In-house counsel should act now to take advantage of the anticipated economic recovery by sharpening their efficiency in helping companies meet the demands of business growth, and by actively participating in business planning, according to experts.

Corporate legal departments will be in a good position to serve their companies when the economic recovery finally hits full throttle if they promptly complete a number of key administrative tasks, said William A. Wise, general counsel at Analog Devices in Norwood, Mass. and chair of the Boston Bar Association’s in-house counsel section.

In-house lawyers should “make changes to provide for a more efficient delivery of services in the future,” said Wise. “Review the quality of your legal files and reporting processes. Revise standard agreements and initiate a training program for managers on using standard forms. Evaluate your legal team’s support of sales, finance, [research and development], and purchasing.”

Another important activity, Wise and other in-house counsel suggested, is for corporate legal departments to spend more time with management to devise suggestions on enhancing business. This will also help in-house attorneys to better understand the business and future plans.

Investors and CEOs are starting to emerge from a “funk,” said Jack Bradley, president of Bingham Strategic Advisors in Boston.

“The economy was in the doldrums and all the buzz about the corporate scandals got people into a very defensive mode,” Bradley said. “They were being very risk averse. Now that the stock market has come back, people are starting to feel more positive about things.”

However, the news is still mixed. Despite a 20 percent surge in stocks since March, unemployment in the U.S. reached 6.4 percent in June — the highest level in more than nine years.

But the one truth about the economy is that it will recover eventually. And in this calm before the storm, now is the time for in-house counsel to get their houses in order, according to experts.

“Expansion of business opportunities will need legal support that is both timely and efficient,” said Wise. “If you have a small legal department, consider hiring part-time legal counsel to work on specific projects. Their efforts will afford them familiarity with the company, its business and managerial personnel. Plus, you will get information about their effectiveness from the business managers they support. When the demand comes, those who proved themselves are available as a full-time resource.”

Get Your House In Order

In-house counsel need to get comfortable with what the new expectations will be for successful companies, experts told New England In-House.

“There’s a higher level of expectation as far as where a company needs to be with products in the market and as far as where they’re at with clinical trials and the pipeline they have of products. The market is more rigorous,” said Michel Morency of Greenberg Traurig’s Boston office.

“We’re advising biotech clients to be more realistic about expectations,” added John M. Garvey of Greenberg Traurig. “Partnering with a pharmaceutical company and getting a deal closed in three months and getting into a large venture round shortly thereafter — it’s not going to happen. It’s going to take a lot more time.”

Given what will likely be the new climate, Morency added that clients are “tightening up their intellectual property, making sure their balance sheets are clear and there are no accounting problems. They’re cleaning up threatened or pending litigation so they can file their S-1s and maximize [their worth].”

Joseph P. Vrabel Jr. suggested assessing files and evaluating employee manuals and corporate governance policies.

“We fall back on documents we’ve always used before. When things slow down, go back and look at documents on everything and see if you can make them better,” said Vrabel, general counsel of Capital Risk Management in Framingham, Mass. and president of the Massachusetts Bar Association .

He also suggested thinking more about how a company will comply with Sarbanes-Oxley Act of 2002 and other legal reporting requirements. “You’ve got to pay a lot more attention in-house. The regulatory climate is such that if you don’t pay attention then you’re going to be in trouble,” he warned.

[See related articles on Sarbanes-Oxley, “Effective Records Retention A Must To Comply With Expanded Laws,” “New SEC Rules On Attorney Conduct Take Center Stage,” and “Best Practices In Adapting To ‘Sarbox’ Emerging.”]

These activities may not have an immediate impact, “but it may help you six or eight months down the road,” Vrabel explained.

Another activity that will yield fruit in the months to come is talking with management about procedures and policies, and sitting in on meetings with as many departments as possible, experts said.

The line that separates business risk from legal risk is not firm, observed Steven Goldberg, general counsel at Imagitas, a Waltham, Mass.-based sales and advertising firm.

