Case 1: BigPicture

(upbeat music) - Hello and welcome to this podcast mini series by Bacon and Kenzie, the trainee test. I'm your host, this episode, Harry Clarke. In this series, you'll get a first-hand look about being a training at Bakers is all about. Hearing first-hand from trainees and partners alike about how they tackle a series of simulated legal problems. Today, I'm joined by three trainees and a partner. - Hi, my name is Adrian. I am a first-e trainee that is in the intellectual property and technology team in Bakers. We call that the IP Tech team. And I started my training contract six months ago, so under lockdown and I would definitely categorize that as a little bit of an interesting experience, but the very challenging and rewarding time. - Hi, I'm David. I'm a second-seat trainee, sitting and banking. I was in corporate for my first seat. Like Arjun, I'm finding the lockdown experience quite interesting. Hopefully, we will be back in the office at some point in the not-student future. - Hi, I'm Zoe. I'm also a first-seat trainee currently set in private equity and funds. Prior to joining the firm, I grew up in Vietnam until I was 15 and then I went to school in Singapore for four years before coming here for university where I did social anthropology. Then I did a law conversion course and I joined the firm in March, under lockdown. So it has been a really interesting experience for me as well. - Hi, my name is Sezy. I am a partner in our corporate department sitting in the energy mining and infrastructure team. My focus is on mergers and acquisitions, which sits nicely with the case study that we're about to launch into. I actually joined the firm as a trainee, so I have been with the firm my entire legal career. - Fantastic, well thank you all again for coming on and for taking the time to speak with us. And I'm sure people listening and I find it's really insightful to get a first-hand look about what being a trainee's list is like and kind of practicing through this sort of simulated environment. And so I think to start with it's great to get a grips as to what this challenge is going to be about to give some of the basic facts about this case study and what the trainee is going to be working through. So, Sezy, perhaps as the partner on this scenario, you could start by giving a little bit of information about the task that the trainee is going to be dealing with and the background information they're going to need. - Yeah, absolutely. So the first thing I'd say is that this case study is certainly not an unusual scenario to be faced with particularly sitting in the corporate group. And we very often do get approached by clients when they are in the early stages of thinking about a project or a transaction and they come to us for a high level early stage advice, a bit of a brainstorming session, et cetera. And that's really what this case study relates to. So we in this case study have been approached by one of our longstanding clients, a computer games developer and technology company called Big Picture Limited. And Big Picture Limited are thinking about acquiring a UK company called PC Games Limited who are focused on the development of video and computer games. So we've been approached by the General Council of Big Picture, our client, with a list of questions, initial questions around the transaction that they're thinking about. And the transaction in very broad terms involves Big Picture acquiring all of the shares in PC Games. So we'll call PC Games PCG. And PCG currently is owned by three individuals, Lara Croft, Mario Kart, and Donald Kekong. I'm sure some of those names sound familiar. And they each own a third of PCG. So our client is talking to them currently about the terms on which they might acquire their shares in the company. And they are asking us questions around some of the key issues at this stage of the transaction, particularly around the exclusivity of the arrangements that they are currently discussing with the owners of PCG. Some initial concerns that they have around the behavior of the individual sellers, a couple of skeletons in the closet, it seems. And also whether Lara, Mario, and Donald are willing to participate in the transaction on the terms that are being proposed. So our client wants to have a call with us and has very helpfully given us the specific questions in advance and is going to be looking for our sort of high level, but also commercial advice on some of the questions and concerns that he has. Fantastic. We're trainees. I'm sure you were taking notes and I've got the grips of the basics, everything that's going on, but any questions before we got started? No questions. All good, Jimmy Harry? No questions. They're good to go. Okay, we're going to trust their first instincts of hearing that through and let them get started with this task. So trainees feel free to go away and to get started with your trainee test and to start working on the task at hand. Good luck, guys. Good luck. So Suzy, whilst the trainees are working, I think now's a good time for the two of us to have a quick discussion on your expectations for this transaction as a partner and what you're going to be looking for in the trainees. So I think, I mean, I think that the case study is actually while once you reach the answers, they are actually quite straightforward. The challenge with this case study is that there is quite a lot of information and words to digest in order to then take the fact pattern and apply it. And that is actually quite a common task that we