Divestitures from a Legal Perspective

Divesting a business is never easy. While corporate development plays a huge role in the preparation, the legal team also plays a crucial role. In this article, Andrew Gratz, Chief Privacy Officer, and Associate General Counsel at LyondellBasell, walks through what a divestiture looks like from a legal perspective.

"Whether you like it or not, lawyers influence everything. Any strategic action a company will take has legal consequences, so it is best to have lawyers in the room when the strategy is being developed." - Andrew Gratz

To ensure a successful divestiture, the legal team needs to understand the reason behind the sale. According to Andrew, the legal team can't develop the “how” if they don’t understand the “why”. Also, the legal team needs to know how you intend to sell the business. Are you doing an auction process? Are you doing a bilateral deal? All of these matter because there will be varying legal ramifications. 

Know what you're selling

Lawyers must have a good grasp of what is for sale. Depending on the nature of the transaction, there different risks and issues that may arise. Here are some common issues to consider when selling a business. 

1. Contractual issues - If the actual value of the business you're trying to sell is attached to a contract that cannot be transferred because of a change of control provision, that will diminish the value of the divestiture. Fix those before you try to sell. 

2. Employment issues - If the value of the business you're trying to sell requires the services of employees that can walk away anytime, there may be issues. If that's the case, have retention agreements 

3. Tax issues - Every deal has tax consequences. Always clear the proposed transaction with your tax advisor to ensure there are no adverse consequences of doing an equity deal or an asset deal.

4. Debt instrument - If the asset you're looking to sell is collateralized, then your bank will have an interest. Scrub your debt instruments to make sure you can sell that asset. 

5. Permits - If the permits are in your name, figure out how the acquirer will have the ability to run those assets on day one.

6. Licenses - If those assets depend on specific licenses, find a way to transfer those to the buyer. 

7. Intercompany agreements - If it's a carve-out, there could be two or more companies occupying a larger industrial site. Determine how you will share that particular site using intercompany agreements.

8. Regulatory issues - If you're selling to a strategic buyer, think about clearing anti-trust concerns. If you're selling to a competitor, be careful giving them access to sensitive information that could compromise your competitive position if the deal doesn't go through.

Legal Documents

Similar to selling a house, you need to present the documents and data room in an organized format. To give a good impression, files must be complete, well managed, and have the appropriate language. Examples of files that need to be thoroughly checked include the teaser, confidential information memorandum, and purchase agreement. 

According to Andrew, when it comes to a carve-out, the least of his concerns is the purchase agreement. Lawyers bring the most value through ancillary agreements where they can use their expertise and experience. Make sure you involve them as soon as possible. 

Do's and Don'ts of TSA

"As the seller, you want to provide the fewest services possible, for the short amount of time possible in a TSA." - Andrew Gratz

If a transition service agreement is unavoidable, make sure there is compensation for it. If you dedicate a tremendous amount of resources, licenses, and people to manage the TSA for free you will lose money.

However, if you have a buyer that will offer you a clean exit for a slightly lower price, you should highly consider the offer.

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