Significance of Contract Due Diligence during Merger & Acquisition

We need to admit that merger with another company brings in uncalled complexities and new sets of problems including transition of thousands of contracts.

Discovery

  • Are you aware that there can be contracts with high legal risk in the other company that may have non-assignment or change of control provisions, which may severely impact the closing of M&A?
  • Do you know that the purchasing party contracts can come with high-level business risk decreasing the value of recently acquired business due to non-compete and other contractual restrictions?
  • How many contracts of the company have transactional risk dues to non-transferable clause and are you mindful of the fact that you may have to serve a notice period for some important transaction?

If organization is negligent in managing contracts transition, it can initiate high risks for the business. Contract due diligence during M&A transactions enables discovery of such legal, business and transactional risks. It also assist the company in eliminating cost overruns and minimize effort by brining in minor changes during due diligence process.

Standard Process

Mentioned below are high-level steps followed by best of the attorneys and advisors during Contract Due Diligence process:

  1. Contract Review to identify important sections
  2. Flagging contractual, business and transactional risks
  3. Presentation of outlining risks and issues

This does not guarantee that there have not been any misses during the process. Fact is a seller wants you to BUY, so s/he will present things with a rose perspective only. Major challenge we face due to such incomplete process is limited resources that lead to loss of time and funds due to administrative tasks.

Existing disconnect between Due Diligence and Contract Lifecycle Management

Organizations typically have an internal team to manage their contracts or a mature CLM processes in place provided by a specialized vendor. While, due diligence activities are either handled by another set of internal or an external attorneys. In any case, contract lifecycle management and due diligence will not be handled by same team which results in major disconnect.

Due diligence team generally do not have access to contract database therefore they may not be able to determine if both the parties have contracts with a same vendor. This needs through analysis and drafting of an addendum or amendment post merger. Inability to identify such duplicate contracts may result in amplifying the cost significantly.

Also, in a typical due diligence activity the contracts of the one company will not be mapped with the standard operating procedures and policies of the other company leading to non-compliance with standard processes.

Our approach to M&A Due Diligence

We believe in leveraging all aspects of contractual options for potential benefits of the transaction and focus on delivering expected benefits by brining in better quality of operations. To achieve maximum cost reduction and to know the actual cost of ownership it is important to reveal all the post-closing contractual issues before the merger ends. To prevent the heartache down the road we strongly recommend contract integration with due diligence, which will reveal the good, and the bad sides of the same coin.

Our SMEs with proven experience recommend to perform ‘gap analysis’ in order to map the metadata and identify the material difference between both the companies contracting standards. Metadata in this context includes the data related to a particular contract. ‘Gap analysis’ also includes two-tired review process; structure and escalate issues based on severity and likelihood of occurrence; ascertain ‘non-conforming’ contracts and non-standard clause language; and need basis reviews for time-sensitive matters.

This process provides the roadmap to the Company as the contractual risks are identified and they have a clear visibility of the contracts that needs amendment post transaction. Additionally, it will ease the activity of mapping the metadata of both the companies to provide consistency in the Company’s contract lifecycle management system.

Following our recommended solution to perform pre-transaction contract due diligence the Company can avoid the double cost of two different teams for reviewing the contracts and by the end of transaction the Company would have a robust contract lifecycle system. With such improved contract lifecycle management the Company can boost the bottom line of the transaction with 10-15%.

Other benefits:

  • Easily identify unreliable vendors.
  • Contractual awareness and easy access supports your sales and marketing department to boost the revenue and drastically cut down unpredictable costs.
  • Digital contract repository.
  • Better reporting quality, greater transparencies, tighter spend monitoring leads to quick identification of savings opportunities.

#AdvancingLaw: Artificial Intelligence (AI) in Legal Practice

Where will AI take us?

AI continues to find new ways to transform laborious tasks in the legal field and has gained strong footing globally. With its growing use in otherwise time-consuming and labor-intensive activities, lawyers can focus their time, cost and expertise on more specialized tasks.

Popular uses of AI technology are in the field of due diligence, legal research, e-discovery and contract management. Legal professionals typically have to sift through terabytes of data to find relevant information pertaining to a case or client. With the help of AI, lawyers can go through incredible amounts of data in a much shorter span of time. Richard Susskind predicts that the world of legal services will be of online courts, AI-based global legal business, liberalized markets, commoditization and outsourcing, internet-based simulated practice, and new legal jobs.

Another fascinating use of AI in law is imbibed in what is popularly known as ‘robot lawyers.’ Essentially, these are AI applications that use machine learning to decipher everyday language to perform mundane legal tasks. One example is the Do Not Pay app that helps people contest parking tickets without having to consult a real lawyer and rack up huge legal fees.

AI in law – is set to become the new normal. We need to accept the fact that machine learning algorithms now perform tasks that we thought only human beings could do. But remember that these algorithms only simulate human thinking – they are not “conscious” or “thinking” agents in themselves.

What benefits do we hope to derive from AI?

Case Predictions:

An exciting use of AI is in the field of case predictions. AI wraps in multiple technologies, such as data mining capabilities to analyze past case records and predictive analysis techniques. E.g. Ross AI software forecasts what the outcome of a particular legal proceeding might be.

A combination of AI and human expertise in case predictions equips lawyers with a better knowledge of possible outcomes, thereby supporting superior decision-making capabilities.

Document Review:

The application of cognitive computing to legal tasks that need a heavy examination of documents, such as discovery and due diligence, has far-ranging benefits. It significantly reduces the number of man-hours needed and consequently, cuts down on personnel costs.

TAR tools use predictive coding to accomplish this task, and machine-learning capabilities allow the software to analyze documents faster while employing algorithms that learn from the previously processed data.