set our trainees in their day-to-day lives at the firm. And I'm obviously talking from personal experience in terms of what I do in the corporate group. But quite a lot of the time our clients do want to talk to us when they are thinking about transactions. So they haven't committed, but they're thinking, we want to do this. What do we need to think about as the top five issues before we spend time and money going further? And often that means that we get sent reams of documents and paper that they want us to digest and then talk about with them intelligently. And often you don't get a lot of notice on this sort of stuff. So five minutes is extreme, admittedly. But I think that this is a really good skills test in that sense of being able to read the information calmly, assimilate it in some sort of logical way. And then look at the questions and sort of go through that logical thought process. What is the client actually asking us? Where do I start with all of this information and following that thought process through? And what I always say to people where we're to our trainees when we're doing these sorts of things is talk me through your whole thought process because it's really helpful, not only for them, because it helps their clear thinking, but actually it's really helpful for me because then I get taken along on the journey, I get the background foundation information as well. And I can hopefully identify if someone's taken a wrong turn anywhere. So I always say to people, even if it seems really straightforward and simple, still write it down, write down each decision point and how you're getting to the next decision point. So that's ideally what I'm hoping our trainees are gonna do when they come back to us to answer these questions. I'm hoping they're going to show their thought process. - So you've painted my picture there as to a little bit more about what you might be looking for from the trainees in this given scenario and even how you might have sort of approached this and sort of the initial steps you might be taking. But I guess on the other side of the coin, fingers crossed, do go well. But what are some of the things that a trainee might forget to consider or might miss out when they're conducting their analysis or completing this sort of task? - I think the number one thing I find when we're doing these sorts of exercises is that people try to be too clever. They think there's a trick somewhere or they think that we're trying to trip them up. Something sneaky. And rarely is that the case. So I think that's the first thing is, is that could well be what they think here is that, okay, I need to be clever on this. Actually, you need to be calm and logical and read the words on the page. That's the approach they need to take but I do often see the former. And I guess the other thing is, and what again, even where somebody has answered the question, we are here to give our clients advice. So we tell them the law or we tell them what the position is under the relevant contract, but that's only half of the advice. The second half of the advice is, here's the position and now here's what we think you should do. And it's that second half that often doesn't get looked at because you get the answer to this very specific question that we've been asked and you stop and you move on. Well, actually, that's not the value ad we need to be showing our clients or giving to our clients, what we need to be saying is, this is the position. And here's what you now need to go and do with it. And that might require some commercial thinking and thinking outside of the box, thinking practically and there's a couple of questions in this that's probably gonna require that sort of thinking. So it will be very interesting to see if any of our trainees get to that next step and take it to the next level because that's always the differentiator. And that's the case all the way through. You know, however seen you are, that's the differentiator of these of your clients. - Well, we'll have to wait and see. They were certainly very sort of headfast and not wanting to ask you questions and get stuck in. So hopefully they will miss any of those steps along the way. - They're probably concerned about the limited time and they have to read their envelope of information, I would imagine. But yeah, I think they will be the two things that the potential pitfalls or as I say differentiators. - So trainees, I've since spoken to Susie and she's now eagerly awaiting in the other room for your findings and your thoughts on this transaction. What are your sort of first impressions? - I think speaking for me personally, I think it's, I've been really having any questions. As I think I was keen to just kind of get started given that the limited amount of time that we would have. So just wanted to just have a look at the tasks, see what it was about. And then from there, we can kind of discuss what the train is to consider all options really. - Okay, great. And you mentioned that you had the impression it was a relatively straightforward task. No real problem areas when it came to your analysis, to any kind of key moments where you've read this task and thought you needed a few minutes to break it down. Anything that's sort of been an obstacle in your analysis and discussion so far? - Well, I think that we are in agreement with regards to most things so far. But I imagine as is to the case, very commonly occurs when you analyze these situations, is that a lot of the time you just say it depends on further information. (laughing) - It's