Using Letters of Intent to Initiate Effective Business Negotiations

When exploring possibilities for a company merger, an acquisition of assets, or just a simple business arrangement, the standard and most effective approach to this challenge is through a letter of intent with a confidentiality provision. The advantage of this strategy is that you can “test the waters” of entering a potential business relationship without losing control of any information you deem proprietary.

Within any letter of intent, exclusivity and confidentiality are key elements; business interests are mutual, and neither party should divulge or share any of the private information contained in the letter with third parties. It’s important to note that while all letters of intent always include a non-disclosure or confidentiality provision, a non-disclosure agreement can also stand alone or serve as an addendum to other contractual documents.  

When developing a letter of intent, your desired goals need to be spelled out and tailored specifically to the proposed business relationship you’re seeking. You also need to state any contingencies that make the business relationship conditional. These provisions usually relate to financing or logistics requirements, which if not satisfied, will void the proposed agreement. Equally important, you need to secure some protection for both parties regarding sensitive or confidential information. A non-disclosure provision allows you to work together without fear that you’re going to be subverted or undermined by someone else’s actions — perhaps a price-bidding maneuver, high or low, depending on your positioning.

Recently, I helped two companies in merging their businesses into one larger operation, all of which began with a letter of intent to explore the possibilities. Part of that process required the sharing of financial records, private information that no company wants escaping into the public domain. Consequently, we created a non-disclosure provision citing mutual confidentiality in exchanging certain information. We needed to confirm that if the business relationship were not successful, then all the exchanged documents on paper would have to be returned or destroyed, including originals and photocopies, and that an agreed-upon mechanism for purging sensitive e-mails and attachments would have to be established.

I generally advise setting a long-term non-disclosure period, regardless of the planned success or unexpected failure of the business relationship, and that any exchanged information shared outside of the signing parties within their respective organizations should be on a strictly need-to-know basis. In proposed agreements where subcontractors may be involved, they too must be bound by the same terms of confidentiality contained in the original letter of intent and sign a non-disclosure agreement.

As noted earlier, exclusivity is important, much like having a serious, committed relationship with someone — engaged but not yet married. In fact, any letter of intent should always point out that during the course of specific business negotiations, both parties are mutually exclusive and must not deal with anyone else with the same agenda. In other words, both parties need to be able to proceed in good faith with some assurance that they are going to be working together exclusively during the term of the letter of intent. As in the case of a personal engagement that doesn’t work out, if the business relationship doesn’t come to fruition, then either party is free to pursue further transactions with other parties.

In summary, it is important to remember that the primary objective within any letter of intent is to assure exclusivity and confidentiality regarding the business relationship you’re proposing and to ensure an effective negotiation, with all parties protected.

The Key Sections of an Effective Master Services Agreement

In our previous discussion, we looked at the major benefits of master services agreements (MSAs), particularly how they can streamline future business opportunities for your organization. As a quick review: A MSA serves as a general blueprint for how mutual business interests will be addressed and conducted on one project or on multiple or ensuing contracts.

Although a MSA can be a less formal contractual approach for project work, its development still requires careful thought and attention to detail in crafting an effective document. The initial step begins with the scope of work — a statement explaining what the parties are seeking in the agreement and a description of the services to be performed. The scope spells out the “bigger picture” of the business relationship, noting that future scopes of work will be issued pursuant to the master agreement.

A key element of a MSA is the provision for timely payment of services, with a 30-day time frame considered the general standard for most industries. Payment should also be conditional upon approval of the work performed satisfactorily. However, be cautious. Prevent line-item invoicing disputes from placing your entire payment at risk, or at the very least, from delaying payment beyond 30 days. I always include language noting that if any part of the invoice is disputed, the undisputed costs shall still be paid according to the agreement terms as a show of good faith among the parties in resolving their dispute.

A termination clause is another necessary provision of a MSA. I generally advise setting contract terms for specific time frames, say for one year, which automatically renew unless officially terminated. As accepted practice, either party should be able to terminate with reasonable notice at any time. Although such notice usually depends on the nature of the business itself, 60 days is considered preferable, especially if you have numerous subcontractors involved with a project. However, some organizations do lean toward shorter notification periods.

Confidentiality is an important part of any contractual relationship or when following a termination, unexpected or planned. A provision regarding confidentiality and nondisclosure of proprietary information should always be standard. The language should be explicit — and mutual, not unilateral confidentiality — whenever possible. It is preferable that both parties, not one, should agree not to disclose any valued information to third parties.