Contract Lifecycle management:

Legal departments in corporate are inclined to use tools build on natural language processing for reviewing and creating contracts, now, it also assists lawyers in due diligence and risk assessment.

This provides greater transparency, price predictability and an accurate analytics for managing a large number of contracts existing in an organization.

How can we bridge the gap between AI and Lawyers?

Dr Paola Cecchi-Dimeglio, a behavioural scientist and senior research fellow for Harvard Law School’s Center on the Legal Profession and the Harvard Kennedy School, claims that, although AI has the ability to transform modern businesses, including those in the legal sector, ‘much of what constitutes AI remains somewhat misunderstood’ by the majority of those people or business entities that would benefit most by its use. This can be subsequently problematic and may limit the benefits that AI has to offer.

AI is growing but has still not reached the desks of the majority of the lawyers, as they are naturally – like all human beings – resistive to change. Technology (AI or otherwise) will disrupt every industry, and Lawyers have to prepare themselves for changes that are strongly predicted now. Any work that is repetitive, requiring minimal professional intervention or based on a template, will become the “sole province of software”, says Stefanie Yuen Thio, joint managing partner and head of corporate at TSMP Law Corp. A legal consultant can effectively play a role to bridge the gap between lawyers and technology and guide them on how software can deliver the proactive aspect of their mundane jobs.

And with changing skills, it is obvious that hiring at legal firms will transform too. “Law firms will hire more developers and contract executives, some of whom will not need all of the same qualifications as today’s lawyers,” adds Pollins of CMS.

How can OmnesLaw help?

At OmnesLaw we work closely with law firms and legal departments and see an undercurrent of change in Indian law firms too. Lawyers at the top will adapt to adopt the new technology to further their strategic contribution. While junior lawyers can expect AI to reduce their burden of mundane repetitive work. Data has again gained prominence irrespective of industry and lawyers need to be able to understand and leverage and also contribute to tech areas such cloud, cybersecurity, robot ethics, etc.

Contact us to discuss how we can assist you in taking this ‘leap of faith’ by performing a necessary assessment of your existing processes, technology, and skills and handhold you to transform while you continue to serve effectively to your clients.

Further reading:
1. AI in Law and Legal Practice – A Comprehensive View of 35 Current Applications
2. https://blogs.thomsonreuters.com/legal-uk/2018/02/07/ask-dr-paola-ai-changing-legal-industry/
3. https://www.theedgesingapore.com/lawyers-may-need-tech-skills-ai-changes-nature-legal-industry

Data Analytics in Contract Management

Data analytics is the hot, new trend in contract management, allowing companies to now see contracts as a key source of intelligence that can be used to guide business strategy.

Some of its key areas of focus are monitoring contract performance to maximize business impact, comparing actual data against estimates, and forecasting future sales.

Businesses should design strategies to manage risk by marrying financial risk assessment tools with data analytics, which can help to evaluate risk interactions and common causes. Data analytics helps map out transactional risk scenarios, arming companies with the information required to mitigate potential risk.

The best-in-class contract management solutions use advanced data analytics to extract hidden value from a large portfolio of contracts. OmnesLaw has built behavior prediction and intelligence to detect cost-saving opportunities by studying contract data.

Contract Analytics for better procurement and compliance management

Procurement teams generate massive amounts of data but 40% of companies feel they can achieve large savings in their procurement contracts by managing contracts better.

Data analytics can effectively derive insights from contractual data to realize sourced and negotiated savings, enforce supplier compliance, and manage internal obligations. But to do this you need to link internal data sources such as contract and spend data, to external data sources such as supplier databases.

Contract Analytics should lead to enhanced “Order to Contract” linkage and drive demand to preferred suppliers. Thereby decreasing maverick spending and increasing contract compliance.

With a combination of data mining, predictive analysis, and risk analysis, enterprises can forecast spending based on anticipated changes, better analyze and understand spend patterns, and identify risk and/or define measures to deal with risk scenarios.

Overall, contract data analytics in procurement promises improved contractual compliance, improved data integrity between contract data and downstream systems, and greater visibility and control.

Text Analytics Application in Indian Law Firms

Text Analytics systems such as Technology Assisted Review (TAR) and Predictive Analysis have been around for some time now, but Indian law firms have only recently begun employing them in their operations.

 

TAR is now being used by several Indian firms to simplify otherwise labor-intensive activities. For example, with the help of numbers-based text analytics, firms are able to cut down on the number of man-hours and resultant costs required to extract relevant documents during the discovery process.

 

The Supreme Court of India recently digitized about 10 million of its documents. As a result, homegrown text analytics software CaseIQ, an online legal research tool, has been steadily gaining ground in the Indian legal sector. Skeptical legal professionals are beginning to see the usefulness of this tool, which uses text analytics to extract and sort relevant information from the Internet.

 

India is now starting to leverage the full spectrum of Analytics capabilities in law.

Emerging Trends in Contract Management

At best, enterprise-wide contract management can be a tedious process requiring meticulous insight and dedicated resources. However, with the introduction of new cloud-based technologies, the process has undergone a tectonic shift.

One of the emerging trends in automation is the use of online systems that allow for easy access across multiple devices and help consolidate disparate data spread across sectors like legal, sales and procurement, thereby creating a single, cohesive contracts repository. With the advent of cloud-based systems, all users can access contracts at any time on any device; phones, desktops, notebooks.

Data Analytics enables to fully leverage a contract’s potential as a business asset.  Compliance risks are mitigated by identifying patterns in areas such as pricing, payment terms, and lapsed contracts. Analytics can also help to weed out non-performance entities and improve business impact. This is increasingly becoming an integral need of contract management systems today.

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