Jessica Pearlman speaks with Business Law Currents about the Private Target Deal Points Study, the uptick in women deal lawyers, and how she helped "the Facebook of China" acquire "the YouTube of China."
Business Law Currents: You’re very involved in the transactional side of the law. Did you always want to be a transactional lawyer?
JCP: I knew I wasn’t going to litigate. Even before I applied to law school, I just knew litigation wasn’t for me. I liked the idea of bringing something together more than the idea of dividing something up.
That being said, I thought I would be an IP attorney. You know, at the time I was in school that was the hot area. I tried it as a summer associate, and I also had the opportunity to try some M&A. That was it. I remember thinking to myself, “You are stupid, because in terms of having a balanced lifestyle, in terms of having predictable hours, this is not the way to go.” [laugh] But you’ve got to do what you enjoy.
Business Law Currents: You don’t really see as many women deal lawyers as you do men. Can you comment a little bit about that?
JCP: I’m happy to say that it seems like things are on the uptick. We have a number of women partners and associates who are in the M&A space here in K&L Gates’ Seattle office.
It’s something I track at the ABA meetings. I’m active in the M&A Committee and I chair the Market Trends Sub-Committee. I always do a count of how many attendees we have, and I keep a separate tally of how many are men and how many are women. Part of the uptick in women attendees comes from the related areas – escrow agents, investment bankers, areas like that – but even that is a victory, too. It’s good to see more women coming to our meetings in general.
Business Law Currents: Can you give us a little background about the Facebook of China deal you recently completed?
JCP: The Renren deal. It’s an online social-networking site that’s often referred to as “the Facebook of China.” The acquisition was of an online video sharing site called 56.com, often referred to as “the YouTube of China.” It was a really interesting deal. We were dealing with Chinese-based companies that were incorporated in the Cayman Islands, but there were U.S. issues as well.
Business Law Currents: What were some of the challenges of conducting what was essentially a multi-continent deal?
JCP: Well, of course there are time zone challenges, but I think we covered those really well. The partners in the deal on the corporate side were me and Wilson Chu out of our Dallas office. Given the time zone difference between Dallas and Seattle, I think we were available twenty out of twenty-four hours per day.
The target's shareholder base included VCs from the U.S., China, Japan, and Taiwan so there was much to juggle with all the multi-jurisdictional legal issues, all on top of the multiple language and cultural nuances. Luckily, we stretched the day by using our lawyers on both sides of the Pacific so things get done while you're sleeping!
Business Law Currents: That’s one true advantage of a global firm. K&L Gates has how many offices worldwide?
JCP: Forty-one. I’ve not been to all of them but what I can say is that it’s been great for my practice to have that global footprint. I can think of a deal for a client where we weren’t originally engaged to look at UK issues with the UK subsidiary of the target company. But the issues cropped up, and the client realized they needed a bit more M&A-experienced help with them. It was just a question of me calling a UK colleague to talk about the issue. There was no additional conflict check or other intake process needed, which was a great advantage. It was very easy to get up to speed and moving on those foreign issues.
Business Law Currents: Is it fairly common for you to work with other partners in your practice group from other offices?
JCP: Our ability to work across offices is something on which we pride ourselves. I think it can be a benefit to the clients in a number of ways. Sometimes it’s a question of finding the right fit for the client, other times it’s a question of the right time zone for the client; other times it’s a question of the particular capabilities the client needs.
Business Law Currents: Let’s talk about your work with the ABA. How did you get involved, and how has that helped your practice and you as a professional?
JCP: I remember looking at a list that the ABA had sent of their different committees. I was a junior or maybe a mid-level associate. I realized we didn’t have anybody who was actively involved in the M&A committee, and I thought well, maybe this is a worthwhile thing to get involved in. It started off with me begging to get money to pay for the trips to go to the meetings and…well, let’s just say be careful what you wish for. I started off by volunteering for smaller tasks – in particular, I raised my hand as a volunteer to work on the look and feel of the early deal points studies (because, embarrassing as this is to admit, the inconsistent formatting was bothering me) – but a lot can happen when you actually show up and do what you said you were going to do. However many years later I’m now chairing the Market Trends Sub-Committee and co-chairing the Private Target Deal Points Study.
It’s been a fantastic experience for me. It’s been a great way to meet practitioners around the country and around the world. And in terms of my professional experience, I’ve learned a lot from the process. We talk about what’s going on in the market in our Market Trends meetings, we do mock negotiations of deal points at our meetings. I think a great way to learn a lot about M&A and meet a lot of players in M&A.
Business Law Currents: Looking at the Private Target M&A Deal Points Study, the work that went into this is just incredible. What kind of trends and analysis did you find in this process that surprised you?
JCP: One thing that I think is surprising to many of us who are active in the M&A space is that, if you look at some of the indemnification slides, the stats come out more seller-friendly than I think we would have expected.
One theory for why that may be the case comes from how we source these deals. We’re pulling all the deals that meet our criteria that closed in a given year where a public company was buying a private company and the agreement was required to be filed with the SEC. That means it had to be material enough to that public buyer for it to be filed in the first place. What does that exclude? What effect does that have on leverage? Those are the two questions to ask yourself when you’re comparing the stats on the page to your real-life negotiation.
One thing to remember is that many large serial acquirers are not filing their purchase agreements. Those deals are just not material enough to them. You’re not going to see much in the way of Microsoft, Google or Cisco agreements in the mix here. I think that those deals are more likely to be more buyer-friendly than the mix we do have. I can’t promise that, but that’s my expectation. I think that these numbers would be a little different if we had access to those agreements for purposes of the study.
