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Outside General Counsel – Is it Right For My Business?

Outside general counsel services have gained in awareness recently, but what exactly is it and is it a value add for your business?

What is It Exactly?

For some firms, like ours, outside or “fractional” general counsel services have been offered to select clients for many years, so it is really nothing new. In many ways, it is simply a deeper relationship with a business client, with involvement earlier on in the business cycle and on a more continual or even day to day level, and often with a broader group of key business managers and employees. In contrast, traditional transactional engagement are typically sporadic and centered around specific deals or events, such as a capital financing, acquisition, or developing legal problem.  An outside general counsel spends far more (unbilled) time with your business and should be in sync with your strategic business plan, operations and execution.

Outside general counsel engagements should utilize a different billing arrangement than the traditional hourly rate multiplier. Outside GC services are usually provided on a flat fee basis, based on average expected usage over longer periods of time (such as quarterly or yearly), that equate to a much lower equivalent hourly rate for the work involved. This can not only be budgeted, but also removes the reluctance to consult counsel earlier or more regularly since it doesn’t start the “meter” running. Outside general counsel are still contractual so there is no benefits, payroll or overhead costs. When properly tailored to your business, an outside or fractional general counsel engagement should deliver the benefits of lower overall legal costs and, equally as important, a more proactive avoidance of legal problems, with legal alternatives factored into your overall business strategy from an early stage.

Is it Right for Your Business?

Certain types of businesses will benefit more from outside or fractional general counsel services than others. For most of these businesses, maintaining an in house legal staff is not feasible and does not make business sense, and retaining competent outside counsel at high hourly rates can be cost prohibitive and is done only when the necessity is clear and present.

The types of businesses that benefit more from an outside or fractional general counsel engagement generally fall into one of these categories:

  • Early stage, emerging companies anticipating rapid growth and/or capital financings, often (but not always) competing in a technology space. Many of these companies tend to wait until a major event to retain transactional counsel, leading to a reliance earlier in the start up cycle on free or generic legal forms, DIY contracts, corporate governance neglect, non-cohesive equity structures, and other common pitfalls.
  • More mature, privately held entities that rely on tailored contractual arrangements, compete in a more regulated environment, have equity holders with varying levels of involvement or objectives, can foresee future financing needs or exit strategies, or utilize strategic alliances. Although businesses like these can have adequate resources, they do not have pressing daily legal needs that justify the administrative cost of employing an in house legal department.
  • Large entities that have an in house legal department, but have periodic, recurring need for transactional assistance that falls outside the core competency of full time in house counsel, such as program acquisitions or divestitures, licensing, strategic relationships, channel agreement formation and negotiation, due diligence assistance, or similar needs.

What are the Benefits?

The benefits of utilizing an outside general counsel structure include:

  • Lower legal costs. The main driver for this is that outside of the Big Law practice, experienced attorneys are more incentivized to provide personalized services on a more consistent basis to fewer clients, and at a fraction of the traditional hourly cost. Having consistent engagement with fewer clients eliminates the need to maintain multiple client relationships and pass them on to other firm attorneys, which narrows the ability to provide consistent, focused attention to any one client. This also eliminates the related increase in firm overhead needed to serve multiple clients, which ultimately is reflected in hourly rates.
  • Customized and Consistent Service Delivery. In the traditional Big Law – client relationship, the firm’s objectives can be mis-aligned with any one client that it serves. Smaller or less complex matters get passed down to junior level lawyers due to cost constraints, when the matter at hand may not be so “small” to you.  Many projects result in cumbersome “one size fits all” solutions that are challenging to understand and implement with real world business partners. With a good outside counsel relationship, the attorney can deeply understand the way that you like to do business and your company culture, and consistently adapt services tailored to your objectives.
  • Proactive Avoidance of Costly Issues. By engaging an outside general counsel earlier in your life cycle, at affordable and predictable costs, you can avoid the even greater, and sometimes insurmountable, costs of deferring professional guidance. For most early stage companies, critical legal needs actually occur much earlier in your life cycle than you recognize. Outside general counsel can help to ensure that your equity plans and commitments are properly structured and implemented, good corporate governance is observed, contractual commitments are professionally crafted, and steps are taken to protect your proprietary assets, among other important tasks.  This can all be done at a minimal cost when addressed early, and is painless for the client. What you gain is a trusted business partner that is part of your team rather than an outside service provider.

If you think that you may be a candidate for an outside counsel relationship, give us a call. We have customized engagements with several companies over the years in a wide variety of industries. We will take the time to understand your business, assess your needs and, offer a program that makes sense.

Preserving Privileged Communications After a Merger

In a merger, unlike an asset purchase, all assets and liabilities are transferred, or assigned, to the buyer or successor company by operation of law. These assets include files and data, including legal files and correspondence. For companies in merger negotiations, there are often sensitive discussions and assessments made by the target company and its counsel concerning issues such as the merger negotiations and potential or actual liabilities, which can impact the purchase price or even the jeopardize the closing. In addition, there can be post-merger claims by the acquiring entity, often against assets of shareholder groups, or holdbacks of the purchase price. In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), the Delaware Chancery Court held that pre-merger attorney-client privileged communications between target stockholders and the target’s outside counsel regarding a merger were owned and controlled by the buyer after merger closed, and could be used by the buyer in litigation concerning alleged breaches of the seller’s representations and warranties. The Court also noted that the parties to the merger agreement could negotiate a provision in the merger agreement to preserve the attorney-client privilege. Recently, in Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM (Del. Ch. May 29, 2019), the Delaware Court of Chancery had an opportunity to address such a provision and upheld a clause in a private-company merger agreement preventing the acquiror from using the target’s privileged emails in post-merger litigation. In that case, the merger agreement contained a Great Hill provision that assigned pre-merger privileged communications to the stockholders’ representative and prevented the buyer from using such communications. Despite this, the buyer attempted to use over 1,200 pre-merger emails that it obtained from the email servers of the target company, which were acquired by operation of law in the merger. In ruling on the privilege dispute, the Court held that the parties were legally able to exclude from the transferred assets the privileged communications and that the negotiated clause preserved the privilege and prohibited the Buyer from using the communications in post-merger litigation. The Court reached this ruling even though the target shareholders representative had not taken steps to prevent the disclosure of the emails. The RSI case is the first opinion of the Delaware Court of Chancery to directly address the scope of a privilege assignment or “claw-back” provision in a merger agreement. As highlighted by the Court, it is critically important to negotiate and draft these provisions with detail and precision. These provisions can become very important if there are post-merger disputes, as they can affect the consideration retained by the sellers. When drafting these provisions, target companies and their stockholders want to ensure that they preserve pre-closing privileged communications, clearly assign control over the privilege to the target stockholders or their representative, and prevent the acquiror from using the privileged communications in subsequent litigation or claims. A carefully drafted provision can also save the seller’s stockholders from undertaking a comprehensive pre-closing document review and separation of communications.