expectation, which we would see is as very valuable.
We do see that that earlier stage of the agreement, we would raise, you know a timetable so that we’ve got the legal document that’s fine and dandy, but either as part of that or a schedule or something just worked kind of adjacent to that is the timetable.
So are we aiming to close at the end of July? You know, we’re in June now or are we doing it for August/September? So that expectations can be kind of built into the process because without that the the process can kind of meander and that’s not good. One that we were involved with recently our client, which was a very well-versed North American client came to it at the end and saying look, you know, the vendor was getting deal fatigue, you know, we need to wrap this up.
You know, there are small New Zealand, you know tight knit group of vendors they’re getting…so it was a really useful discipline that we you know, we had some very interesting legal issues. But we were given the firm guidance from the client that now is not the time to play legal games that you know, the commercial momentum was now waning somewhat and you had to bring it to a conclusion.
So, you know those kind of sign posts are very useful because everybody wants to either make the deal or not. You don’t want to kind of spend a lot of money and on advisors and then it’s for nought.
Bruce: Though, the intermediaries, whether they’re financial or legal intermediaries, can often take that heat out of that discussion as well I find.
We see two steps from from here from them NBIO, one is they go into due diligence or two is that a little bit more discussion is held and then it goes into a sale and purchase agreement with due diligence after that which depends often on the two parties and their lawyers. What do you see, what’s your view?
David: I’d kind of see them that they would often go in parallel. Often we would say that due diligence starts first, you know before the documentation so that at least you know, you’re not spending all of that time and energy if in fact it’s that unsure that you wanting to go ahead at least get through that process. One that we would put in front of you if you are overseas purchaser, is that also, both those two issues, but also statutory approval or overseas investment office approval also be addressed at the earliest possible stage.
Because if you are an overseas purchaser and you potentially may need overseas investment office approval because of the timing impact of that approval you need to address that issue at its earliest and we would be say as part of the due diligence you should address that at the outset. Because if you are caught and for whatever reason you’re caught by land approval and because under the present regime that takes over six months you can see that that really does upset the transaction timetable because most purchases kind of do not, unless it’s one of a mega deal, and there’s some regulatory requirement, in the US or China or whatever, that puts a big kind the question mark on the transaction itself.
Bruce: So we’ve done our due diligence, hopefully well, possibly delayed and we often see a delay because the acquiring party doesn’t want to spend a large sum of money on due diligence until they’ve reached agreement on many of the key terms.
So you’ve done the due diligence and now you’re at the stage where they feel like, they’ve got sufficient information to close the deal. They ask you to prepare a sale and purchase agreement. What are the key parts of that sale and purchase agreement?
David: So the first one on that one is who are you acting for?
So on a tender, and these are where some of the differences come up, on a tender sale, in fact, it will be the vendor counsel that will prepare the first draft of the agreement and they will have done it quite early on in the process because they want to compare like with like effectively in the indicative bid state.
In a Private M&A, and it’s not going out to tender, the purchaser’s counsel will prepare it. And obviously they want to feed the results of the due diligence into that draft and the critical one is obviously price. So that’s the the main one and then you’re looking at basically issues around escrow or retention.
So because of the use of trusts in New Zealand, that’s probably the one that comes up the most. If its two big corporates to each other there’s not the kind of that credit risk for a potential warranty claim and that’s a bunch of issues about how much you put aside how long you put it aside for what are the caps and collars for the claims?
Then you’re looking at the chunk about the restraint because obviously if you’re buying it on a multiple based you’re at least wanting if possible that multiple to apply to the restraint arrangement that you have and quite a comprehensive restraints in terms of you know, non-compete non-customers non-employees etc.
And then your last one is your warranties. You’ve got 25 pages of what potential warranties that you’ve got plugged into the system. And then you have potentially some attachments which might be you know, new employment agreement new executive contract transitional services agreements those kind of ones but that’s where you’re concentrating your negotiation to try and tease out you know where the pushback is from the vendor.
Bruce: You may also have a shareholders agreement if less than a hundred percent stake has been taken in the company in the case of a private agreement. If you have a shareholder agreement what are some of the key terms and that shareholders agreement, in the private case?
