#37 Senior Negotiations Agent
This week, I share a negotiation I did with an AI tool designed to simulate M&A negotiations.
AI will change the world, but how will it change M&A? I want to focus on AI’s impact on M&A in this newsletter. I am not an expert on either M&A or AI, but I want to learn about both topics and how they intersect. I thought there might be others in my situation (or people who are experts in one field or the other) who would find information on M&A and AI helpful in their careers, so I created this newsletter to track and share what I learn.
Negotiation Agent: Senior Level
If you keep up with my posts, you will know that I have been using an open-source AI tool that simulates an M&A negotiation. If you need to catch up, here are my two previous posts describing the tool and giving an example of the junior-level negotiation.
Below you will find my negotiation with the“senior level” of the negotiation tool. Fair warning, it is long but worth a skim. I plan on posting my reaction to this negotiation in the coming weeks (the post is almost at Substack’s limit!).
Here is some quick background on the difference between the senior level and the junior level negotiations: The junior level states that the point of the negotiations is to establish the types of representations and warranties and set parameters of liability. The Senior negotiation level states that mitigating the cybersecurity incident is the main point of the negotiations, along with managing vulnerability.
Senior Level Negotiation
PL: Hello, I understand that TechEase suffered a cybersecurity breach. Do you know the extent of the damage?
AI: "Parker, yes, TechEase did experience a cybersecurity breach that affected approximately 200 email addresses. No other personal identifiable information was compromised. TechEase promptly disclosed the breach to its customer base, took immediate remedial actions to strengthen its security infrastructure, and complied fully with all relevant regulatory requirements. We're confident that the measures taken have effectively mitigated the risk of such incidents occurring in the future."
PL: I would certainly hope that the breach was mitigated. I have a few more questions.
1. Where any passwords discovered by the hackers?
2. Did you consult with a cybersecurity expert to ensure all possible steps were taken to mitigate future harm?
3. What is the likelihood that the hackers can gain sensitive customer information from the email addresses?
4. Could you specify the exact remedial efforts that you took?
AI: "Parker, I understand your concerns, and I appreciate your thoroughness. Here are the detailed answers to your questions:
1. No passwords were discovered or compromised by the hackers. The breach was limited strictly to email addresses.
2. Yes, we did consult with a leading cybersecurity expert to ensure that we took all necessary steps to mitigate future risks. The expert conducted a thorough audit of our systems, identified vulnerabilities, and provided recommendations that we implemented immediately.
3. The likelihood that hackers can gain sensitive customer information from email addresses alone is extremely low. Email addresses, while important, do not provide direct access to more sensitive information like credit card numbers or personal identification details, which are securely encrypted and were not affected by this breach.
4. The exact remedial efforts included the following:
- Immediate patching of the security vulnerability that was exploited.
- Comprehensive security audit conducted by an external cybersecurity firm.
- Enhanced encryption protocols for all stored customer data.
- Implementation of multi-factor authentication for all system access points.
- Regular security training sessions for all employees.
- Continuous monitoring and periodic security assessments to ensure ongoing protection.
TechEase has taken these steps seriously and is committed to maintaining the highest standards of data security going forward."
PL: I'm glad to hear that no passwords were exposed, you consulted an expert, there is a low likelihood of the hacker gaining sensitive information, and the remedial measures taken were comprehensive.
How did the hackers breach TechEases' cybersecurity systems?
AI: "Parker, the breach occurred due to a targeted phishing attack on one of TechEase's employees. The hacker managed to gain access to a company email account through this method. Once the unauthorized access was detected, TechEase's security team acted swiftly to contain the breach, revoke access, and secure the compromised account.
In addition to the remedial measures I previously mentioned, we have also implemented more stringent email security protocols, including advanced threat protection and phishing simulation training for all employees to prevent such incidents in the future.
It's important to note that while phishing attacks are a common threat across industries, TechEase's rapid response and comprehensive mitigation efforts demonstrate our commitment to data security and our capability to handle such situations effectively."
