Investment documents: why are buyout advocates reinventing the wheel?

Having worked in the private equity industry for over 25 years now, one thing that often confuses me is why we still don’t have a standard set of capital investment documents that everyone from. works as a starting point for most UK / EU private equity funds. offers?

Our financial counterparts handled this over two decades ago with the introduction of standard documentation approved by the Loan Market Association (LMA) and a common assumption at the time was that corporate / stock documents would eventually follow. the same path. Yet here we are now with probably more variety than ever before, with each major law firm using their own in-house developed house style and most of the sponsors having their own preferred documents and / or particular key provisions. The proliferation of American law firms in London has also led to a gradual introduction of American legal concepts into English legal documents.

One of the reasons for the lack of compliance could be that, unlike the LMA, the private equity industry does not have a single unifying business body that has the clout and buy-in from the industry to effectively dictate what the standard documentation should look like. The British Venture Capital Association (BVCA) has published template documents for early stage venture capital investments and it was a positive step, although it appears that many venture capital houses continue to use their own models. In the United States, standardized documents produced by the National Venture Capital Association (NVCA) of the United States have been around for some time. More recently, it was reported that Project OneNDA, an initiative supported by several law firms in the city, is developing a universally standardized Non-Disclosure Agreement (NDA). When it comes to traditional private equity, there are few signs of similar progress.

Some will wonder if we really need standard documents. It would certainly help to avoid the perpetual arguments of lawyers about what is standard. It is true that most versions of these documents are in fact very similar to each other in substance. Yet this is where much of the evil lies. So much time and money is spent essentially checking different newsrooms that are essentially striving to achieve the same goals and objectives, but in a multitude of different ways, each with their own pitfalls and traps hidden for the recipient. unsuspecting. The challenge is to review, modify, negotiate and agree to all of this in an efficient and cost effective manner.

New novelties
Lack of standardization is not only a problem for more complex and lengthy documents such as investment agreements and bespoke statutes, but can also extend to relatively basic items like RFI lists. due diligence, manager questionnaires, start of disclosure letters, etc. to. These documents in particular call for industry standardization. There are new innovations in the market, such as document automation and managed legal services, and we hope that these will solve the problem of too many competing versions, although this will not in itself lead to a single set of standard documents.

For more complex documents, the argument is sometimes made that they are too complicated and tailor-made to be standardized, but in reality 80-90% of the writing is reasonably mechanical. Uniform documents would allow lawyers to focus on the remaining critical 10-20%, where real value can be added around issues such as deal structuring, value retention / leakage and critical negotiation points. No one is saying that standard documents cannot be changed, it would simply reduce unnecessary time spent working on clauses that shouldn’t need to be discussed in the first place once the point has been commercially agreed.

Another argument against standardization is that for cross-border transactions, the documentation must be adapted to suit the company laws of the jurisdictions concerned. This is a valid point, but again, it could be relatively easily standardized and, in reality, most of these documents are already based on English model law with local variations and local completion / transfer mechanisms.

Maybe someone will respond by saying that there are already artificial intelligence programs that can check the drafting of the other side of things like dragging provisions, puts, pre-emption rights, limitation provisions, etc. If they do, then they are not widely known and certainly not widely used. If we had recognized the standard documents, they would not be necessary anyway.

A standard approach should certainly be better for clients, in terms of legal costs but also time spent, thus eliminating potential delays in the process. Yet, for now, there appears to be little real momentum for change. So where can this momentum come from? Not clients or their advisers at all levels, it seems. Maybe legal service providers managed over time? You might see this emerging early for use on venture capital trades and small cap PE trades alongside contract automation, but it seems unlikely to be adopted by the traditional PE community afterwards.

Gold standard
It would be a major statement, however, if enough large PE law firms broke their coverage and agreed to some sort of new gold standard. You might see this concept gain traction in the market.

Thinking more laterally, this is actually something you might see the Big Four accounting firms coordinate on as they venture deeper into legal services, given their reach in the industry and the global recognition of their brand. Now that would really be parking a tank on the lawn of traditional PE law firms!

Ian Ivory heads the Private Equity Emea team at the US law firm Bryan Cave Leighton Paisner.

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