David: So if if you are a partial acquisition and therefore it is a shareholders agreement as well, that actually changes the tone of the negotiation from the outset because in the traditional buy and sell I buy you I run it you say goodbye. You may stay there for a year or two or whatever. But it’s a handing over of the baton. When you going into one where in fact there is a residual shareholding in, you’re both now got your hand on the baton. So in our de Bono hat analogy or whatever you are a lot more less aggressive. So a lot more less dogmatic than a vanilla purchase because you’re going to have an ongoing relationship with them. So even as lawyers, we would say you should be less aggressive much more group hug type arrangement because you are going to have to work out the shareholders agreement. The shareholders agreement will have often what are the supermajority issues? I.e. what the issues which require you both to approve them. You know, is it the business plan is it made your transactions only? Is it how you’re going to in exit the joint venture Etc? Because you’ve you’re turning from a purchase into now a joint venture, and from our experience you should adopt a different kind of approach to get the best result because after you’ve done the purchase you don’t want to have been fighting effectively because you’re now again sitting around the same table trying to get the best result for the joint venture for both parties. So it is a kind of a different approach which we would recommend is adopted and you know, then you’ve also got the kind of say well what’s reasonable for the other side.
What’s the protective mechanism that is reasonable that they have. And then work out, okay, how do we resolve the deadlock? And what’s the clients view in terms of resolving deadlocks? Because none of them are easy, you know, there’re various choices between exit mechanisms, etc. etc. And you don’t really know whether you’re going to be the buyer or the seller at that stage. So you’re trying to put the alternatives to clients and they will then have to choose what best fits their commercial needs.
Bruce: So you have a minority shareholder, perhaps the original owner of the company. They now hold much less than they used to they used to controlling the company. They’ve sold a majority to a to another party that other party perhaps there’s a majority of directors on the board.
What’s the the majority shareholder has decided to sell out a few years later. What are some of the protections that are minority shareholder would have in the case of the majority selling out?
David: So that’s mainly comes down to what’s colloquially called the drag along carry along provision.
And the drag along is basically where the majority and you have to define the majority is able to drag the minority along and sell out. Mainly because it’s prefaced on the commercial position that a purchaser will not want to buy a majority position they’ll or they’ll pay the top dollar for a hundred percent of the business and therefore it’s in everybody’s interest if they want to get the top dollar that they can drag the minority along to sell out and the reverse of that is a carry along.
And that’s where basically the majority do find out that they’ve got someone who’ll take their interest say it’s 75 or 80 percent and the minority don’t want to find themselves basically stranded with a new majority shareholder not getting a right to exit. So they’re allowed to carry along with the major shareholder to exit at that price.
So it’s mainly to kind of agree. What is the percentage that applies there? And in our view it’s best to have those provisions in, they’re good provisions. It’s just getting a commercial agreement, what’s the percentage that’s appropriate and you know, then you can basically play it out.
We will often raise, do you want to have a Russian Roulette type formula and that’s basically where you can issue a notice to buy out and at that price the other person who receives it can turn it on you and buys you out at that price and that is a very, you know, the procedure is set up so that it’s a fair price that’s stated. Obviously, it works best with two basically equal financial players because they both got the financial ability to buy or sell. But again, what you’re desperately wanting is to avoid a situation where there is a majority in a minority and they’re effectively at war with each other within the marriage and that’s what it is, but there’s no way of getting any resolution. The minorities decided just to be as obstructive as they can and, that’s obviously the majority’s view on life, the minority believes the majority is just trying to bully them in respect of every proposal and as being you know not taking any fair regard of the interest of the minority and everybody’s lawyer up.
And it’s just costing a huge amount of dead money. There’s no value being created effectively other than a lot of heat, but there’s not sufficient light in terms of saying the business is actually hurting by this cost it needs to be stopped. So if you can agree that exit mechanism often you go to the kind of the employment scenario where you go off to mediation and you know, you try and strike a deal that way but again, that’s an expensive process. But we do recommend that the clients think through how deadlocks are going to be resolved. What is the best mechanism or mechanisms in place?