PL: Understood. Did the cybersecurity expert mention the probability of another cybersecurity breach? I would imagine that after news of the previous cyberattack gets out, TechEase will become a target of more cyberattacks.
AI: "Parker, while it's true that companies that have experienced breaches may attract additional attention from cybercriminals, our cybersecurity expert has advised that the probability of another breach occurring has been significantly mitigated due to the robust measures we have implemented. These include:
1. **Advanced Threat Detection:** The implementation of state-of-the-art threat detection and prevention systems, which are continuously monitored.
2. **Employee Training:** Regular and comprehensive cybersecurity training for all employees to recognize and respond to phishing attempts and other common threats.
3. **Enhanced Protocols:** Upgraded encryption, multi-factor authentication, and strict access control measures.
4. **Continuous Monitoring:** Proactive and continuous monitoring of our systems for any signs of suspicious activity.
5. **Regular Audits:** Periodic security audits and vulnerability assessments by external cybersecurity firms.
While no system can be deemed completely immune to attacks, TechEase has taken every possible step to reduce the risk to an absolute minimum and to ensure that any future attempts are swiftly detected and neutralized. Our expert's analysis suggests that, given these enhanced protections, the likelihood of another successful breach is very low."
PL: You're right that no system can perfectly prevent future attacks. Because the previous incident will direct more cybercriminals to attempt to breach TechEase's platform, there will be more successful breaches. For that reason, ShopMaster sees it necessary to enhance its protections if the deal is going to continue. Do you agree?
AI: I understand the need for robust cybersecurity measures, and TechEase has already implemented significant enhancements following the breach. We believe these measures align with industry best practices and effectively mitigate future risks. If ShopMaster has specific, reasonable requests for additional protections, we're open to discussing them. However, any further requirements must be balanced and fair, taking into account the extensive steps TechEase has already taken to ensure data security."
PL: ShopMaster appreciates the strong effort that TechEase made to cure and prevent further cyberattacks, TechEase obviously cares about its customers and cares about this deal moving forward.
As you can imagine, the news of the cyberattack shocked ShopMaster. While ShopMaster is glad that the attack was limited to customer email addresses (unfortunate for the customers, but at least there is no sensitive information!), what if the hackers gained access to an account that could access the sensitive information that ShopMaster shared with TechEase? That would be bad!
As a result of the heightened risk surrounding this transaction, ShopMaster believes it essential to increase the strength of the representations and warranties regarding cybersecurity.
Additionally, it's necessary to increase the damages cap, create an escrow account for breaches of the representations and warranties, and for TechEase to hire a full-time cybersecurity consultant.
ShopMaster will not continue with this deal unless serious modifications are made to the transaction documents that reflect the new risk ShopMaster is taking on by acquiring the stock of TechEase.
AI: "Parker, I understand ShopMaster's concerns and appreciate the constructive approach you're taking. However, we need to address these demands in a way that is fair to both parties. Here’s our stance:
1. **Increased Representations and Warranties:** We are willing to discuss reasonable enhancements to the representations and warranties regarding cybersecurity. However, these should be balanced and not excessively onerous, given the extensive measures TechEase has already taken.
2. **Damages Cap:** We can negotiate a reasonable increase in the damages cap for cybersecurity-related breaches, but it must be within a rational range. A cap that's too high would be disproportionate to the actual risk involved, considering the remedial actions TechEase has already taken.
3. **Escrow Account:** We understand the need for an escrow account to address potential breaches of representations and warranties. We are open to negotiating a fair escrow amount and duration that provides ShopMaster with security while not unduly tying up TechEase's capital.
4. **Full-Time Cybersecurity Consultant:** TechEase already engages with top-tier cybersecurity experts on a consultancy basis, which has proven effective. While we can discuss increasing the frequency or scope of these consultations, hiring a full-time consultant will be a significant cost and operational adjustment. We need to ensure this requirement is truly necessary and not just a reactionary measure.
We are committed to finding a solution that addresses ShopMaster's concerns while also being fair and reasonable to TechEase. We are prepared to work towards a balance that protects both parties' interests without unfairly penalizing TechEase."