“It’s extremely important that in-house counsel interject themselves into business meetings,” Goldberg said, “even if they just listen and shut up and make sure they understand what the company is trying to accomplish, so they really understand what the risks and opportunities are.”

Bradley suggested that companies should be aware of opportunities that might exist for joint ventures or mergers and acquisitions. The most appropriate targets are competitors “where people are looking down the road and realizing it’s time to exit the business, or where there are opportunities to consolidate in a geographic region or product line,” he advised.

Steven P. Reynolds suggested colleagues to prepare for acquisitions, new business alliances, new products, and international expansions. “As businesspeople come out of the bunker, that’s the natural tendency — to think about growth,” said Reynolds, senior counsel at Texas Instruments in Attleboro, Mass.

But, at the same time, don’t neglect takeover defense strategies.

“As competitors get more comfortable with their positions in the market, we may very well see more hostile-deal activity,” said Spencer D. Klein, as evidenced by the recent hostile takeover bids by Oracle Corp. of PeopleSoft, and the Canadian aluminum maker Alcan of its French rival, Pechiney.

“Remember, stock prices are low, so people with cash have a real opportunity to buy opportunistically, and borrowing costs are very low,” said Klein, head of M&A at McDermott Will & Emery in New York City.

Because recovery will come slowly, and because many were burned by the ramp-it-up policies of the late 1990s, many companies will be reluctant to increase costs and spending, favoring a more conservative approach.

One way to maintain lower costs is by outsourcing, Bradley added. “In general, companies are looking to stay very focused on what they do best,” he explained. “Look for ways to outsource other parts of the business, particularly administration. That’s immediately adding value to what the company’s product line is.”

And this is true for the legal department, too, Reynolds cautioned.

“It would be a big mistake for in-house departments to think that if times are better, now you get to staff up. Businesses are going to be very cautious about how they’re going to spend again,” Reynolds said. “Be conscious about how you’re going to handle increased legal work. You need to he thinking creatively about how you manage. It may mean managing in a more difficult environment.”

Reynolds suggested in-house counsel “think about preparing for the way in which the business mix might change [when the economy improves]. When things go bad, companies may be laying off people. That’s more contentious when the job market is poor. You see customer and supplier bankruptcies at a much higher level. Litigation tends to increase, too.

But the mix of issues changes as the economy improves.

“There will be a change in the mix and you’ve got to be prepared for that,” Reynolds said. “If your department hasn’t geared up to handle that, it needs to start thinking about ‘good-time’ work.”

Economic Recovery: When And How Much?

It looks to like an economic recovery is in the works, according to Alan Clayton-Matthews, public policy professor at University of Massachusetts, Boston: “The economy looks like it’s falling downward, but the leading indicators are positive: tech stocks, consumer confidence, consumer spending on automobiles. Also, we have large federal tax cuts coming that will affect the economy in the second half of this year.

He did temper his enthusiasm by noting that “the economy is still in decline. It’s losing jobs, there’s a high amount of layoffs, and incomes appear to be very weak.”

The recent CEO Economic Survey, conducted by the Greater Boston Chamber of Commerce and UMass Boston, reveals that companies appear ready to spend and hire.

The survey found that 46 percent of the region’s CEOs and senior executives plan to increase employment in the next quarter, while only 7 percent are likely to decrease employment. The survey also found that nearly 80 percent of CEOs and executives in all sectors plan to invest the same or more money in information technology, and nearly 70 percent will invest the same or more in capital equipment. 100 CEOs and senior executives were surveyed.

According to Clayton-Matthews, Biotech has supported the region’s economy throughout the recession, as have its related sectors, medical devices and pharmaceuticals. “It’s provided a lot of stability to the economy we wouldn’t have had otherwise,” he said.

And still the sector continues to improve, according to Morency.

