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"I'd like to thank my lawyer"

This is one of my favourite expressions at each year's Academy Awards. We all like to give and receive thanks. This post is the story of how I convinced a client to not invest in a tax-driven commercialisation venture and how in appreciation he introduced me to the glory of Penfolds Bin 389 Cabernet Shiraz.

It was the last day of the Australian financial year, 30 June. It was many years ago. I was in Canberra with my client in one of the meeting rooms at of one of Australia's largest law firms. There was a deal on the table which I'd worked on for weeks and which we continued to work on that day. My client wished to make an investment of millions of dollars in a venture which was to commercialise an alleged aids drug technology. He was one of several investors. In return my client anticipated major tax deductions for several years.

Planning for the day began weeks ahead when I received no less than 10 centimetres of contracts and legal documents to read. They had been prepared by the same large law firm acting for the Australian branch of the aids drug venture. The documents had been structured on:

  • legal advice from that firm,
  • accounting advice from a tax-focused large accounting firm, and
  • patent advice from a large patent attorney firm.

Weeks before, working through the complex set of documents I became more and more confused as to the real intent of the venture. That's when I went to the photocopy room, took two A3 sheets of plain paper and joined them with a sticky tape. I spent the next day or two re-reading the papers and preparing and refining a graphic of the proposed deal. I needed the big picture, and the detail on how all the bits linked together.

On the A3 sheets I drew the numerous business entities referred to in the contracts, all created just for this venture. They included the inventor and a IP holding company in the US which I drew at the top of the sheets, a research arm in New Zealand and several company structures and a partnership linked to or operating in Australia, which I placed at the bottom of the sheets.

Onto the sheets I then added lines in various colours going up and down each side. I joined the entities with these colour lines to respectively illustrate the flow of legal rights, legal obligations, put and call options, and payments of advances and royalties. The graphic became and remains the most complex business structure I have ever drawn in my legal career. I've kept it as a historical memento and I use it as a training tool for young lawyers.

And then it suddenly hit me! The thought came quickly, though the reading and drawing had taken days. The thought was this - the venture was not designed with the intention that it would make a profit for the investors. My client was one of the "investors". It was the complexity of the graphic that sparked this Eureka moment. The sheer complexity of the venture as planned told me more about the real motivations driving it than any of the wording in the documents.

The implications of this insight about motivations were not all immediately apparent. Sure, I thought and my client noted, the venture could still work for tax minimisation purposes for my investor client. Sure those minimisation impacts were promised by the big accounting firm to be enormous and spread over many years. But what if problems arose, I noted, commercialisation is not a picnic - who was going to be responsible for management of the commercialisation venture? This was more of an issue if the venture's motivation was not profit-driven. Tens of millions were being raised from a range of investors, each of whom was being asked to sign a common set of standard contracts. They were beautiful documents, works of legal art, but they were to my mind now completely suspect.

It is common sense that if the real motivations of someone are hidden under spin, then there is a greater risk that they'll be caught out. Genuine motivations normally produce passionate devotion to the cause, clear and succinct document. It's harder to support a cause when you're living a lie. Liars can make dumb mistakes, leaving clues for detectives. They tell more and more stories, create more and more paper. In a career devoted to reading legal documents you can sometimes get very good at reading between the lines of such stories.

I thus entered a more intensive detective stage in my matter. I engaged a patent search firm to investigate the alleged intellectual property on which the entire venture was said to be based. I also called a tax specialist with a Phd in tax to shed light on the alleged tax-effective status of the venture. They both conducted research to test certain key claims made in the 10 centimetres of paper regarding the patenting of the technology and its tax status under Australian law. My focus remained on the intellectual property and commercial law issues and project managing the matter to provide unified advice.

It was I think at about 7.30pm on that fateful night of 30 June when the penny dropped. My nervousness had been growing for days. With my client keen to progress and wanting legal certainty a great weight was on my shoulders. I was seated across the table from the proponent of the scheme, with my client beside me eager to resolve the matter. For the last few hours the meeting room had become a telephone exchange, with me comparing notes with my cross-disciplinary team of advisers. The time was right, I had finally "got it".

ImageI looked the proponent in the eye, the project leader in the accounting firm, and I said words to this effect: "I've just been advised that the patent your scheme relies on, does not exist. It is a patent registration in the US for sure. But it is not as yet registered in Australia and hence your entire scheme can be challenged by the Australian Taxation Office as my client's investment would not be in respect of intellectual property currently recognised in Australia. The work done is flawed."

The proponent was dumb struck. I invited him to speak on the speaker phone to my team of advisers. They told him the raw facts.

No matter how many of his own specialists he then rang in the law, accounting or patent attorney offices advising him, they all said they had each looked at their slice of the picture and now mumbled disclaimers about having no responsibility for the effectiveness of the scheme in its entirety. They each spoke for their silo, not the venture as a whole.

My graphic and team of advisers had scored a direct hit against all three law, accounting and patent silos. They fell like ten pins. My client was in a bit of a shock, he took some more convincing but finally he decided he would not invest a cent in the venture.

It was a cold night. At about 8.30pm the heat which came off the angry proponent in the room seemed to exceed the heat of the air conditioning. My client made his decision, speaking quietly to the proponent he said: "I'm very disappointed by the unprofessionalism of you and your team. We're leaving."

My client and I sojourned to a nearby hotel restaurant. As our steaks arrived my client introduced me to Penfolds Bin 389 Cabernet Shiraz. A glorious wine shared as we clinked glasses and my client said "I'd like to thank my lawyer".

Bin 389 helps us end on a positive note as it is an Australian commercialisation success story. First produced in 1960, Max Schubert was the winemaker, together with his assistant, Ray Beckwith. Today it epitomises the Penfolds winemaking art of multi-regional blending. It uses grapes from South Australia. In Australia Bin 389 is often referred to as 'Poor Man's Grange'. But tasting it for the first time that 30 June night, I felt very rich indeed. And my client's thanks kept coming for years.


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