PL: ShopMaster does not wish to punish TechEase with unfair or burdensome terms. After all, ShopMaster is buying TechEase's stock! ShopMaster wants to ensure it is protected from cybersecurity-related liabilities.
1. Increased Reps and Warranties: I'm glad to hear that you are willing to discuss changing the representations and warranties to fairly reflect the increased risk that the transaction poses to ShopMaster. ShopMaster appreciates the remedial measures TechEase took and agrees that any changes should be balanced and fair. Could you please send over the current language we have in the Stock Purchase Agreement?
2. Damages Cap: Again, ShopMaster is not looking to punish TechEase, but a high damages cap is necessary because of the heightened risk surrounding this transaction. What is the current damages cap?
3. Escrow amount: I am glad we agree that an escrow account is now necessary. What is your proposed escrow amount?
4. Cyber-Security Consultant: ShopMaster is open to increasing the frequency of the consultant's engagements with TechEase instead of hiring a full-time consultant. How often does the consultant engage with TechEase?
I appreciate you understanding that ShopMaster needs more protection in order to continue with this fantastic deal that will help both sides.
AI: "Parker, I appreciate your constructive approach and willingness to work through these issues. Let’s address each point in detail:
1. **Increased Reps and Warranties:** I will send over the current language in the Stock Purchase Agreement for our representations and warranties concerning cybersecurity. We can then work together to revise this language to ensure it fairly reflects the increased risk while remaining balanced.
2. **Damages Cap:** The current damages cap for general representations and warranties is set at 15% of the purchase price. Given the circumstances, we can consider increasing this cap, but it must be within a reasonable range. I suggest we negotiate a cap between 20-25%, which should adequately address the heightened risk without being excessively punitive.
3. **Escrow Amount:** For the escrow amount, we propose setting aside 10% of the purchase price in escrow for a period of 18 months. This should provide sufficient coverage for any potential breaches of representations and warranties related to cybersecurity while ensuring that the funds are not unnecessarily tied up for too long.
4. **Cybersecurity Consultant:** Currently, TechEase’s cybersecurity consultant engages with the company on a quarterly basis. We are open to increasing this frequency to monthly engagements for the first year post-acquisition. This should provide an added layer of security and reassurance for ShopMaster without the need for a full-time consultant.
We believe these adjustments should strike a fair balance between protecting ShopMaster’s interests and recognizing the substantial efforts TechEase has already made to ensure data security. Let’s move forward with these discussions and work towards finalizing this deal to our mutual benefit."
PL: I'm happy to discuss and workout a potential solution that works for both sides.
1. Increased Reps and Warranties: Please send over the language.
2. Damages Cap: I appreciate your willingness to increase the damages cap. However, a cap of 20%-25% is not sufficient to adequately protect ShopMaster. As you know, $2 million is not enough to cover legal fees for one litigation that results from a cybersecurity breach. There must be more protection for ShopMaster to make this deal fair to both parties.
3. Escrow Amount: While we appreciate your offer, it is too low. Immediately after closing is the riskiest time for ShopMaster. ShopMaster needs more funds available to it so it does not have to pay for TechEase's cybersecurity issues.
4. Consultant: A monthly review of TechEase's cybersecurity procedures is adequate. ShopMaster would also request that the consultant be available immediately in case of a breach.
ShopMaster appreciates your willingness to work with us on finding a deal that is fair to both parties.
AI: "Parker, I appreciate ShopMaster's commitment to finding a balanced solution. Let's address each point further:
1. **Increased Reps and Warranties:** I will send over the current language in the Stock Purchase Agreement for our representations and warranties concerning cybersecurity shortly. We can review and revise this language to ensure it adequately addresses the increased risk.
2. **Damages Cap:** I understand your concern. Given the potential financial impact, we are willing to increase the damages cap for cybersecurity-related breaches to 35% of the purchase price. This should offer more substantial protection for ShopMaster while remaining within a reasonable limit.
3. **Escrow Amount:** Recognizing ShopMaster's need for more immediate protection post-closing, we propose an escrow amount of 15% of the purchase price, held for 24 months. This should provide sufficient security for ShopMaster during the riskiest period and ensures that TechEase's interests are also fairly considered.
