The 5 Scariest Questions Your CEO Could Ask About Your Contracts, Pt. I
And how to respond without losing your cool (or your shirt)
Even if you’re not scared of your CEO, you may be scared of the questions they could ask about your risk and liability. It’s a good thing your contracts can probably tell you everything you need to know.
We recently produced a webinar called The 5 Scariest Questions Your CEO Could Ask About Your Contracts. Pulling from the webinar, we’ll go through the five scenarios in which your ability to mine into your contract data could make a massive difference to your business and your reputation. Because we think this topic is so important for corporate legal professionals, we’ll take two blog posts to dig into the risks and solutions presented by your contracts.
Ready? Let’s go.
“I don’t need to worry about contract surprises, right?”
In the case of a merger and acquisition – whether you’re buying something, selling something, or spinning off a piece of the business – your contracts, especially revenue and sell-side contracts, will get a lot of attention. The evaluation of your businesses value depends on many things, and on many things being certain. “Surprises” are rarely a good thing in this case, as they usually mean a reduced evaluation.
So what does your CEO mean by contract surprises? A surprise could be a missing contract, which leads to uncertainty and, thus, risk. Other surprises could be unaccounted for ‘termination for convenience’ or ‘termination for change of control’ clauses in your client contracts. Because such clauses mean a client may choose to end the relationship simply because they do not like the post-merger or post-acquisition relationship, it’s essential to understand where such clauses exist so that the risk they pose can be accounted for in negotiation and evaluation efforts. Furthermore, in the unlikely scenario that you have a client agreement with language that sees for strict customer consent, there’s the possibility that a customer withholding or delaying consent would, in turn, delay and potentially compromise the closing of a lucrative M&A deal. In short, when these types of clauses are “surprises,” the value will be less than expected and the CEO will not be a happy camper.
The Rogue Vendor
“We have a problem with a vendor – they’re claiming that they own part of our product/want to create a competing product/have already approached our biggest customer – but our contracts with them are tight, right?”
In the unlikely but unfortunate case of a vendor attempting to become a competitor, all of your contracts with this vendor would come under the microscope. If you’ve had a long business relationship, you’ll most likely have a long and messy contractual history as well. You’ll need to locate all the executed agreements you have with the vendor – including amendments – so as to understand your precise rights. Are you sure the copies you’ve found are the signed copies? Do they have the right to terminate? Do you have non-compete language? If yes, you’ll need to ask if are there any loopholes? Have they expired? Do the non-compete clauses apply after termination? Did we ever neglect to account for ownership of new things we created? Only once you can answer all of these questions with certainty can you know how to move forward in the case of a vendor gone rogue.
The Price Tap
“I have a strategic account insisting that they receive the best pricing we’ve ever granted to any client. What is this pricing?”
If you’re going to concede a Most Favored Nation (MFN) clause, you need to do so with your eyes wide open. MFN clauses are usually dangerous but, when used strategically, may help secure important business. What do you need to know when the CEO asks for the worst pricing you’ve ever agreed to? You need to know the pricing, of course, but also what types of price escalation and what discounts were used, as these are things you’d likely need to offer to this new strategic account. You’d also need to find this out very quickly: if you charge more than the lowest price, you’re in breach of the new contract; if you charge less, you’re in breach of all of your other MFN agreements. Yikes.
Check back or subscribe to our blog feed to catch the next post, where we’ll finish up the list and talk about how you can answer even the scariest questions about your contracts.
Click here to watch the webinar.