What are they comfortable with and even to think outside the square? That basically would it be possible that we agree neither will sell for a standstill period of let’s say three or five years and then outside that standstill period free transfer can be given so that there’s no restrictions because if you’ve got pre-emptive rights that kind of kills value and would the clients be prepared to consider that as an alternative.
Now often clients won’t but again trying to press the the clients. How would you like the disputes to be resolved? What’s a mechanism that you can live with because often unfortunately, there are disputes and as much as we gain from those disputes, there’s not quite the commercial benefit, that is the cost.
Bruce: Another dispute would be capital dilution where the majority shareholder believes or the business does need more capital, but the minority shareholder doesn’t want to match the capital that the majority of shareholders putting in. So another good example of a dispute that could happen without a properly drawn shareholders agreement and good advice. Going back to the sale and purchase agreement. One other issue that may come up is working capital.
So you strike an agreement on the price, but the price of oil will often, we should also talk about share versus asset sales as well, though the price will often include an amount of working capital that then would be altered post at settlement or the closure of the agreement. Perhaps let’s break those into two why do people choose asset sales versus share sales even for a for a good size mid market company and how, in both cases is working capital addressed?
David: So as you say its an excellent point the debate about whether it’s shares or assets. Our majority of clients are purchasers and we would always say, you know, can we do it as an asset deal, because the beauty of an asset deal from a purchasers point of view is we only take over the liabilities that are specifically defined as assumed liabilities.
We don’t take over the risk of historical tax so we don’t have to do due diligence to the same degree in the area of tax at all. And you only take that future risk under your watch going forward. From a vendor’s point of view they like the share arrangement because basically they give you the box, they sell you the box and it’s got the nice toys in the box, but it also has the historical heebie-jeebies that may or may not be in the box. But basically it’s all your risk and particularly tax because tax can come up, you know, five six years down the road and we’ve had that happen in reality. So from a purchaser’s point of view we like assets, vendor and our New Zealand tax, no capital gains as such, prefers the shares and as you pointed out Bruce it is a wee bit more challenging to do assets the bigger the deal bigger the size of the business etc. But we say it’s a very valid issue to deal with, particularly, if you’ve got an historical problem with the vendor, even four five years back. We would also have had recent examples on it where the client was halfway through doing a share one and although we had tried to convince them to go down the asset route because it was only a relatively modest acquisition of about 10 or so million, and they had a death a workplace death. And of course we immediately then said to the purchaser stop. You know this needs to switch to an asset deal because the problem that we would get if we bought the share deal is although the death was on the vendors watch we would inherit that under a health and safety one, so if we had a death in the future it would be two strikes.
So for liability personal liability, etc, etc we disparately wanted to ring-fence the issue of the death to the company and therefore we did not buy the shares we bought the assets. Looking to buy it, you know should buy assets and you know, no no no, this is had no problems for the last 35 years and then the experience was that the client decided they’d buy shares and then five years down the road there was a knock on the door and it was Inland Revenue doing an audit in respect of it and not only the problem that you’ve got there is all of the people had gone. So it was five years down the track. There was no one who had any corporate memory of doing that particular tax return.
Even if in fact a dozen eventuate in a claim, you’ve got a truckload of cost and management time on a non-productive event, which wasn’t on your watch kind of thing. So but I accept that, you know, the bigger the transaction that makes it a wee bit more challenging.
Bruce: Do you find that somewhere during the process the sellers representatives, whether the M&A people or their lawyers, say your client, the purchaser, please provide evidence of funds and if it’s financing please provide a letter from the financing company saying that will provide funds do you see that?
David: Only rarely to be honest mainly because thankfully our purchasers are mainly big well known purchasers, but I have had that where they the purchaser was a virtually an unknown entity private overseas.
And I would recommend that that’s not an unreasonable request particularly, if it you know significant acquisition. The vendor doesn’t want to go through all the cost and the agro only to then find out that basically, the purchaser is a phantom and it’s not realistic that they’re going to be able to, fund it at all.
