United States: FYI – לידיעתך

This is a true story. The names have been changed for purposes of confidentiality.

I debated with myself about whether or not to write a newsletter piece on this transaction. However, the matter was of such a nature, and the consequences so dramatic, that the story needed to be shared. What was at stake was this: Either the principal shareholders started over from scratch, with years of toil and sacrifice being for nothing, or they would never have to work again. The transaction lasted longer than normal; for a period of 5 months, with hope and despair going from one extreme to another, like a roller coaster ride. Only a few hours before a closing deadline, did we really know how it would turn out.

Because I write this case study in SGR's Israel newsletter, the natural assumption is that I am writing about an Israeli M&A exit transaction. That would generally be correct. The key principals were indeed very smart, very talented Israelis in their technical and creative abilities, who had opened a company in the U.S., which in this story I will call "KinneretTech." However, this story could apply globally.

Our case study starts in the usual way, with a group of talented individuals forming a Delaware corporation to develop and market very innovative technology. They all knew and liked each other, decided that documents downloaded from the Internet would attend to the corporate formalities and there was no need to obtain professional advice in forming the company. Laboring tirelessly, the technology was developed and perfected. But without sufficient sales to generate cash, they did not have funds to pay their employees adequately. Thus, employment offer letters were issued offering the employees a percentage interest in the company once a stock option plan was developed. In other cases, oral statements were made about awarding a percentage interest in the company.

Increasingly desperate for cash, they sought contractual relationships with customers which would involve prepayments of a portion of the purchase price for their products.   What mattered was getting cash in the door, and if the contact contained cash, little of the rest of the contract was critically evaluated. Once again KinneretTech did not seek professional advice on negotiating or entering into these contracts. This in particular was the case with a contract signed with a major global technology company, who in this story we will call "Goliath."

A mutual acquaintance learned about KinneretTech and realizing they needed professional counsel, was kind enough to refer them to me. I was contacted in the mid-summer of 2016 after the CEO had made contact with another global company who was interested in KinneretTech's technology. I will call them "BuyerGlobal." If BuyerGlobal acquired KinneretTech, it would be very complimentary with BuyerGlobal's own strategic plans, and would provide them with a competitive advantage to acquire KinneretTech as opposed to developing the technology from the start.   BuyerGlobal was prepared to pay; and pay handsomely for KinneretTech, although for a company the size of BuyerGlobal, this would be a small acquisition. They wanted a deal done quickly, and with no complications.

Salvation appeared to be at hand! Rather than wondering how they would meet the next payroll and office rent, the principal shareholders of KinneretTech might never have to work the rest of their lives. A letter of intent was negotiated on an expeditious basis and signed. Hopes were high.

And then the due diligence started.

We found that the actual existence of KinneretTech was not at all clear. The typical formation documents to select officers, approve the issuance of stock and attend to the customary formation formalities, were, as usual, styled "Unanimous Written Consent."   Except that they were not unanimously signed. Only the purported Secretary signed them. The bylaws they used were copied from an Internet source and were actually the bylaws for a publicly traded company formed in California (KinneretTech being a privately-held company formed in Delaware). "No big deal" you ask? Not quite. In fact, not even close. Buyers in M&A transactions demand a comprehensive suite of representations and warranties. While they can vary a bit from one deal to the next, you can be assured that in any such document, the buyer wants a representation and warranty that that stock has been duly and validly issued, what the capital structure is, that the contracts the target has with third parties are valid; just to name a few. With the formation documents as they were, there could be no assurance that the stock had in fact been validly issued, that the officers were really officers, that there was a duly constituted board of directors, or that any of the contracts KinneretTech had were actually valid. But wait: Just get everyone to sign and verify everything. Is that not the easy thing to do? It would be, except all those fellows who used to like each other when KinneretTech was formed, were not so friendly any longer. There was a falling out and some had been fired from KinneretTech. One had even sued KinneretTech.

Remember those offer letters? They spoke to providing employees a percentage (specified for each employee) of KinneretTech's capital subject to a stock option agreement being in place. But the offer letters did not say a percentage of what. Was it a percentage based on the issued shares at the time the offer letter was signed? Was it a percentage of authorized shares? Was it a percentage when the option plan was put in place? Would the percentage be guaranteed as additional shares were issued? Was it a percentage on an actual or fully diluted basis? What was the option exercise price? There was no way to tell. And to make it worse, no option plan had ever been put in place. One could say: well, then those employees were not entitled to anything. Really? The employees (some now former employees) certainly thought so, and if we closed a deal with many tens of millions of dollars being paid for KinneretTech, would any reasonable person expect them to just walk away? Hardly. And just how was KinneretTech supposed to give any accurate representation and warranty on the capital structure, and deal with the almost assured litigation that would ensue from those employees post-closing? In the States, such a case would be ideal for plaintiffs' lawyers who work on a success-fee basis, with a real possibility of class action litigation. BuyerGlobal wanted a quick deal with no complications. This was not looking pretty.

Not looking pretty then turned into outright ugly. A diligence review of the contract which KinneretTech signed with Goliath revealed that (a) KinneretTech had granted very broad rights in its intellectual property to Goliath, (b) Goliath was not obligated to buy anything from KinneretTech, and (c) in certain key areas, Goliath and BuyerGlobal would be competitors in the marketplace. BuyerGlobal insisted that KinneretTech amend the contract with Goliath. But Goliath had no need to amend. It liked having broad IP rights and no obligation to make any purchases.

The transaction was now looking very questionable. BuyerGlobal was willing to pay a substantial amount of money for KinneretTech if the deal could be done cleanly. If not, they would walk away. Them walking away was looking very possible, and there was no "Plan B" to keep KinneretTech running for the longer term.

There were other serious problems we found in diligence, but due to space limitations in this newsletter, I won't elaborate on them. The challenge we faced was that there were multiple and interlocking serious problems at KinneretTech.   Courses of action that would tend to remedy one problem, triggered issues in other areas. And convincing BuyerGlobal that KinneretTech would remedy these problems, without cost or stress on them, was absolutely essential. So very creative strategies had to be developed and executed with great care. Even then, the amendment of the contract with Goliath was only obtained a few hours before the closing deadline. And, to the enormous relief of all concerned we closed.

I share this story as a cautionary tale. This story was a millimeter away from a very different ending. Regardless of which professional advisors a company wishes to use, the important thing, the critically important thing, is that professional advice must be obtained in running a business. One cannot assume that all will simply work out, that everything can be fixed, or that people will necessarily cooperate. The goal of almost every technology entrepreneur and their backers is to bring the technology to a point where a large company is willing to become an acquirer. But large companies have many opportunities for acquisitions, and often will do many each year. In general they want them done expeditiously and cleanly. A potential target that due diligence reveals is a mess may simply be passed over in favor of another and easier acquisition opportunity.

Be sure that being passed-over is a story you tell once a year with your family about a great historical event, and not a story about your company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.