If the creation of intellectual property is part of the MSA scope of work, the rights to that creation must be defined among the parties. In Washington, the inventor of any property as a service provider automatically retains all intellectual property rights, if not stated otherwise in the agreement. However, most contracting parties prefer the insertion of a “work-for-hire” provision in the MSA, which states that any inventions, patents, copyrights, or trademarks created during the course of the contract are considered intellectual property, whose rights will be retained by the contracting party, not the service provider.

Indemnification provisions are another standard feature of MSAs. The indemnification process basically means that one party will step in and defend the other if a mistake, error or omission occurs. Like confidentiality agreements, indemnification provisions can be mutual or unilateral, although usually they are unilateral because one party — often the contracting party — will have greater bargaining power to position unilateral indemnification in its favor. Regardless, should you find yourself in the situation where contractually you have a unilateral indemnification provision that’s not in your favor, make sure that you have proper liability and risk insurance as a safeguard.

It is also typical for a MSA to have a non-assignment provision, meaning that the scope of work contractually tendered cannot be assigned to someone else without the approval of the other party. Obviously, you don’t want to enter into an agreement only to find that your contractual interest is later assigned to another party with whom you’ve not encountered or dealt with before.

Other sections common to MSAs include no waiver, notification, entire agreement, and severability provisions. A no-waiver clause basically points out that just because one or more aspects of the contract have been ignored, intentionally or otherwise, the entire agreement cannot be invalidated. A notification provision simply identifies the communication format for notifying contractual parties.

An entire agreement provision, also known as an “integration clause,” prevents later oral contradictions from either party to the basic terms of the entire contract, usually aimed at altering or adding language that was not in the original MSA. Severability, which is similar to the no-waiver clause, states that if any provision is found to be contrary to law or unenforceable, it doesn’t invalidate the entire contract.

Finally, I’m an advocate for spirit of cooperation provisions. Although a contract is a formal agreement, it shouldn’t be viewed as adversarial or negative in a litigious sense. It should relate how the parties are going to move forward in a partnering effort to develop a positive business relationship. To that end, I always build in mediation and arbitration clauses as vehicles for negotiating resolutions in good faith when problems arise.

Master Services Agreements Can Help Cultivate Long-Term Business Interests

If your organization is seeking to expand business opportunities and foster long-term relationships, one of the most beneficial tools to use is a master services agreement (MSA). This document not only serves as a blueprint for how mutual business interests or projects between two parties are to be addressed and conducted, but it also helps organize business relationships in a contractual but not burdensome manner, making it a very user friendly tool.

MSAs are popular for establishing relationships among a wide array of businesses, including information technology, communications, and life sciences. Traditionally, they have been used frequently for union negotiations, government contracts, and supply chains aimed at long-term relationships.

One of the primary benefits of crafting a MSA at the beginning of any business relationship is for expediting future opportunities. There is a true advantage to this approach, especially if the signing parties to the agreement are working together on more than one project at a time or plan to engage in multiple projects in the future. In many instances, the original MSA requires little or no revision of its basic contract provisions — saving time and overhead dollars. Subsequent agreements generally only call for a new scope of work, perhaps a revised purchase order, or some other change order that complements the original MSA.   

This happened to be the recent case with one of my life sciences clients, a Clinical Research Organization providing support for drug trial testing for the Food and Drug Administration. My client was hired to monitor the drug administering protocol and patient results for one particular drug at various health clinics. The MSA spelled out the business relationship for that particular project. When another drug is to be tested through clinical trials — next week, next month, or next year — a new scope of work will be issued for this second project, which will just basically outline what the new drug is and its planned use or purpose. However, the terms of the original MSA will still apply to this new project.

I’ve also observed long-term applications of MSAs in installation contracting: cell phone towers, cable systems, and communications infrastructure. Some of these agreements have been in effect for more than 10 years, and the process is simple. The parent company just forwards a revised purchase order or directive to the contracting interest, stating, “Pursuant to our master services agreement, please install . . . .” Revisions to the location, cost, and completion time are specified on the MSA as usual, but the minor terms of the contract remain intact from earlier versions.

As you can see, building a foundation for business longevity is a key benefit of MSAs. If you let your client know going forward that you can add to the MSA by tacking on an addendum or a scope of work change order, then you won’t have to negotiate the basic terms all over again.

In our next discussion, I’ll address some of the key sections of a MSA and where to begin in developing a document that has flexibility for long-term use.