Business Law Currents: One of the interesting things about your presentation to the M&A Committee was that you spent some time talking about definitions and concepts that were brought out. Can you comment a little bit about sandbagging and what kind of trends you’re finding?
JCP: “Sandbagging” relates to when a buyer learns something in due diligence before closing. Should that buyer still be able to recover on a claim for a loss relating to what they learned before closing? If there’s a provision that says that you can, some people call that a pro-sandbagging clause. Others think that term is pejorative and call it a more benign “benefit of the bargain” clause.
The seller-friendly version would say that the seller has no liability if the buyer had knowledge of the breach giving rise to that loss before closing. Such an “anti-sandbagging” provision was included in just five percent of the deals. That’s a little bit down from prior years.
Forty-one percent had the pro-sandbagging provision and fifty-four percent were silent. I think what happens here is that there are some deals where it doesn’t come up, and there are others where the parties can’t agree and just go silent, thinking, “let’s just let the chips fall where they may.” But what does that mean in effect?
There are a couple of cases on this out of New York. Let’s talk about those cases.
The first case I want to mention is CBS, Inc. vs. Ziff-Davis Publishing Company, from the New York Court of Appeals. In that case there was no express pro-sandbagging or pro-benefit of the bargain clause. After signing but before closing, the buyer discovered that the seller had breached its reps and warranties regarding the target company’s financials. The buyer decided to close anyway, and then sought indemnification for the loss that it suffered as a result of that breach. The seller argued it wasn’t liable for that breach because the buyer didn’t rely on the truth of the representation. The buyer knew the rep was false at the time the deal closed, so there was no reliance and thus no recovery.
The court didn’t agree. The court said that what matters here is the buyer’s reliance that it is purchasing the promise of the seller, not reliance on the truth of the underlying representation itself. So that was a “pro-sandbagging” or “benefit of the bargain” result in favor of the buyer.
That case was followed by a Second Circuit US Court of Appeals case, Galli v. Metz. Under very similar facts, the court applied the holding in Ziff-Davis but limited the buyer’s right to indemnification because the court said the buyer needs to show that it didn’t waive its claims when it closed over the known breach. The court did distinguish this from Ziff-Davis because in that case the facts showed that there was no waiver, but that wasn’t clear in this instance so the case was remanded on that point for factual determination.
Compare that to the “traditional” default rule, which requires that if a buyer closes over a known breach of a representation, the buyer has to prove that it relied on the truth of the representation itself in order to get indemnification after the fact.
I think there’s a key lesson here, which is if you’re going to go silent on this issue you need to know where you are as far as governing law. You need to have done so thoughtfully. You need to think about the common law default position in the jurisdiction that governs your acquisition agreement.
Professor Charles Whitehead of Cornell, who spoke at one of our Market Trends Sub-Committee meetings, is publishing an article about to come out in the Delaware Journal of Corporate Law that analyzes the default state rules with respect to sandbagging. He calls the anti-sandbagging states the “traditional rule;” those are based in tort theory. Those tort theory states are California, Texas, Maryland and a handful of other places. The buyer has to prove its reliance on the truth of the representation in order to recover.
What he calls the “modern” rule is based in contract theory, and that’s what’s coming out of those cases like Ziff-Davis and Galli where the buyer has purchased the seller’s promise as to the truth of the reps and warranties. The seller has to indemnify the buyer for a breach of those reps and warranties, even where the buyer couldn’t have relied on the truth of the representation itself, unless the buyer waived the breach.
That’s now being followed in about fifteen contract theory states, including Delaware, New York and Illinois. Going silent there is equivalent to pro-sandbagging, which is a win for the buyer. So where you are really matters.
Business Law Currents: Is this something that’s larger in the private deals versus the public deals?
JCP: In the public deals there is no indemnification after closing because you’re not going to get recovery from those shareholders, so this is a non-issue in that context.
Business Law Currents: So as we conclude, you mentioned that you are balancing your career as a deal lawyer with that of a woman and mother of two daughters. How is that going?
JCP: Mayhem! But the hilarious, enjoyable kind of mayhem. One of my daughters is five and the other one is eighteen months. They are both...type A. They know what they like and what they don’t like and they let us know in no uncertain terms. Maybe it’s because they are the children of two lawyers. My husband and I will probably spend the rest of our lives apologizing to them for being lawyer babies [laugh].
This interview was conducted by Christopher Longley, a Senior Relationship Director at Thomson Reuters.
Jessica Pearlman is a partner in the firm’s corporate group and resides in the Seattle office of K&L Gates. Ms. Pearlman represents emerging and established companies in various corporate, securities, and finance matters, with an emphasis on mergers and acquisitions for both public and private clients, domestic and international. Ms. Pearlman has particular depth of experience in various technology sectors, including software, social media, data security, data storage, healthcare applications, mobile applications, and search and search engine optimization, as well as in digital and traditional media, biotechnology, and transportation. She is a frequent presenter on mergers and acquisitions topics.
Ms. Pearlman serves as chair of the Mergers & Acquisitions Market Trends Subcommittee of the Mergers & Acquisitions Committee of the American Bar Association’s Section of Business Law and is a member of the Thomson Reuters Partner Advisory Board.
© 2013 Thomson Reuters. All rights reserved. Republication, repurposing, modification or redistribution of Business Law Currents content, including by framing, removal of hyperlinks or similar means, is prohibited without the prior written consent of Thomson Reuters.