Can your lawyer destroy a good business deal?

Over the years in business and as a member of over forty boards, I have received good advice from corporate attorneys and on occasion bad advice as well.  There is a line that should be drawn in a relationship between corporate attorney and CEO or board.  Attorneys are paid to protect the corporation, not to give business advice.  Some are experienced enough to provide great business advice.

But the law degree they earned does not assure that, even though most CEO’s respect the advice they receive from their attorney highly enough not to doubt the conclusions or the experience behind the conclusions offered.  And since attorneys are paid to protect, often they will give a litany of warnings about what could go wrong when accepting a contract clause that they have been trained to challenge.

There comes a time when a CEO must decide to reject what may seem like important good advice from the attorney and chance acceptance of terms within a contract that may cause risk, but controllable risk or risk that is so remote as to be worth the acceptance of the business represented by the contract at hand.

[Email readers, continue here…]  I was chairman of a company that had been offered an investment by a Fortune 500 company offering to make a strategic investment in our business, which would be capable of driving new demand to the large company through a series of new web services creating a greater need for the large company’s products.

The business terms had been agreed between the business development officer of the investing company and our board, as both companies turned the details over to their respective attorneys for documentation.  The attorney for the investor was a member of a large, respected law firm in Silicon Valley, and certainly was full of himself as sole legal protector of the rights of his very significant investor.  As drafts of the otherwise standard investment agreements passed from him to our attorney and our management, we immediately spotted a significant number of terms we not only had not agreed to but were contrary to the spirit of the investment.  The attorney held fast defending every challenge, stating that “these terms are standard for our client and cannot be changed.”  We appealed to the business development executive, who deferred to the attorney restating that the terms were unchangeable as far as the big company was concerned.  After conferring between our attorney and board, we walked away from what would have been a fine strategic partnership, killed by an attorney who probably understood the client requirements but was unwilling to offer flexible solutions to problem areas.

That attorney had made what we considered business decisions on behalf of his client.  By the way, we immediately found a willing replacement that had an attorney not quite so full of himself and quickly concluded a similar deal to the acceptance of all.  And to this day, I caution my CEO’s not to deal with that Fortune 500 firm because of the experience we had with its attorney.  You never know how much far reaching an action can be, given the speed and extent of communication between CEO’s today.

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10 Responses to Can your lawyer destroy a good business deal?

  1. Hi David,
    Do you know the story of what happened when IBM went calling on Digital Research and Gary Kildall to cut a deal for CP/M for the IBM PC? Bill Gates told IBM that Microsoft did not have an operating system, and recommended DR. Apparently the lawyers kaboshed the deal, IBM went back to Microsoft, and the story had a very, very sad ending for both DR and Gary. Unbeknownst to me at the time, I ended up funding the purchase/development of MSDOS through a large purchase by Apple of MS Olympic Decathalon for a holiday promo for the Apple II.
    Warmly,
    Barry

  2. Peter DeForest says:

    There is a lot of wisdom here. I am not a lawyer, but I have negotiated contracts for my small business for nearly 20 years, and have seen opposing lawyers derail negotiations for many reasons; a misguided feeling they are protecting their client (usually protecting them from doing business with you), a misunderstanding of their role (trying to make business decisions instead of offering legal advice), offering problems instead of solutions, and defining risk (understanding which risks are real and which are imaginary).

    This may sound simplistic, but I focus on the other other party and less on the contract. A good partner with a bad contract can work out, but dealing with a bad partner, even with the strongest contract, will not end well for you.

  3. William D. Volk says:

    Hell Yes.

    Saw a 7+ million $$$ deal (that I bought in) killed by the lawyer the CEO bought in … during 2012.

    Have the Lawyer(s) look over the deal, but DON’T have them in the meetings.

  4. Arthur Lipper says:

    Attorneys are precedent driven and therefore trained to look backwards for assurance of correctness. They are good at
    assessing that which has occurred and terrible at prediction, except as relating to that which has happened previously in similar cases.

    Similarly, physicians and engineers, who are educated based on what has worked, are so aware of the penalties for making decisions based on other than that which has worked in the past that they have a natural bias for the more secure which limits creativity.

    The issue is can creativity be taught or encouraged in professions where being wrong can cost lives and be severely penalized?

  5. Michael O'Daniel says:

    The answer is yes. All I needed to read was the subject line.

  6. Tom Lamb says:

    As an ex-Wall Street lawyer (and three-time CEO), I take a different view. I will not work with a lawyer who says she/he can’t answer a question because it is a “business decision”.
    There are some sorts of “business decisions” for which I really do want to know my lawyer’s opinion, such as the “business decision” to assume legal risk. The ultimate decisions belong to me and my board, but if my lawyer has seen this issue 10 times before, why wouldn’t I want/demand to know what he thinks? Of course I don’t ask my lawyer for his opinion on actual deal terms (e.g. consideration, quantitative metrics, financial/accounting decisions, personnel decisions, etc.) – that is the job of my deal team and me.
    As for Dave’s example, the lawyer may have been part of the problem, but in my opinion, the real culprit was the BD person who lacked the spine/tenure/experience to stand up to him. Perhaps the BD person did not believe in the deal enough to cross the lawyer – or more importantly, the General Counsel – the lawyer’s real client.
    Or maybe the deal was not important enough at the time for the company to divert from its playbook. Most companies have an unwritten playbook of terms that they absolutely hold fast on – guarded vigilantly by the GC and typically generated, for better or worse, from years of transactions, trial and error. Companies will divert from the playbook, but it takes advocacy and persuasiveness from the deal team to make that happen.

  7. Dave Berkus says:

    Good one, Tom! There are always two sides to a controversial subject. Well said.

    Dave

  8. Berni Jubb says:

    An area ripe for some AI intervention :-)) Berni

  9. Peter Cowen says:

    Excellent wisdom. Early in my career I was a co-founder where conditions were put in place by the investor to take control if certain performance conditions were not met that we learned was later their true intent. It as a tantalizing deal that ended badly. A painful experience where we wish we had smarter and shrewder legal representation on our side!

  10. Michael O'Daniel says:

    Re Barry Yarkoni’s comment, this story has become the stuff of legend and there are probably several versions. My understanding is that IBM did approach DR and was either told “we’re not interested” or DR didn’t show up for a scheduled meeting (two different versions right there… )

    Too bad, because I was a CRM user / devotee and they were one step away from having WYSIWYG — one can only imagine how the digital world would have turned out if DR had been able to move forward on this opportunity.

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