Reflections of “Man’s Best Friend” in Protecting Client Interests

Most avid dog owners will admit their canine companions are creatures of habit, comfortable in their routines, yet still guided by instincts of which we as humans are basically clueless. The moment you “think” you have figured out all this instinctive behavior can often have surprising consequences. Fortunately for me and my dog Eddi, a German short-haired pointer, we haven’t become candidates quite yet for America’s Funniest Home Video, but there’s still time.

Early one morning recently, I let Eddi out in the backyard to do her normal “business,” something that generally takes about 2 or 3 minutes. When she didn’t return on time as usual, I became a little anxious. As it turns out, she was gathering an opossum — undoubtedly a valued gift for her master. I must note that I have received this same gift several times over already. Her strong instincts to hunt and track game don’t end with unsuspecting opossums, however.

This past summer, Eddi resorted to chasing small black bears. After numerous encounters with chasing these wild animals up trees and through the lowland forests, I knew I had to address her uncontrollable behavior, mostly for her own protection. So, I invested in a shock collar to help reinforce my stop commands, which she had obeyed previously, in addition to developing some new commands to help guard against her sometimes out-of control behavior.

By now, you’re probably wondering where I am headed with this personal tale. It’s simple. Out of love and fondness for our four-legged companions, we often assign them human traits, mostly the ability to think and reason, but what about man? Do we not sometimes exhibit that same lack of control of our behavior that we witness in our pets? We don’t have full reign over our lives entirely; we depend on others, much like our pets depend on us. Attorney-client relationships should be built on the premise of trust and dependence to consult with each other and openly discuss issues before chasing that proverbial bear up a tree.

My clients that have the most control over their businesses and the fewest legal conflicts are the ones that come to me early on to discuss potential problems before they escalate into legal dilemmas. In promulgating contractual relationships, we can modify documentation where necessary to protect clients’ interests, making sure they fully understand all pertinent issues beforehand. Those who instinctively feel they can handle their own legal matters or sign contracts without first consulting an attorney are the ones who usually end up in litigious situations because they don’t understand the ramifications of their decision.

Of course, I must confess that perhaps some of my clients occasionally gaze upon me unknowingly like my dog Eddi, asking herself, “What is he doing?” After the recent encounters with bears, she took on a new challenge a couple of times — herding elk. She gets behind the herd and chases them towards me, which is probably instinctual, encircling game and bringing it back to the hunter, waiting for the hunter to kill it. Well, I am no hunter, so she probably thinks I am the most inept owner in the world because she’s doing all the work and I’m not finishing the task. As Eddi’s master, though, it is my responsibility to protect her and safeguard her behavior as much as possible, particularly with new experiences, such as chasing elk. I have that same obligation to my clients.

Just as I have to constantly retrain Eddi to keep her clear of harmful encounters with other animals, I try to continually steer my clients in the right direction. In fact, it is often my role to discuss clients’ new business proposals. We review contract language; we talk about potential risks and rewards; we examine ways to avoid risk; and we look at how to increase the opportunities for more business and further benefits. I believe that all successful businesses, like pets and our selves, should require the same consideration of their well-being.

The Importance of Insurance

When people hear the term “insurance,” they automatically assume that it is some form of coverage broadly defined in general terms. What many do not realize is that insurance is so much more than simple coverage for accidents and other unforeseen events, and being properly insured is an important aspect of doing business.

Insurance should perform a very crucial function: to protect a person or business entering into a transaction. One cannot always shift risk and responsibility to another party in the transaction.

The type and amount of insurance necessary is critical. Those who may have insurance may not be covered for what is actually needed, and those who have the proper type may not have enough to cover the potential damages one is exposed to in a business transaction. The specifics are dangerous traps, and many do not read between the lines where they should.

For instance, I have a Clinical Research client I formed in 2008. Clinical Research Organizations (CROs) assist in the testing of experimental drugs from conception through FDA approval.Once the company was up and running, they spoke with a broker who obtained an insurance policy.Six months later, they asked me to evaluate whether they were property covered for their particular line of work.

They were not.

The broker had simply procured them a medical malpractice policy, even though a CRO does not practice medicine. There was a specific exclusion in the policy precluding testing for administration of drug trials, which is exactly what a CRO does.

For six months they were operating with no insurance protection. I was able to put the client in touch with a qualified broker and obtain a full refund of the premium they had paid for the useless coverage. Legal advice regarding the adequacy of insurance is critical.

I have another client who contracted with a tile contractor who worked on condominiums for six full years before realizing that the insurance company had included a condominium exclusion that the contractor was unaware of. Unfortunately, the exclusion was discovered too late and my client and the tile subcontractor incurred substantial unanticipated costs due to the exclusion. Although the condominium exclusion was never blatantly stated, it was clearly within the policy and no coverage was provided.