So if you’re a purchaser and you are not listed or you’re not of a suitable size, I think you’ve got to accept that that is a reasonable request and you’ve got the then try and deal with what reasonable evidence can you provide that a person who’s you know is looking to spend quite a lot of time and money entering negotiations with you to show you bona fides.
I mean, it’s a wee bit like, you know if you’ve got a big flash car and someone knocked on the door and you had said I would look I’m you know interested in your Mazarati, personally I just have a Volkswagen so no one would ever have to spend a lot, but if it was a Mazarati you’re not going to just let anybody give it a spin. You want to know that they’ve got that preferably interest but even more important that they’ve got the lot.
If it’s a hundred K car, if an eighteen-year-old turned up you’d say on your bike unless you can show me why I think that you should or could you know buy it for a hundred K.
Bruce: Point I’d make is that for purchases who aren’t famous having a very good website is very helpful. You can provide a lot of substantiation to any offer they make .
We should return to working capital sounds so boring working capital, but it can be a heck of a thing. So in an asset sale of course, it’s the stock that will be counted in effect, at some stage, at settlement. In the case of a share sale talk through the mechanism
So as you say working capital is often a component in a share sale and as you say, it’s kind of their link to the same things that clients use the term working capital, you know, I’m happy to pay you say 50 million dollars on the assumption that you’re going to leave working an agreed level of working capital and in some ways you’re happy with that at the term sheet or the MOU because they’ve agreed the price.
Now when you come to do the definitive agreement, you’ve now got to get this defined, you know agreed working capital amount and that’s where to be honest it does help to get the accountants involved in that stage because as a as a lay person you know working capital is you know that gross assets minus gross liabilities effectively.
And then basically we have that and then you have the schedules as to how you’re going to calculate it and it’s our view in our recommendation that those schedules are as detailed as possible and that there are model working capital calculations in the schedules so that there’s you know on the basis of their price that they agreed to pay 50 mil.
Here is the working capital figures with the historical part of the figures all filled in and then there’s going to be the working capital adjustment calculation in respect of the next schedule and there’s a blank schedule but all the headings are all in there and even more importantly the assumptions are in there like stock. If it’s 90 days, it’s obsolete blah blah blah blah blah, but you get all of those details by the accountants. Preferably the ones who are actually going to do the calculation so we don’t get a mismatch of who prepared and who actually does it, all of those agreed at the same stage because like you if you that is the area where there is most likely to be a disagreement. If it’s an asset deal, it will be around stock. And if it’s a share deal it will be around the calculation of working capital. So you better to have your argy-bargy doing those schedules, but preferably not only in words, but doing it with a set of statements in the schedules with numbers in it one with historical so you can see what happened in the past, and how it was treated and then one is the form that you’re going to use on closing effectively.
Bruce: I’d also say that even at the NBIO stage, it’s good to have some description of how working capital be calculated, we’ve had the odd one where there’s no description at all and just means that in theory the vendor can strip the company just before settlement and take all that Capital which would be a heck of a lawyer’s bill further down the track I’m sure.
How about you? What was your what was your journey to this point?
David: Well, I basically was through University and then I went to a national firm or it wasn’t a national firm at the very beginning but at that stage quite a few years ago now they then started to be a national firm and I’ve got to admit my interest was in perhaps more of the public M&A.
So it was our I happened to do one of my Master’s paper on the defences against takeovers. And in those days I put my hand up to do that kind of work in the office and there wasn’t too many others who were interested in that area. So was bought up on the Hawke’s Bay Farmers Meat takeover and then that developed into doing work with with Ariadne Brierley’… all of those. Mr. Judge Mr. Brierley kindly came to my university seminar as my guest speaker and I interviewed a lot of people. I got a lot of help from US law firms who freely gave their documentation and information on takeover to compare the different takeover type rules etc. So I developed that at the early stage.
I was very fortunate to be appointed to the takeovers panel for when it was established and spent ten years on the takeovers panel, which was again fantastic because you actually got the be involved in policy issues. So the policy issues behind equal treatment, you know fair price has been great.