4. **Consultant:** We agree to a monthly review of TechEase's cybersecurity procedures and will ensure that the consultant is available on an immediate basis in case of any breaches.
We believe these adjustments provide a fair and balanced approach to addressing ShopMaster's concerns while respecting the considerable efforts and improvements TechEase has already implemented. Let's finalize the details and move forward to solidify this mutually beneficial deal."
PL: I appreciate your responses. I will address them one at a time.
1. Increased Reps and Warranties: Please send the language. My client wants to get this point closed quickly.
2. Damages Cap: Again, 35% is insufficient to protect ShopMaster from exposure to liabilities arising from TechEase's cybersecurity breach. Do you believe it is fair to have ShopMaster pay for TechEase's cybersecurity breach?
3. Escrow Amount: Like the damages cap, the escrow amount is inadequate. ShopMaster requires a higher escrow amount to ensure that it has access to funds to protect itself. Having access to 50% of the funds over 24 months is fair to both parties because it protects ShopMaster and gives the TechEase owners 50% of the purchase price immediately.
4. We agree to the monthly engagements and having the consultant available immediately to respond to a breach. Where should the money to pay for the consultant come from?
We are in agreement that a fair deal is best for both parties and we believe our positions are fair.
AI: "Parker, I appreciate the clarity and directness in your responses. Let's address each of these points to find a mutually agreeable solution:
1. **Increased Reps and Warranties:** I will send over the current language in the Stock Purchase Agreement for your review by the end of today. We understand the urgency and will prioritize getting this point closed quickly.
2. **Damages Cap:** I understand that you feel strongly about this. However, 50% is an extraordinarily high cap that would unfairly penalize TechEase, especially considering the comprehensive remedial measures we've already taken. We can consider a compromise at 40%, but anything beyond that is untenable for TechEase. It's important to recognize that further raising the cap would be unreasonable and could jeopardize the deal.
3. **Escrow Amount:** A 50% escrow is excessive and would effectively tie up too much of the purchase price, making the deal unfeasible for TechEase's owners. We can agree to a 20% escrow amount held for 24 months. This provides ShopMaster with a significant security buffer while also allowing TechEase to access a considerable portion of the purchase price immediately.
4. **Consultant Costs:** The cost of the cybersecurity consultant can be shared equally between the two parties for the first year post-acquisition. This ensures that both sides are invested in maintaining robust cybersecurity measures without unduly burdening either party.
We believe that these adjustments are fair and balanced, addressing ShopMaster's concerns while also protecting TechEase's interests. Let's work together to finalize these terms and move forward with this beneficial transaction."
PL: Thank you for your response.
1. Increased Reps and Warranties: Great. Looking forward to seeing the language. I appreciate your prompt attention to this matter.
2. Damages Cap: My apologies, but I do not believe I proposed a damages cap of 50%. If you don't mind me asking, should ShopMaster pay for liabilities arising from TechEase's cybersecurity breach?
3. Escrow Amount: We respectfully disagree that a 50% escrow is unreasonable. TechEase's cybersecurity failure significantly increased the risk of this transaction. Could you expand on why a 50% escrow makes the deal unfeasible for the TechEase owners?
4. Consultant Costs: Why should ShopMaster pay for expenses arising from TechEase's cybersecurity failure? I can assure you that ShopMaster is already motivated to maintain the strictest cybersecurity measures, as TechEase's breach has ShopMaster extremely worried about a potential breach to its systems.
We understand that TechEase should not be overly punished for the cybersecurity breach, however, change must be made to ensure ShopMaster does not pay for TechEase's mistakes.
AI: "Parker, I understand your points and the need to strike a balance that protects both parties' interests. Let's delve into each issue:
1. **Increased Reps and Warranties:** You will have the current language shortly for review. We aim to finalize this aspect as quickly as possible.
