In the fast-paced world of business, mergers and acquisitions (M&A) play a pivotal role in reshaping industries and corporate landscapes. However, beneath the surface of these transformative deals lie complex legal challenges. From due diligence to closing conditions, it is important for business leaders to understand the legal intricacies of these transactions to better ensure a successful M&A transaction.
1. Negotiating the deal
The details matter. Taking the time to get all the proper paperwork in order is a fundamental step to the success of the M&A transaction. At the outset of any M&A deal, both the acquiring company and the target company may sign Non-Disclosure Agreements (NDAs). These agreements can help to protect sensitive information shared during due diligence.
Another important document, the Letter of Intent, is generally a non-binding contract that outlines the buyer’s interest in the deal. It can include the proposed deal structure, initial purchase price range, and an exclusivity period.
Next, the parties will negotiate the deal structure. Two common options include the stock deal or the asset deal. With the stock deal, the buyer directly purchases the selling shareholders’ stock, gaining ownership in the seller’s legal entity. In an asset deal, the buyer acquires the operating assets of the business instead of stock shares.
2. Processing the deal
Although there is an expectation of self-disclosure, the buyer is wise to conduct thorough due diligence of any target entity. Buyers need to carefully assess financials, contracts, intellectual property, and potential risks of the target company.
The legal landscape for the impact of these disclosures is constantly evolving. The buyer is wise to take the steps needed to protect their interests throughout this process which can include a careful review of the following:
- Equity and cash: Review documents to get information about the mix of equity and cash. It affects tax implications and shareholder interests.
- Working capital adjustment: Buyers and sellers adjust the purchase price based on changes in working capital between signing and closing.
- Representations and warranties: These are assurances made by the seller regarding the company’s condition. Breaches can lead to disputes.
- Non-competes and non-solicits: Agreements preventing sellers from competing or soliciting employees or customers post-deal.
Although the exact steps will vary depending on the details of your specific deal, the steps noted above are broad examples involved in most M&As.
3. Closing the deal
Before finalizing the deal, buyers are wise to seek indemnification from sellers for any undisclosed liabilities or breaches of representations and include conditions that must be met for the deal to close, such as regulatory approvals or financing. Once these steps are complete, the buyer can move forward with the final contract detailing all terms and conditions of the transaction.
M&A litigation often arises due to a breach of fiduciary duty, inadequate consideration, or disagreements over terms. Legal tools, such as robust contracts and thorough due diligence, can serve to help resolve disputes and better ensure successful M&A transitions.