Corporate lawyers in Spain facing pressure on fees – Araoz & Rueda

In a competitive M&A environment, investors are extremely reluctant to spend money on legal services at the outset when there is doubt that a prospective deal will be completed

Spanish law firms are under increasing pressure from financial investors to offer free advice in the preliminary stages of deal auction processes, says Pedro Rueda, partner at Araoz & Rueda in Madrid.
“Over the past year or so, the M&A process in Spain has become very competitive for financial investors such as private equity houses and venture capitalists,” says Rueda. “Unlike industrial players, who prudently devote their efforts to a specific acquisition within the same industry, private equity houses and venture capitalists are coming up against plenty of new players in the marketplace with lots of money.”

Crowded market
Consequently, with fewer opportunities and everyone targeting the same deals, these financial investors are looking beyond larger deals and setting their sights on mid-sized ones. “The fact that they are competing in such a crowded marketplace is obviously having an impact on many different aspects of the auction process,” explains Rueda, citing by way of example how bidders are now completing deals with their own resources as they are no longer given any time to negotiate the financing with funders. “Financial investors are now willing to refinance the deal and structure the debt afterwards, because they know that if they are seen to have financing problems, a second bidder will immediately come and take their place.”

Reluctant to spend
However, Rueda says that in the rush to complete deals, financial investors are less willing to spend as much money on the initial stages of the auction process. Traditionally, bidders would make comments to the sellers by way of a new draft of the SPA (sale & purchase agreement), showing changes they would make to the contracts. This process would usually involve the purchaser paying a lawyer to prepare those mark-ups, or any extra agreements relating to the transaction. However, clients are aware they are less likely to complete a deal given the fierce competition, so this makes them more reluctant to spend money on legal advice on a transaction that may never happen, explains Rueda. “Now bidders have become more conscious of the fact that they are competing for the same deal and are therefore more conservative with respect to those initial expenses,” he says. “They want to bypass the process of creating a new draft of the SPA and just send general comments to the vendors, along the lines of ‘if we succeed we will make these changes’.”

Less profitable
This has enormous implications for lawyers, says Rueda, as it can be the difference between spending two or three hours summarising a document with bullet points and working 40 to 50 hours to present a comprehensive mark-up. As a result, the work of legal advisers on such transactions is diminishing, explains Rueda. “It’s a huge contrast in workload,” he says. “And while we can turn around the comments to the clients quickly, it is obviously far less profitable for us.”

Something for nothing?
Furthermore, with financial investors so concerned about only spending money on the competitive process once they have won the auction, lawyers are increasingly being expected to do this preliminary work for free – the idea being that, if the client ends up winning the deal, then the lawyer will get paid. “Financial investors argue that as they are the generator of business, if the lawyer doesn’t get this deal, they may get the next deal and recuperate what we have just written off on doing the first initial steps for free – they tell us that we’re their partner and therefore we must run the risk.”

Not a real partnership
Lawyers must therefore be willing to have some difficult conversations before any work is done, says Rueda, because the fact that these financial players “call into question the fee scale on every single deal and will happily work with another firm without a second thought is proof enough that this is not a real partnership”.