really your response. I've heard that phrase a little time a bit depends. So we have to see if that's gonna fly with Susie and what she's going to be looking for from this task. But, no, it was really interesting to hear from her insights and to see how you guys are going to approach this challenge and sort of feedback your answers to her as well. Any final thoughts on whether or not you sort of think this is a relatively routine task that you've been through before? Does it kind of echo other things you've done in practice or any kind of new elements to this that you've sort of seen for the first time or not covered recently or in a while? - No, I agree. I think it's quite straightforward, quite common place, share acquisition transaction with the typical issues you would expect. - And David, any thoughts? - Agreed. It's nice kind of having a series in corporate for my first seat, so the share acquisition side is the due diligence or something, you do a lot of there. And then having moved the banking as well, it's quite nice to kind of being able to see the problem as well from things I've picked up in banking as well, so. - Great, we all seem very set in your approach and have reached some sort of conclusion together. So it'd be interesting to see how that's going to come together with what's easy made of the problem when we come back to the main test. Okay, so welcome back everyone. Training easy, you've had some time to go through this test. I've obviously had the pleasure of speaking both to CZ and to you guys and to hear two sides of the coil in terms of how each of you would sort of analyze this issue. And it's been really interesting to hear a little bit about your sort of different thought processes and how you've approached this task. So I guess trainees over to you feel free to sort of tell Susie what you've been telling me in your sort of thought process behind this task and the sort of advice you'd be giving to the client's key concerns in this scenario. - Sure, so I'm happy to go with Susie. Would you like a brief summary of this? - Yeah, exactly. What I often find is quite helpful for everybody involved is if you could just give me two minutes setting out the fact pattern. - Sure. - So to the extent you have any questions, burning questions before we kick off with the questions. - Sure. - In the case study, then do ask me. - Before we launch into the questions, I'd have been posed by the General Counselor. So for those that haven't and for the listeners that haven't been able to read through the scenario. So as Susie and Harry mentioned before, so our client is big picture limited. They are looking to acquire 100% of the share so take full control of the shares in a company called PC Games Limited. For the most part, we will call this as the target, as it's normally known within the corporate world. So then kind of a brief background into the target company PCG. So as mentioned, they are predominantly within the app development and video game sector which is an increasingly popular sector. And the currently designing an app to be launched on iPhones and other multimedia devices. So there's potential growth for a company which is why potentially our client is looking to acquire them. As mentioned previously at the start, it's owned by three key employees. So Lara, Mario and Donald, they have each in equal share. So roughly 33.3% of the share holding within the target. While it's obviously got a strong reputation and it's obviously a successful business, it has been running into some cash flow issues in recent months and as a result, it's how to borrow heavily, which is resulted in certain interest payments not being met. And actually, it's led to defaulting on certain financial covenants and just kind of explaining what those are for the listeners. It's effectively terms within a contract that kind of binds you. So if you're unable to pay them, they may have later implications for other contracts within the down the line. Right where we are right now for our client is that they are looking to negotiate a non-binding head of agreement, which is effectively sets out the relationship that's going to be governing the next course of negotiations that we're going to be having with the target company. OK, well, shall we just jump in with the first question then? So one of the key things that our clients focused on is exclusivity in terms of the discussions that it is having with the three individual sellers. And the client said, well, we're a bit worried about PCG owners going off and speaking to other interested parties about a transaction here. Do you see-- if Lara and Donald and Mario were to go off and start speaking to anybody else about a deal? Do you see any issues with that based on what's currently written in the heads of agreement? This would for very much within the exclusivity clause. So Lara, Donald and Mario wouldn't be able to actually go and entertain other buyers. That's based on paragraph three and that's under clause A. And this would actually have binding legal effect because under paragraph five, it says that these heads of terms are not intended to be legally binding between the parties. Say for the paragraph that I've just read out, but also paragraph three, which is the exclusivity clause and also clause four, which is the governing law. So within the one month period that has been set, Lara, Donald and Mario aren't able to entertain other offers from other buyers. What that does mean is effectively that your place is a clock for our-- and a time limit