“The biotech companies we work with are from very early-stage to publicly traded companies and they’re seeing different activities at different levels, but they’re all heading toward economic recovery,” Morency said.

“With very early stage companies,” he continued, “we’re seeing a lot more interest in strategic alliances. Everybody’s trying to get money. We’re seeing more venture capital interest. We’re seeing business plans.”

Later-stage companies in all industries are beginning to see more action in mergers and acquisitions, and mature, non-public companies are preparing to go public when the initial public offering (IPO) market heats up again.

“We’re seeing more mergers and acquisitions,” said Greenberg Traurig’s Garvey. “A case in point is the merger between Biogen and Idec Pharmaceuticals. That will make it the third largest biotech company in the United States, probably the world. There have been some S-1 filings of biotech companies, so they’re expecting to go public soon. They’re waiting to see who’s going to be the first one.”

M&A activity takes center stage when a host of conditions combine, including cash-rich companies with confident CEOs and a market that’s ripe for consolidation.

“There’s been a definite uptick in deal activity in the last month or two, a lot more discussion about deals that are credible,” said Klein. “Why is that? There’s a lot of factors. One is that the price of assets remains relatively low, but CEO confidence may be leveling off. That will allow those who can be opportunistic, those who have cash or are more comfortable with their stock price, to be able to engage in more significant activity.”

Another factor is that companies realize they’re going to have to buy revenue to grow, Bradley of Bingham added.

“They’re not going to save their way to prosperity,” he said. “People are realizing that if their business is going to grow they’ve got to look at revenue-enhancing opportunities. A lot of companies have to buy revenue because their industry or sector is probably ripe for consolidation.”

But there is a flip side to this, which will likely become a hallmark of the next economic upswing — deals are taking much longer to negotiate and complete than in the past. The failure rate is higher because of it.

Klein explained: “It used to be that people would announce they’re selling. There was a high level of interest and a deal would be signed very quickly. Now there’s a lot more due diligence and it’s being done in phases.”

In the past, Klein said, finding problems during due diligence was a call for pricing negotiations. Now it’s an excuse to walk away from the deal entirely, he said.

“It’s good, prudent business behavior,” Klein said. “Many of these transactions are bet-the-company transactions. Even for very large companies, the transactions are very significant in terms of the profile of the company and its financial success. Those transactions shouldn’t be engaged in lightly and should only be done when they make sense.”

Mixed Bag

Companies in New England are reporting a mix of positive and negative signs of economic growth.

For example, Analog Devices has seen six sequential quarters of growth, and contracting activity in support of new business is steady, according to Wise.

And while Texas Instruments’ main focus is semiconductors, a sector hit hard in the recession, the company’s division based in Attleboro, Mass. focuses on the automobile industrial market, which is as strong as ever, according to Texas Instruments senior counsel Steven P. Reynolds

“Auto and real estate, which are both very big indicators for us, have been robust in the United States,” observed Reynolds, immediate past president of the Northeast Chapter of the American Corporate Counsel Association. “The auto industry has had three of its best five years recently.”

But Vrabel doubts economic recovery is as close as many say.

His company, Capital Risk Management, Inc., buys and restructures distressed debt from banks.

“Banks put debt together and offer it as a pool and put it out to bid. I’m seeing as much debt being put out to bid as I’ve ever seen,” said Vrabel. “That tells me the economy is still bad.”

And Bradley pointed out that several areas of the economy have not yet made a move toward recovery, and no appreciable uptick in capital spending has occurred.

Garvey added that it is still difficult to get firm commitments from venture capitalists.

“If values were to start increasing, like double from where they are now, it would be a much better [situation] for our clients,” Garvey said. “We see that pharmaceutical companies a year ago were far more willing to do collaboration deals. Now they’re more in the acquisition mode, buying up assts of small biotechs. That indicates that it’s cheaper for them just to take them over.”

Everyone agrees, though, the recovery, when it comes, will be a slow one and that growth will be nothing like it was in the 1990s.

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