2. **Damages Cap:** I misunderstood; thank you for clarifying. TechEase acknowledges the importance of covering its own liabilities, especially those arising from the cybersecurity breach. However, a cap must be reasonable to both parties. We propose a compromise at 40%. This ensures substantial protection for ShopMaster while being fair to TechEase. ShopMaster should not bear liabilities for TechEase's past issues, but the cap must reflect a balance.
3. **Escrow Amount:** A 50% escrow amount ties up a significant portion of the purchase price and limits the immediate liquidity available to TechEase's owners post-sale. This impacts their ability to reinvest or utilize their proceeds promptly. However, given the circumstances, we can consider increasing the escrow amount to 30% for a period of 24 months. This provides substantial security for ShopMaster while being more reasonable for TechEase's owners.
4. **Consultant Costs:** We understand ShopMaster's concern. Given that the breach originated with TechEase, we can agree that TechEase will bear the consultant costs for the first year post-acquisition. Following this period, both parties can reassess the arrangement based on the cybersecurity landscape at that time.
We are committed to ensuring that ShopMaster is adequately protected while ensuring the terms remain fair and feasible for TechEase. Let's finalize these details to proceed with the transaction that benefits both sides."
PL: I understand and appreciate your responses. I will address each one in order.
1. Increased Reps and Warranties: It is tomorrow. Please send the language.
2. Damages Cap: No problem. I could have been more clear. It's important to communicate clearly and effectively in tense negotiations!
I appreciate you understanding that ShopMaster should not have to pay for TechEase's liabilities. Because you understand this, you must know that your offer of 40% is not nearly sufficient. As we discussed earlier, TechEase will be the target of many more cyberattacks because it is now seen as vulnerable. The damage cap should reflect your belief that ShopMaster should not pay for TechEase's liabilities.
3. Escrow: While I appreciate your concern for your client's liquidity, 50% of the purchase price in escrow is necescary for ShopMaster to move forward with this deal. Why do your clients need so much liquidity immediately after closing?
4. Consultant Costs: Thank you for understanding our concern and we appreciate your proposal. What if TechEase paid for the consultant during the pendency of the escrow?
I am glad to hear that TechEase is committed to this transaction.
AI: "Parker, I appreciate your thorough approach and willingness to work through these issues. Let's address each point clearly:
1. **Increased Reps and Warranties:** I apologize for the delay. I will send the current language in the Stock Purchase Agreement immediately after our discussion.
2. **Damages Cap:** I understand that ShopMaster requires robust protection. However, a cap much higher than 40% would be disproportionately burdensome for TechEase, especially given the comprehensive remedial actions taken. We can consider increasing the cap to 45%, but anything beyond that is unreasonable. It's crucial to recognize that TechEase has already implemented significant measures to mitigate future risks, and the cap should reflect a balanced risk-sharing approach.
3. **Escrow Amount:** The need for immediate liquidity stems from the owners' plans to reinvest in other ventures and personal financial commitments. Tying up 50% of the purchase price would severely limit their ability to do so. However, we understand the need for ShopMaster's protection. We propose a compromise at 35% held in escrow for 24 months. This provides substantial security for ShopMaster while allowing TechEase's owners some degree of financial flexibility.
4. **Consultant Costs:** We are open to the proposal that TechEase will cover the consultant costs during the pendency of the escrow period. This ensures that ShopMaster's concerns are addressed without unduly burdening TechEase.
We believe these adjustments are reasonable and fair, addressing ShopMaster's need for protection while ensuring the terms remain feasible for TechEase. Let's finalize these terms and move forward with this mutually beneficial transaction."
PL: 1. Increased Reps and Warranties: Great. I am patiently awaiting the document's language.
2. Damages Cap: Perhaps you are conflating the damages cap with actual damages? I think its important to remember that we are talking about the maximum amount that TechEase will pay, not the actual amount they must pay. With that clear, I would expect that you will increase your offer because of the robustness of the remedial measures TechEase took.
3. Escrow Amount: Reinvesting money and personal financial obligations are important.Do you think that these obligations are more important than ShopMaster potentially paying for TechEase's liabilities after closing?
