Legal Considerations for M&A

Selling or acquiring a company or business—or any other transaction that falls under the general category of mergers and acquisitions (M&A)—can be one of the most significant and complicated processes that a founder will encounter. While this article will focus on the perspective of a sale, as that, along with an IPO, is the most common exit transaction for a founder, many of the concepts described below also apply in the context of an acquisition. Although a company or business sale is fundamentally a business transaction, it is one that necessarily involves complex legal issues that touch on a wide variety of different types of law, including corporate, tax, employment, and intellectual property, just to name a few.

In order to both maximize the value of the company or business being sold and to minimize the time, expense, and frustration that can be associated with the process, you must carefully prepare the company or business for sale, ideally before seeking a buyer and starting the negotiation process. This consists of a number of steps:

1. Engage appropriate legal counsel

A critical initial step in the process should be to engage competent and experienced M&A transaction counsel. Although you may already have a relationship with other outside counsel, our recommendation would be to engage counsel specifically trained and experienced in M&A deals given the unique nature of the subject, and the fact that such counsel will have better insight into market practice and expectations for deal terms. Depending on the specific facts of the transaction, you may also need to engage legal counsel in specialized areas, such as tax, IP, antitrust, and labor and employment, which your M&A counsel can assist with. Legal counsel are primarily responsible for drafting and negotiating the transaction documents (except in an auction-type situation, the buyer’s counsel typically is responsible for the first draft of the acquisition agreement), and can assist you and/or your management team to create a data room for due diligence and facilitate the due diligence process.

2. Conduct sell-side due diligence

Prior to a buyer conducting due diligence, the selling company or business should conduct its own due diligence to confirm that there are no issues that could delay or otherwise adversely impact the transaction, including the need to obtain any required consents or approvals, such as internal corporate (e.g. board and/or stockholder), regulatory, and/or third-party approvals. If you discover any such issues, you can use this period to resolve them or develop negotiating strategies to deal with them. In addition, information that you obtain during the due diligence process can be used to prepare the “disclosure schedules” to the acquisition agreement, which consist of (i) certain information that the selling company or business is affirmatively required to provide to the buyer by the acquisition agreement and (ii) exceptions to the seller’s representations and warranties provided in the acquisition agreement. Some specific examples of the types of due diligence that you should consider performing include:

• Preparing appropriate financial statements—which may consist of audited GAAP financial statements—and other financial information, including possibly financial projections, given the size of the transaction;
• Reviewing corporate records to confirm that, among other things, the selling company is qualified to do business and in good standing in all necessary jurisdictions; all organizational documents are up-to-date and comply with applicable law; and all equity has been issued in compliance with applicable law and the organizational documents;
• Reviewing material contracts to determine whether they include change of control, anti-assignment, or other provisions that may be triggered by the transaction and that could have an adverse effect on the company, business or buyer going forward;
• Determining whether any assets to be transferred as part of the transaction are subject to a lien or other encumbrance (which will likely need to be removed prior to the deal closing);
• Confirming that the selling company or business has ownership of or sufficient right to use its key intellectual property;
• Reviewing the status and transferability of any governmental permits or licenses required for the operation of the selling company or business; and
• Reviewing all outstanding legal claims or other litigation against or by the selling company or business, and developing a process for how to address any such claims or litigation that cannot be resolved before the closing.

3. Prepare diligence materials for buyer

During its own due diligence process, a selling company or business should start compiling documents and information to be provided to a buyer for the latter’s due diligence. Typically, a buyer’s due diligence access will be provided through an online data site (often referred to as a “virtual data room”). While a buyer usually provides a list of requested due diligence materials, it will almost always seek to obtain information and/or documentation regarding the selling company’s or business’ financial statements, corporate records, organizational documents, capitalization, material customer and vendor contracts, assets (including key intellectual property), employees and employee benefits, governmental permits and licenses, litigation, real estate and insurance.

4. Structure the transaction

A threshold issue to address at the outset of any M&A transaction is the structure of the deal. The three principal ways to acquire a business consist of (i) an asset acquisition, (ii) a stock acquisition, and (iii) a merger, each of which is further described here.

5. Negotiate the terms

Either in conjunction with or following the buyer’s due diligence, the parties and their representatives, including financial advisors (if any) and M&A counsel, need to negotiate the terms of the transaction. Although every transaction is unique in some respects, certain key provisions that are commonly negotiated in almost all acquisition agreements are described here.

6. Signing and closing

Once the deal documents have been fully negotiated, the parties can move to signing and closing. Certain M&A transactions—typically those that do not require significant (if any) third party consents, whether governmental/regulatory or otherwise, to be consummated—can be signed and closed simultaneously. A simultaneous signing and closing eliminates transaction risk during any intervening period and thus is generally preferable for sellers. However, a simultaneous signing and closing may not be possible for legal or practical reasons, such as if the deal is conditioned on the receipt of third party approval or the buyer obtaining financing. When signing and closing are not simultaneous, there is a separate signing stage that is usually less complex and involves fewer documents and actions than closing. The parties’ M&A counsels will generally coordinate all aspects of both signing and closing, including obtaining the necessary signatures and compiling and circulating executed versions of the required documents. Once closing occurs, the parties must address any post-closing matters, such as making any required state filings and satisfying any additional obligations required by the transaction documents, as applicable.

Although the M&A process might seem overwhelming at first, with the right advisors and a considered approach, it can result in tremendous benefit to all parties involved, and in particular founders desiring a successful exit.

Assaad Nasr, Guest Writer, is a Corporate Partner and Co-Head of the M&A group at Buhler Duggal & Henry LLP

The information in this article is provided solely for general educational purposes and is not intended as legal advice. This article should not replace competent legal counsel from a licensed attorney in your state. 1984 and its affiliates expressly disclaim any and all responsibility and/or liability for any consequences resulting from the use of this article or any other document found on 1984’s website.