The bottom line is, if you want protection during your transactions, you need to have the right insurance. And to get the right insurance, legal advice regarding the adequacy and sufficiency of insurance is critical.

Life Sciences, in Lieu of Chocolate

Science and technology fascinate me. Perhaps this isn’t the first sentiment you imagine hearing from an attorney, but it occurs to me daily. My enthusiasm for the life sciences industry and the intelligent people who make up its moving parts is one reason why I look forward to coming to work every day.

I was tempted to surprise the whole industry with a box of chocolates, but for today I’ll simply share a few pieces of what I value most.

I entered life sciences law with a strong desire to help companies start from scratch. As I mention on the website, my first client in this field was a Clinical Research Organization (CRO). The four individuals behind it have backgrounds in different areas of the field: pediatric oncology, managing FDA compliance issues and pharmacy. These clients fill the room with brain power, but as good as they are at what they do, they’re not attorneys. Companies in this industry have so many moving parts; they need someone on their side who understands contracts and licensing. For example, they need an operating agreement to explain how the business will run and how decisions will be made. This particular company has taken off in leaps and bounds in the four years since we started working together.

Always Changing

Due to fluctuations in venture capital and government funding, life sciences is a continuously changing environment. As soon as someone gets funding, everyone in the industry knows who they are and wants to start a new business with them or buy their existing operation. This is why new companies should involve an attorney from day one. Clients come to me knowing as much about indemnity, choice of entity and portion of liability as I know about biostatistics. This doesn’t prevent me from handling their agreements and licensing. We teach each other, and it’s in those learning experiences that I find my job so much fun!

Always Innovating

The intellectual abilities of my clients keep me on my toes. Every innovation brings a new set of issues to address on the legal side. I’m good at dealing with these issues. When you have smart people from varied backgrounds coming together and creating something new that’s financially viable, it’s an exciting thing to be a part of. These companies have a bright future not only in Seattle and San Francisco, but nationwide.

Always Building

The ultimate reward of working with life sciences companies from the very beginning is watching their rapid growth. Legally secure, my clients have a strong foundation to build on. The potential is huge because nothing can come up and bite them from behind. As their business grows, my business grows. Once the legal corners are squared, my role is to make sure the company is moving in the right direction.

The life sciences draw all kinds of curious people. Working with sponsors and vendors, or negotiating biotechnology agreements and software licenses allows me to hear about advancements directly from the source. In an industry that’s always changing, innovating and building, I get to learn something new about the world every day.

Small Business Pitfalls: Why Attorneys Make Cents – Part II

In my last post, I began making the case for retaining a qualified attorney to help you start and grow your business. You know by now the complexities of business law but may be still stuck on price and value. To you, I offer some of the insights I’ve gained that illustrate why it’s cheaper in the long run to have an attorney on your side.

Counting the Costs

The hazards of starting and running a successful small business are many. And frankly, they are all really expensive. Startup clients often call me midway through their attempt to start an LLC. They’ve done something wrong and they’re stuck. More often than not, charting the right course from the outset is a lot cheaper than untangling a mess. I also get questions down the line from established small business owners who’ve yet to understand when they are signing a document, they can be representing both themselves and the company — setting both up for liability.

Another source of panic calls I get is from people who’ve set up with the wrong structure, are in trouble and need help keeping their personal assets separate from company assets. I also counsel clients on choosing the proper insurance.

Furthermore, licensing requirements are another source of pain for new businesses caught unawares in legal dramas. For example, if a contractor goes into business as a landscaper and doesn’t have a contractor’s license, he can’t sue if he doesn’t get paid. I don’t think a lot of people know that. You may think you can just open a business and start working. But a contractor, for instance, has to have a bond to be licensed with the state of Washington for a minimum amount of $6,000.00 or $12,000.00, depending on the type of business.

Been There, Still There

One of the biggest benefits of developing a long-term relationship with an attorney is that he or she will know your company well whenever a problem arises. Waiting to call an attorney when you’re in trouble or being sued virtually ensures you’ll pay more because the lawyer will clock more hours getting up to speed. Moreover, I especially enjoy the continuity of advising on startup through to contract negotiations and as businesses grow, handling mergers and acquisitions.