And yet underlying that is the public M&A is you kind of do three or four a year at that space but you will have five or six private M&As going on. Why I like them is the negotiation you get to meet the other side you get to meet the other clients. You got to negotiate with your own client, and then you’ve got to negotiate with your lawyer on the other side. It helps if they are an experienced M&A lawyer on the other side, there’s no doubt about that. But you can get a variety of people and I very much enjoy the the cut and thrust of that negotiation.
And also you learn a terrific amount about the business. So, you know, if you’re doing due diligence on Tegel chicken, you’ll learn about you know, the difference between, freezing chicken and fresh chicken and I remember doing on Tegel many many years ago.
I was blown away that basically when I was a child, it was all frozen chicken with everything that you got yet it all moved to fresh chicken and the margin on fresh chicken and the margin on cutting a breast, you know up as opposed to a whole chicken is huge. So you learn to all about that in the industry and in Tegel, their big contract was KFC.
So if you didn’t have KFC the business would have been dead. So you kind of quickly learnt where does the legal and interchange or intersect with the business? And where can you kind the protect? So for someone like Tegal basically, you wouldn’t pay anything significantly for that business unless you got the KFC supply contract because it underwrote the whole amount of the business.
If you said wheres the growth we could export chicken. No, you can’t kind of it was particularly in those days, it was virtually impossible to export. Because of the way the shelf life and the issues about disease and chicken, etc, etc.
So it’s that kind of combination between interesting law and interesting commerical environment which attracted me me to the area.
Bruce: Customer concentration issue if there KFC’s the the center of the valuation of the company!
And you’ve always lived in Wellington or have you lived elsewhere?
David: No, no always lived in Wellington.
So I was brought up. I did go to Christchurch. I started a degree in engineering from at the outset or engineering intermediate at Vic went to Christchurch and then had to ring up my parents to say that I couldn’t see myself doing engineering for 30 years and I’d switch and then I came back here. I was a term late so I then worked at a law firm just basically delivering stuff, doing Court filing doing basically anything whether it was dry cleaning deliveries or collection and then went back to University finished and then join one of the larger Wellington firms at that stage and then, it then decided to become part of KPMG legal now 20 years ago or 19 years ago. That’s when we set up the boutique firm that we’ve got at the moment that’s been going for 19 years which focuses on corporate M&A and employment, and I do that with my team and other colleagues do the M&A corporate, and we’ve evolved into particularly assisting overseas clients and their special needs.
Because the the ones that mainly buy and it’s mainly, although everybody kind of thinks that it’s more agricultural based in New Zealand, that’s not quite true in the M&A space because we’ve still got co-ops and they don’t do so much transactional work at all. It’s actually in the tech space. So New Zealand does have a very good name in Tech and overseas companies particularly US companies look to do what’s called bolt-ons of getting Tech and seeing if they can commercialize them internationalize them. The New Zealand entrepreneur has found that difficult. The exception is, Mr. Drury and the Xero, they’re the exception to the rule. It would be lovely if there was more of them who could make that but you know, we’ve just done one where a Nelson tech has sold out to a North American. for about 30 40 million, set up 10 15 years ago and there no other option really, you know, it’s not big enough to list. You can’t even, challenging market to list in New Zealand anyway, so they’ve sold out to another industry player obviously paid a price acceptable to the vendors and the few individuals behind that and hopefully. The client can take it to the next level.
Bruce: Thank you for your time, much appreciated, that was very interesting
David: Pleasure indeed Bruce.
Bruce: We didn’t get too complex either we covered the main points I think.
David: We’ll leave you to work and help the clients on that challenging area of working capital, which I’ve got to admit I very much interested in understanding, you know, do not have an accounting background but yes clients are very liberal in their use of the phrase but it’s a lot more complicated than they they’re just the ad lib, yep, we’ll do a working capital adjustment or an NTA adjustment it does, and you as you say you can get really shafted if effectively you don’t pay attention to the detail.
Bruce: I have seen aggravation both ways on working capital that’s for sure. Thank you again