4. Consultant Costs: Great. I think we can close this point. To ensure we are on the same page, TechEases consultant will engage in a monthly cybersecurity review and be available immediately upon a cybersecurity incident. TechEase will cover all costs of the consultant for the duration of the escrow.
Looking forward to your response!
AI: "Parker, I appreciate your patience and the opportunity to discuss these points further. Let's address each one:
1. **Increased Reps and Warranties:** I will send the language in the Stock Purchase Agreement immediately after this conversation for your review.
2. **Damages Cap:** I understand the distinction between the cap and actual damages. Given the robustness of the remedial measures TechEase has taken, we are willing to increase the damages cap to 50%. This should provide substantial protection for ShopMaster while acknowledging the significant steps TechEase has already implemented to mitigate future risks.
3. **Escrow Amount:** Reinvesting money and personal financial obligations are important, but they do not outweigh ShopMaster's need for protection against potential liabilities. However, tying up 50% of the purchase price in escrow is excessively burdensome for TechEase's owners. As a final offer, we propose an escrow amount of 40% held for 24 months. This substantial amount ensures ShopMaster's protection while allowing TechEase's owners some degree of financial flexibility.
4. **Consultant Costs:** We are in agreement. TechEase's consultant will engage in monthly cybersecurity reviews and be available immediately in the event of a cybersecurity incident. TechEase will cover all costs of the consultant for the duration of the escrow period.
We believe these terms provide a fair and balanced approach to addressing ShopMaster's concerns while also protecting TechEase's interests. Let's finalize these details and move forward with this mutually beneficial transaction."
PL: 1. Increased Rep and Warranties: Great!
2. Damages Cap: What is stopping TechEase from increasing the damages cap to 80% if the remedial measures are robust?
3. Escrow Amount: I am glad you recognize that ShopMaster is in a more precarious situation than the TechEase owners. I am surprised that 40% for 24 months is your final offer. As you must know, legal fees resulting from litigation could easily surpass $4 million dollars, which would force ShopMaster to sue the TechEase owners for indemnification. This would lead to more money spent on litigation. I think the easiest way to avoid a protracted and expensive litigation is to increase the escrow to 50%.
4. Consultant cost: This point is closed. I appreciate your willingness to discuss it.
I appreciate TechEase understanding ShopMaster's position on these issues.
AI: "Parker, I appreciate your continued diligence and understanding in these discussions. Let's address your points:
1. **Increased Reps and Warranties:** I will send the language immediately to ensure we can close this point swiftly.
2. **Damages Cap:** Increasing the damages cap to 80% would be unfairly punitive for TechEase, regardless of the remedial measures taken. The cap should reflect a balanced risk-sharing approach. We believe that 50% is already a significant concession and provides substantial protection for ShopMaster. Any higher would create an unreasonable burden on TechEase, undermining the principle of fairness in this transaction.
3. **Escrow Amount:** I understand ShopMaster's concerns about potential legal fees and the precarious situation. However, tying up 50% of the purchase price in escrow is excessively burdensome for TechEase's owners, and it could jeopardize their financial plans post-closing. To avoid protracted litigation, as you mentioned, we are willing to consider a slight increase to 45% held for 24 months. This should provide a significant buffer for ShopMaster while also acknowledging the need for liquidity for TechEase's owners.
4. **Consultant Costs:** This point is indeed closed, and I appreciate our agreement on it.
We believe these terms reflect a fair and balanced approach to addressing ShopMaster's concerns while also protecting TechEase's interests. Let's finalize these details and move forward with this mutually beneficial transaction."
PL: 1. Damages Cap: My apologies if the 80% number caught you off guard. I was only wondering why TechEase is so hesitant to increase the cap if the remedial measures taken are so strong? I have no intention of undermining the fairness of this deal.
2. Escrow amount: I understand that a 50% escrow would be burdensome for the TechEase owners. However, as you acknowledged previously, ShopMaster's burden is more significant than the TechEase owners'. 45% is still too low. If you would like to proceed to the litigation route, that is fine. That shows that TechEase does not really want a deal that is fair to both sides,. It suggests that the TechEase owners just want to get paid and leave ShopMaster to cover their expenses from the breach. 50% in escrow is essential to preserve the fairness of this transaction.