If you’re going to spend the enormous amount of time required to start and build a business, and stake your future on it, you should make sure your legal foundation is solid. The myriad laws surrounding taxes, licensing, permits, new regulations, intellectual property, franchising, advertising, hiring non-citizens, contracts, operating online, environmental codes, workplace safety, acquiring and selling real estate and others are just plain confusing. The best way to ensure you start on the right foot is to sit down with a qualified attorney who explains everything in plain English and goes through the pros and cons of each issue so that you can make the best decisions possible.

Small Business Pitfalls: Why Attorneys Make Cents

Most small business owners hesitate enlisting the help of an attorney until they’re forced to. It may be a cost perception, or it may feel like an indulgence your growing company can’t afford. There are a number of reasons, however, why having an experienced business law attorney at your side makes not just sense, but cents.

Here’s the first of a two-part series offering a number of reasons it makes the most sense to have an attorney right from the start.

Avoiding Unnecessary Complications

From the moment you decide to start a business, you begin reaching out to experts in a variety of areas to help you make sure you start out properly. Hiring the right attorney is likewise a sound investment in the future of your business. Working with new business owners is perhaps one of the most enjoyable aspects of my practice, because I can help you bring great ideas and exceptional talents to a waiting market while avoiding the snares and legal pitfalls that await you as you navigate the minefields of running a profitable operation.

Right Business Structure

My first step in helping a new business is to consult with you and discuss the different options available. Choosing what type of entity: corporation, limited liability company, or general partnership, is a crucial step. While most new business owners operate from the assumption that they may have to form a corporation, I work with my clients to understand the many reasons why an LLC can be a much sleeker way to do business for many, avoiding the annual reporting requirements while still getting many of the tax advantages of an S corp.

Filing Requirements and Contract Negotiations

When starting a new business, it’s absolutely crucial to understand the paperwork required - requirements not only from the IRS but at the state and local level too that you might not even be aware of.

I really appreciate when clients come to me asking for guidance about employment issues and contracts. Constantly changing laws have made the employer–employee relationship more complex, especially for businesses that hire independent contractors. If the contractor-employee line is crossed, it can create an IRS nightmare and an unpleasant exchange with the Washington Department of Labor and Industries. Not only will carefully considered policies and practices help your business avoid litigation, but they allow you to instill a sense of trust and leadership that will help you as you grow. When you care about your people and your partners, you must think about your legal relationships with them.

Next month, I’ll share more about the cents in hiring a business attorney.

Business Attorneys Are a Form of Indemnification

How many times do you agree to a company’s terms of service or sign an agreement without actually reading what you’re signing? While you may be willing to simply click the button and agree to the terms of service to create your account with Amazon and watch that movie you’re anxious to stream, the same attitude can cost your business more than you could imagine.

One of the most important aspects of owning your own business is protecting yourself from damages caused by other people. An experienced business attorney can help you protect your business and assets, creating a shield through carefully constructed language.

Let’s say you own a hotel and you’re having a contractor come in to do some work on the lobby and the contractor’s ladder falls, taking out a chandelier and injuring a guest. The contractor would be responsible for the damages, right?

That all depends on what kind of indemnification clause you agreed to in the contract you signed. I don't know how many times I have had clients come to me with contracts they’d signed without reading or understanding them, leaving them open to significant loss caused by the negligible hands of others.

In the hotel example, let’s say the contractor’s contract indemnified him, his employees and his company so that any damage done by his crew was the responsibility of the hotel. A contract constructed this way basically gave the contractor a get out jail free card with the hotel. The hotel would not only be responsible for the damages but liable for any civil suit brought by the guest. Without proper indemnification, you can be liable not only for the damage caused by the contractor, but also medical bills and other provisions if anyone is injured.

Properly constructed contracts that provide clearly spelled out indemnification protect you and your business from other people's mistakes. I recently negotiated a very favorable contract for a company that leases trucks for film productions. The contract is worded in such a way that if anything happens to that vehicle that is not the sole fault of my client, the film company pays 100 percent of the damages.

Should the film company that negotiated the lease with my client have negotiated for better terms? Yes. Did they? No. I was able to get a very positive provision in my client’s contract that shields his company from risk. Indemnification and contract negotiation require the skill of an experienced attorney. It's important as a business owner to make sure your rights and interests are properly represented and protected.

The law is a complex animal, and too often people try to take on legal contracts and negotiations themselves without the help of lawyers. This leaves them open to costly mistakes and manipulation by others who have the legal knowledge. Indemnification is only one aspect of contract negotiation, but it is an important one. Think twice before creating a contract yourself (or signing one you don’t understand), because it could lead to significant costs down the line.