for our client to kind of negotiate a deal within that one month. After that one month has effectively elapsed, then the key employees of the target company are able to then entertain and look for potential other offers or from other suitors. So these heads of agreement aren't yet signed. So these are still under negotiation. If you're in the shoes of big picture, do you see any way in which we could potentially make the exclusivity clause, in clause three, a little more wide ranging? Yeah, so I think the restricts steps towards selling the shares, but not necessarily selling any of the assets of the company. Bingo, yeah, that's it. That's it. So the exclusivity clause here is actually quite narrow? Yeah, so I guess given that this is a company that develops quite a lot of video games and probably intellectual property, and which I guess the key assets that our client is looking to acquire, we would obviously want to expand that. So rather than just making it, I guess, under clause A and B, so for the purchase of the shares, I guess, shares, but also assets of the company to make it as wide as possible, as you said, to encapsulate so that there isn't any issue of value leaking out of the company before the dealer's commenced. Indeed, indeed. So our advice to the general council would be what? So under clause A and B is to redraft and say that, rather than just say that and the purchase of the shares, open that out and just say, so the purchase of the shares and also assets that are held by the company, which is defined, I believe, as the PCG. Yeah, exactly. So we're really saying to him, at the moment, Lara, Donald and Mario couldn't go out and talk to somebody about a duplicate deal in terms of the sale of the shares that we're looking at. But there is a possibility that they could go under the radar by trying to plug the assets. So let's close that loophole. And I would like to add to that just to make the drafting a bit tighter, I think. We need to carve out from the prohibition of negotiating any set of assets, apart from the normal course of business, because they may very well need to sell something just to carry on business. And we do not want to unnecessarily restrict the ability to carry on their business as normally. So that may well be something that the sellers would raise as their point, because obviously they would be the ones they're looking for a little bit of flexibility. But it's a point, it's a point well made. OK, right, onto the second question. And this is where the tax issues come into play. So apparently, we've been told that Mario is being investigated for potential tax avoidance. And in the background is trying to sell his shares in PCG to his cousin, Giorgio, so that he does not receive any sale proceeds for the sale of those shares directly. So the first question is, is this even possible without the consent of the other two sellers, Lara, and Donald? So I can take this one. So this wouldn't be possible without the other two shareholders consent, because there is a preemption right clause in the articles of association, which is the constitutional document of the company. So before Mario can offer to sell his stake to his cousin, he would need to offer it to make offer on the same terms to sell it to Lara and Donald first. And only after Lara and Donald refuse to turn out in the offer to buy his shares that he can go on and sell it to his cousin. And is there any potential carve-outs or exemptions that he could rely on? There is an exemption to preemption right if the transfer has been approved in writing by an investor majority. Well, do you think that Mario himself could constitute part of that investor majority? From the extract that we have, he very well could. Yeah. So he just need one other shareholder. Yeah, exactly. So if he was-- if the other two or at least one of the other of Lara and Donald were on board with this, then, technically, one of them could consent alongside Mario and reach that investor majority because together, they would be holding 66.66% of the shares. So that might be a way that Mario could get around this preemption restriction if he wanted to. So more broadly and just taking a step back, if you were big picture, would this raise any particular concerns beyond the preemption thought process? David? From a reputational standpoint as well, if a key employee of the company has been a basket for tax avoidance, it kind of raises other issues as well. He's not just a shareholder, he's a key employee, he owns a third of the shares. So it would raise other questions about the company in general as well, how it's being run. Yeah, you'd certainly want to dig into this quite carefully. So I think it's probably one that you'd want to understand fully before moving forward. OK, onto the next question. So apparently Lara has recently received a significant inheritance and our client thinks that she may well want to acquire Mario and Donald shares herself. Do you think that is a risk? Could she do it? So I think in this instance, we had said that Lara is able to do this only before the heads of terms have actually been signed. Because as we mentioned right at the start, if Lara is to go ahead and begin proceedings once the articles, also once the heads of terms have been signed, she then falls under the exclusivity period. Am I, or yes, yeah. So effectively, in order to kind of alleviate that risk, you would want to either potentially bring for the timeline of getting these out of getting the heads of terms signed. So that Lara is then kind of removed from