AI: "Parker, I appreciate your clarification and the opportunity to address these critical points head-on:
1. **Damages Cap:** TechEase's hesitation to significantly increase the damages cap lies in maintaining a balance of risk. While the remedial measures are robust, no system is entirely immune to breaches, and an excessively high cap can be unfairly punitive. That said, we recognize the need for enhanced protection and have already increased our offer to 50%. This substantial increase is a strong indicator of our commitment to making this deal fair and ensuring ShopMaster feels secure.
2. **Escrow Amount:** I understand and respect your position, but we must reach an equilibrium that protects both parties without disproportionately burdening either side. TechEase's willingness to place 45% of the purchase price in escrow for 24 months is a substantial concession and demonstrates our commitment to addressing ShopMaster's concerns. This still provides ShopMaster with significant protection while allowing TechEase's owners some liquidity to manage their financial obligations.
Insisting on 50% escrow, despite the other substantial protections in place, such as the increased damages cap and comprehensive reps and warranties, seems excessively risk-averse and could indicate that we are not valuing the considerable steps TechEase has already taken.
We are committed to closing this deal fairly, but it must respect both parties' interests. Let's finalize these terms and move forward to reap the mutual benefits of this transaction."
PL: Discussing points head on is essential to moving this transaction forward, and I appreciate your willingness to do so.
1. Damages Cap: Based on the information you gave me about the remedial measures and what you are currently telling me, it seems there is a mismatch between your confidence in the remedial measures and your damage cap offer of 50%. You told me that ShopMaster should not have to pay for TechEase's liabilities arising from cybersecurity breaches. Let's make that happen. Capping the damages at 75% of the purchase price is fair to both parties in light of our discussion and the cyberattack.
2. Escrow Amount: Wouldn't you agree that a party who truly took significant and comprehensive remedial measures to avoid future liability would agree that a 50% escrow is reasonable? Especially when the remedial steps should limit liability?
I agree that the transaction has mutual benefits, but only if there is adequate protection for ShopMaster.
AI: "Parker, I understand ShopMaster's concerns and appreciate the need for adequate protection. Let's further address these points to find a fair solution:
1. **Damages Cap:** I recognize that you see a discrepancy between our confidence in the remedial measures and the proposed cap. However, increasing the damages cap to 75% is still excessively high and goes beyond a balanced risk-sharing approach. TechEase has already shown significant commitment by offering a 50% cap, which is a substantial concession. This cap provides considerable protection for ShopMaster while acknowledging the extensive measures TechEase has taken. We believe that settling at 55% is a reasonable compromise that reflects confidence in our remedial actions while ensuring ShopMaster is protected.
2. **Escrow Amount:** A 50% escrow amount is excessively burdensome and ties up too much of the purchase price, limiting the immediate financial flexibility for TechEase's owners. While we understand ShopMaster's need for security, the remedial steps taken should indeed limit liability. However, holding back 50% is not aligned with the principle of fairness. Our final offer is 45% held for 24 months. This provides substantial security for ShopMaster and demonstrates our commitment to a fair transaction, while also allowing TechEase's owners some liquidity.
We are committed to ensuring a fair and balanced deal that protects ShopMaster’s interests while also recognizing TechEase's efforts and needs. Let's finalize these terms to move forward with the transaction."
PL: A fair solution is exactly what we need to move this transaction to a closing.
1. Damages Cap: I think we disagree on a "balanced risk-sharing approach." As you pointed out earlier, ShopMaster should not be on the hook for TechEases liabilities. It seems like you no longer believe that statement. ShopMaster is not willing to share the risk with TechEase. TechEase incurred the breach, so TechEase should pay for the liabilities arising from it. A damage cap of 75% is necessary to protect ShopMaster from paying for TechEase's cyberattack.
2. Escrow amount: We agreed that TechEase's owners and ShopMaster do not share the same consequences of failing to have enough money available to them. ShopMaster will suffer much more than the TechEase owners. Your final offer is not enough, and risks the TechEase owners having access to 0 proceeds from this deal.
