This article is written by Ramanuj Mukherjee, CEO, iPleaders.
Many law students and litigators ask me how much a corporate lawyer can earn, especially if they practice independently or start a new law firm. I think the pricing of SHA is one of the most fascinating subjects that will give you a good glimpse into the earning potential of corporate lawyers.
In law firms, in more than one practice areas, what the majority of the partners do for a vast majority of their time is SHA related work. This is something that contributes a lot to the revenues of law firms, possibly more than a non-corporate lawyer would imagine. M&A, Private Equity and Venture Capital work largely include drafting SHA or SSPA (Share Subscription and Purchase Agreements) apart from due diligence and a bit of deal compliance.
Outsiders think that there must be a price range. Insiders know that the answer is much more complex.
In course of doing research on this article, I spoke to around 6 lawyers, including law firm partners, individual practitioners, founders of boutique law firms that specialize in investment deals and young lawyers who frequently work with startups at considerably low rates. The range I got was Rs. 30,000 to Rs. 40,00,000. Pricing varies wildly, not only from one service provider to another service provider but also from one deal to another.
At the bottom of the food chain, there are individual lawyers who would work on a small deal. They may draft an SHA for INR 30,000, usually for an early stage investment in a startup. I never heard of a smaller number, and finding someone who will competently draft and negotiate an SHA at that rate is quite hard. You have to find a very young lawyer to do it at that rate. A more likely number would be something above Rs. 60,000. However, it seems there is significant undercutting and competition going on at this level, and prices fluctuate a lot.
In recent times, the market has been flooded by lawyers looking for this kind of work, as since advent of startup economy in India, a lot of lawyers who earlier worked for big law firms and handled big deals, moved into the startup market to build an independent practice. With a wider supply base, the price has significantly come down.
The boutique law firms that are known for investment law work will easily charge much more. Some of them will aim for 1% of the deal value as the fee, which means they will get 1 lakh for per crore of investment. This is on the higher side though. Some of them refuse to negotiate on price because reducing price to get a client can send long-lasting wrong signals to the market.
Boutique law firms tend to get high quality, specialized work, the partners are known for their specialization, and often command better hourly rates than some of the bigger law firms, especially compared to junior partners at these big law firms.
Such boutique law firms will easily charge 3-4 lakhs for a 10 crore investment or acquisition. It is rare to be able to charge over 5 lakhs for a transaction for these firms though unless combined with very extensive due diligence.
Of course, with the complexity of deals, prices also increase. If there are several groups of investors involved, that increases the number of negotiation points, markups, the volume of paperwork, and the number of moving parts to track in a deal. Therefore, the price goes up significantly. Usually, such late-stage investment deals involving many investors are handled by more mature firms with more experienced hands on deck.
Next comes the full-service law firms, with M&A, PE, VC specific teams and partners who are responsible for growing these practice areas. These law firms, especially if not tier 1 firms, tend to be aggressive in matters of pricing, offers very cheap rates especially to bag long-term clients, as they tend to have many mouths to feedback at the firm where they are trying to grow the team and reputation.
Earlier, big deals where hundreds of millions of dollars are being invested or huge corporations are being acquired used to exclusively go to the 7-8 big law firms. Things have since changed. The newer law firms, often referred to as 2nd or 3rd tier law firms have really dented the market by offering much cheaper prices and comparable service levels. Also, the big companies and their in-house legal teams have come to appreciate that these newer crop of law firms are much cheaper but not necessarily any lesser in service quality than the much more expensive ones.
Big law firms are able to charge up to 30-40 lakhs in some large deals for negotiating the SHA or SSPA. However, 8-10 lakhs are more realistic targets for them as well. In many of these matters, a fixed fee has become the norm though law firms prefer an hourly billing model.
Why is it so expensive to get an SHA drafted or negotiated?
The jurisprudence around SHA is not really settled. There are a whole lot of standard clauses in a typical SHA, such as tag along, drag along, reverse vesting, Right of First Refusal etc, which are yet to be tested in the court of law. It is dangerous territory for even in-house counsels, and they are not ready to put their neck on the line on how these will be decided in the future. It is much safer to hand off the responsibility to outside counsels who do this work day in and day out.
Also, SHA or SSPA are complex documents, often running into hundreds of pages. This kind of work is quite rare in most companies. The exclusive knowledge and experience needed to do this work, therefore, develops only in law firms that handle M&A and investment related work. If a new lawyer who did litigation all his life jump in to do an investment deal, he will be quite out of depth and there will be a huge learning curve.
Also, those with a better understanding of venture capital, PE and even specific technology industries and insider knowledge of these enterprises tend to do much better in negotiations.
Most other contracts over time tend to become standardized. For example, IP assignment agreements. There was a time when these sort of agreements were unusual in India, and very few lawyers had the skill set to draft or negotiate them. Law firms used to charge a premium to draft assignment agreements. However, over time enough lawyers and law firms worked on it, and now it is a staple agreement, and every company with IP and a legal team probably has several templates which they reuse every time there is an assignment of IP.
This never happened with M&A or investments. The agreement you sign when there is a majority shareholder investing additional money, and the agreement you sign when there is an investor with 5% buying another 10%, will look completely different. Situations are complex and differ every time. Every company has a unique set of opportunities and risks. Every fund has a different objective than another. Investors have a different stomach for risk and every founder has different priorities and unique ways to negotiate. Highly customized solutions become necessary in these circumstances. And this inability to standardize the documentation around deals is perhaps the biggest reason for drafting and negotiating SHA is one the best paid legal work.
This is why big companies and funds started by outsourcing this kind of work to law firms, and it became the norm over time. Some big companies have begun to hire their own in-house M&A lawyers now, especially when they plan on many acquisitions or strategic investments in years to come, but it is still the exception rather than a trend.
What does the future hold?
If you want to be an M&A lawyer or investment lawyer, you must learn to draft and negotiate SHAs. Which is why we dedicate a significant portion of our diploma course on M&A, Investment and institutional finance law course to teaching you how to draft and negotiate SHAs. You don’t just read some study materials or watch some videos, but have to work extensively on exercises that deal with realistic scenarios you will face when you begin to do this sort of work.
And yes, this is an area of work which holds a lot of promise in the future. Investment in the Indian economy is not about the slow down, nor will consolidation through M&A. And this is the sort of legal work that will always be the domain of experts than generalists, so by specializing in M&A you are likely to do very well in the long term.
Just make sure you are well prepared with knowledge, basics and concepts when you show up for that interview. Let us know if we can help you with that.
Our next batch of M&A course is starting from 1st of November. The last date for enrollment is 30th October.If you have read so far, you definitely have some interest in the subject, so don’t miss the opportunity to join this batch. There are only 20 seats, and we take students on first come first served basis.