the element. But also then the issue then becomes kind of appealing to Mario and Donald because Lara may approach them before the negotiations happen. And it's just a case of understanding would Mario and Donald want to actually sell their shares to Lara or is it a case of the client being able to kind of get them on board and think that the target company is best led by them in kind of future profits and projection so that you get Lara, you get sorry, Mario and Donald on their side rather than selling with Lara. What about the lockup that we talked about before? Because the articles, that's in the articles of association of this company. So it applies whether the heads of terms are signed or not. The point around the exclusivity is a good one. But I just wonder as well whether that's of relevance. Well, yeah. So effectively, once the lockup period has expired, so it would expire in January 1, 2024, so five years from-- So let's say we're still in the lockup period. So the same analysis is on the previous question, right? So we are still in that lockup period. So still within the lockup period. So I guess it would kind of, I guess, go back to what we mentioned whether or not the Lara could then get, could either ask Mario and Donald for kind of their consent. So again, it's appealing to either Mario or Donald's nature as to who should run the company, who would be the best kind of course of action for the overall vision of the company. So I guess again, going back to what I said previously, approaching our client to then have a quiet conversation with other parties to think, rather than potentially selling to one key employee, it should be best bought by ourselves and potentially offering incentives for maybe Mario and Donald to stay with kind of the course of action rather than going down a different route. So then question number four, during the course of discussions, it seems that Lara may dig her heels in and say that she doesn't want to sell her shares at all and stay in as a shareholder of the company. So our client has said, look, we only want to do this deal if we can buy 100% of the shares. So do you think there might be any solutions there based on what sits in the articles of association? So there's a drag along clause, which says that if there's a majority of shareholders that want to sell to the-- if the majority of shareholders want to sell, then the minority have to sell even if they don't want to. So if Mario and Donald still want to sell, then even if Lara didn't want to, she would have to under the terms of this drag along offer. As long as there's an investor majority for that. And so who would constitute that investor majority then? Well, two out of the three. So Donald and Mario could, if they want to do this deal, then they would constitute that investor majority. So just walk me through the drag along right? You're absolutely right there on your answer. So don't doubt yourself. So it says that if an investor majority, which is over 60% or above, which transfers all their shares in the company to someone else, then they have the option to require all the other shareholders. I.E. Lara? Yeah, to the same purchaser as well. On the same terms, as the investor majority has agreed with the drag along purchaser. So we would agree terms with Mario and Donald. They would consent as an investor majority. And then they would serve notice on Lara to say, sorry Lara, but you are now required to sell your shares to big picture on exactly the same terms as we have just negotiated. So if you're Lara, you're probably sitting there thinking, well, I'd far rather, assuming Mario and Donald are on board, I'd far rather have a seat at the table negotiating this deal alongside Mario and Donald, rather than be dragged along at the end on terms that I've not approved. So that's your stick with which to stand behind Lara with. OK, great answer. So finally, if you are big picture about to embark on your due diligence exercise of PCG, what sort of things might you focus on? Let's try and come up with five or six particular focus areas. So I think the first one is the standard corporate due diligence. Yeah, it's a share acquisition. So you want to look at the share register to see if these people actually own the shares and look at company house filings to see if there are any charges on the shares. Then we also told that PCG sell its products, its video and computer games to a number of major retailers. So we want to look at material commercial contracts to see whether any of them, first of all, are about to expire and would that be renewed and would that have an implication for the company going forward? Yeah, then it's a share sale. Then there is also, we need to look for a change of control and provisions in those contracts. Absolutely. What about the key asset here? What's the key asset of this company? So I guess it's very much, as I mentioned, at the very start of the introduction, the IP, so the intellectual property. So this would incorporate any trademarks that the business has developed. Any designs of the video games products that it's made, any patents for any potential products that it's looking to develop very much whether or not A, does it own the actual intellectual property, but also B, has it licensed any of those out to any other individuals? Absolutely. Absolutely, yeah. And then, as we mentioned, so looking at the, in terms of also within the IP rights, are any of them about to lapse? So making sure that they are all renewed within, kind of, the deal completion so that from