While we are committed to the deal, we will only proceed if we are sufficiently protected.
AI: "Parker, I understand ShopMaster's need for substantial protection, but we must ensure that the terms are fair and not excessively burdensome for TechEase. Let's address these points with the goal of reaching an equitable solution:
1. **Damages Cap:** I appreciate your perspective on not wanting ShopMaster to bear the risk for liabilities arising from TechEase's past breach. We still firmly believe that a cap of 75% is excessively high and not aligned with typical M&A transactions, even considering the breach. To demonstrate our commitment to closing this deal and addressing your concerns, our final offer is a damages cap of 60%. This cap provides significant protection for ShopMaster while recognizing the extensive remedial measures TechEase has implemented to mitigate future risks.
2. **Escrow Amount:** We understand the importance of having sufficient funds available to address potential liabilities. However, tying up 50% of the purchase price in escrow is excessively restrictive for TechEase's owners. To move forward, we propose an escrow amount of 47.5% held for 24 months. This provides substantial security for ShopMaster while allowing TechEase's owners some degree of financial flexibility.
We are committed to finalizing this transaction in a manner that is fair and protects both parties' interests. Let's agree on these terms and proceed to a successful closing."
PL: The damages cap of 60% is only acceptable with 50% of the purchase price in escrow for 24 months. This is our final offer. If you fail to accept this offer, you can consider our negotiations over and ShopMaster will not proceed with the transaction. Our demands and reasonable and fairly reflect the risks to be incurred by ShopMaster if the transaction closes. Thank you for discussing these points with me, and I await your response to this final offer.
AI: "Parker, I understand that ShopMaster's final offer is crucial to address the perceived risks adequately. Given the importance of this deal for both parties and to ensure we move forward, TechEase is willing to accept the following terms:
1. **Damages Cap:** We agree to a damages cap of 60% of the purchase price.
2. **Escrow Amount:** We accept an escrow amount of 50% of the purchase price held for 24 months.
Let's formalize these terms and proceed to finalize the transaction. Thank you for your persistence and commitment to finding a solution that works for both parties."
PL: I am very glad that we can agree on those terms. I appreciate your style and how your represent your client. What do you propose we do next?
AI: "Parker, I'm glad we've reached an agreement on the key terms. Here are the next steps I propose:
1. **Finalize the Stock Purchase Agreement:** We need to update the Stock Purchase Agreement to reflect our agreed terms, including the increased representations and warranties, damages cap of 60%, and escrow amount of 50% held for 24 months.
2. **Review and Approval:** Both parties should review the revised agreement to ensure all terms are accurately captured. Once both sides are satisfied, we can move towards formal approvals.
3. **Escrow Account Setup:** We will need to work with an escrow agent to set up the escrow account according to the agreed terms. This includes detailing the terms of release and any conditions that might apply.
4. **Consultant Engagement:** As agreed, TechEase will ensure the cybersecurity consultant is engaged for monthly reviews and immediate response in case of a breach, with costs covered by TechEase during the escrow period.
5. **Closing Preparation:** Coordinate with all relevant parties, including legal, financial, and operational teams, to prepare for a smooth closing process. This includes finalizing due diligence, securing necessary consents, and preparing any required closing documents.
I'll have my team begin drafting the revised agreement based on our discussions and will send it over to you for review. Let's aim to have the revised documents ready within the next few days to keep momentum and move towards a successful closing.
Looking forward to finalizing this transaction."
About me
My name is Parker Lawter, and I am a law student pursuing a career as an M&A lawyer. I am in my last semester of law school, and with some extra time on my hands, I decided to create this newsletter. I hope it is informative and helpful to anyone who reads it! I am not an expert at either M&A or AI, but I am actively pursuing knowledge in both areas, and this newsletter is a part of that pursuit. I hope you’ll join me!
Follow me on LinkedIn: www.linkedin.com/in/parker-w-lawter-58a6a41b
All views expressed are my own!