This article has been written by Ramanuj Mukherjee, CEO, and Abhyuday Agarwal, COO at LawSikho.
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, by performing contract drafting work.
I think the pricing of a Shareholders Agreement or SHA is one of the most fascinating subjects that will give you a good glimpse into the earning potential of corporate lawyers.
In more than one practice area of a law firm, the majority of the partners perform SHA related work for a vast majority of their time.
This is something that contributes a lot to the revenues of the 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 the 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 INR 30,000 to INR 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’ve 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 INR 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. Since the advent of the startup economy in India, a lot of lawyers who earlier worked for big law firms and handled big deals, have moved into the startup market to build an independent practice or to build their own law firms.
Opportunities are very high because more startups are being created and they are scaling very fast by receiving VC funding. These VC-funded startups need to scale up rapidly by signing up more clients, hiring more employees, consultants, etc. therefore need many things to be well-documented through contracts.
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 INR 1 lakh 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 by these firms, unless they are combined with 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 specific teams and partners for M&A, PE, VC, 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. They offer very cheap rates especially to bag long-term clients, as they tend to have many mouths to feed back at the firm, where they are trying to grow the team and reputation.
Earlier all the big deals, where hundreds of millions of dollars were being invested or huge corporations were being acquired, used to exclusively go to the 7-8 big law firms.
Things have since changed since then. The newer law firms, often referred to as 2nd or 3rd tier law firms, and other boutique law firms have really dented the market by offering 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, although much cheaper, are not less in service quality than their expensive counterparts.
Big law firms are able to charge up to INR 30-40 lakhs in some large deals for negotiating the SHA or SSPA. However, INR 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 (ROFR), etc, which are yet to be tested in the court of law.
One example is the Reliance and Future Retail deal, which has been approved by regulators like the Competition Commission, but Amazon alleged a violation of the ROFR clause in a Singapore arbitration, because Future Retail did the deal with Reliance without offering an opportunity to Amazon to take the deal.
Navigating these complex matters 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 jumps 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 sorts 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% shareholding who wants to buy another 10%, will look completely different.
The situations are complex and they differ every time. Every company has a unique set of opportunities and risks.
Every investment fund has a different objective from 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 that the drafting and negotiating of SHA is one the best paid legal work.
This is why big companies and funds started by giving 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, and they still send over some specialised parts of the deal to law firms.