day X, from when the, from when our client actually takes control of the business, it has those trademarks or those copyrights or those IP rights to use moving forward and it's not, kind of, effectively restricted in its ability to kind of generate more money. Yep, that's part of the business. Yep. Any other key areas, one or two key areas? We talked about the financial covenants. Yes, exactly. And the terms of, yeah, the terms of those to see whether if breaching them gives the borrowers the ability to take ownership of their shares. Yeah, that's a very good point. Or indeed, some of the assets of the company, right? Because, security could be on the shares or the assets. Yes, another one would be just, I guess, the employment contracts. Yes. Given that it's, I think it's said in the, in the second paragraph on the very first line. So each of the shareholders are key employees. We'd want to determine kind of post acquisition, whether or not they are looking to stay within the business. Or how, how kind of, how key or on crucial are they? Are they individuals, obviously, that lead the company, but are they the technical brains behind the company, where the root, although the value may lie in the actual intellectual property, very much, it also lies within the people of the business. They very much run the business. So understanding and kind of, whether or not to incentivize them to stay on for a short while. So a potential earn out for them, or some kind of, some provision like that, and any other employment contracts, or issues that need to be followed up. Lovely. Well, listen, I think that's a really, really great overview of the sort of stuff that we would really tell them to be focusing on in their diligence. And how are you correct me if I'm wrong? But I think we've probably come to the end of our time. We need to jump to the next piece of the discussion. That was great, very well done, trainees. And CZR acting as the partner. I hope that that was an enjoyable experience for you to sort of hear of what you hopefully all got right. I know you went into this very, very confident of asking any questions. And certainly in the conversations I had with the trainees, they were, quote, 90% sure that they were going to get this right. I guess easy just as your initial reaction, what was your response to how they did? Yeah, I think the answers were very impressive. You'd obviously managed to digest quite a lot of information in a very short time frame. So really well done on that. There were a few areas where perhaps I just needed to guide you a little bit more. And one of those areas was certainly on that first question is looking beyond the narrow question to, well, yes, we can answer your narrow question and tell you what that exclusivity clause does. But we also need to tell him what it didn't do, right? Because that's the value add in that case. And we should be saying to him, he's probably negotiating these heads of terms himself. So we probably need to just say to him, you need to change this and make it better from your perspective. That's where we are bringing the value as his lawyers and advisors. But I think all round guys, it was a really, really good effort on that. And you picked up 99% of the key points there. Our trainees breathe a sigh of relief for that sort of feedback as well. Did you enjoy the experience? Any lessons learnt that you're going to take with you into the future? I think definitely was usually mentioned, although I've not had any corporate experience per se, yeah, it's really open my eyes to just looking beyond what just what the kind of the-- what the clause is thinking, kind of a couple of steps ahead and kind of preempting and looking at what the client wants to achieve. But also really dissecting a lot of the clauses to understand what are the bigger implications rather than just, as Suzy mentioned, very much the narrow picture. I think that from me, that's been one of the key takeaways of this exercise. Yeah, and I think it is the same for me. And I would also add that I think there is a lesson about attention to details. There's a very small point there that I missed that whether just Mario and another shareholder would constitute an investor majority. I mean, I think from a very quick glance, you would think that you need two other shareholders, but actually just need one selling shareholder and another shareholder. So I think it's worth paying attention to these extra level of details to get the right answer, because it makes a very big difference. And finally, David? Yeah, agreed. I think, especially with the drag-along clause, as well, it's worth just having a clearer picture of it reading the clause fully. So you understand exactly how it operates. But then also, yeah, I think it's interesting kind of reading it beforehand and then kind of having it in your mind. And then as the discussions go on, it kind of brings its life a bit more in it. You kind of think about it in other ways. So it's been enjoyable, especially the discussion. So many thanks to the four of you for all taking part today. It's been really interesting to see each stage of this trainee test play out and to hear everyone's perspectives on this scenario. And finally, thank you to the listener for tuning into this installment of the trainee test. Be sure to check out the Baker McKenzie graduate recruitment website linked in the episode description. As well as the next episode of the trainee test, we'll be following trainees as they look into a company with a special vapor detection technology.