The legal aspects of an M&A deal are as important as the financial aspects. Let’s see why.
A target company and an acquirer should carefully prepare and draft all the necessary documents and regulations to close the deal with no losses or undergo regulatory approval successfully. For this, they cooperate with M&A legal specialists who assist both sides at every stage of the M&A transaction.
What is M&A law? What are the main legal aspects of mergers and acquisitions? What is the role of legal firms in the M&A process? Continue reading to get answers and learn more about mergers and acquisitions law.
What is mergers and acquisitions law?
Mergers and acquisitions law refers to the branch of corporate law that addresses the area of mergers and acquisitions specifically. It tackles all the legal aspects that come with the process of a merger or acquisition, from the negotiation of the deal value to the contract drafting.
M&A are complex transactions that involve several legal aspects and that’s why it’s essential for a company to take care of all the legal risks associated with an M&A operation. That’s exactly how merger and acquisition law specialists help a company. They communicate with clients, lawyers, and business executives and handle all the documents: from financial statements to intellectual property and the definitive agreement.
Top 11 legal issues in mergers and acquisitions
Generally, all the legal aspects of mergers and acquisitions examples a company deals with can be divided into three main stages:
- Getting the deal
- Processing the deal
- Closing the deal
These are the main legal aspects that occur at each stage:
Getting the deal
- Non-disclosure agreements (NDA)
- Letter of intent (LOI)
- Deal structure
Processing the deal
- Due diligence
- Equity and cash consideration
- Working capital adjustment
- Representations and warranties
- Non-competes and non-solicits
Closing the deal
- Target indemnification
- Closing conditions
- Definitive purchase agreement
Now, let’s review in more detail what each of these legal issues presupposes.
1. Non-disclosure agreements (NDA)
Every M&A deal starts with the signing of NDAs for both parties: the acquiring company and the target company. This document serves as protection for the buyer and seller to share sensitive information with each other during due diligence.
2. Letter of intent (LOI)
A letter of intent is a non-binding contract that a buyer sends to the seller to demonstrate an interest in a potential deal and make a formal offer for the company. This usually includes the exclusivity period, proposed deal structure, and initial purchase price range.
3. Deal structure
Typically, there are three options for structuring the deal:
- Stock deal: the buyer purchases the selling shareholders’ stock directly. In this way, the buyer gets ownership in the seller’s legal entity.
- Asset deal: the buyer aims to purchase the operating assets of a business instead of stock shares.
- Merger: mergers, together with acquisitions, are a widely adopted strategy for companies looking to increase value, achieve growth, or expand market share.
Both sides of the deal have their own legal interests and considerations within each option. That’s why it’s important to address all the legal issues when negotiating the deal structure and deal strategy (for example, a divestiture strategy approach will differ from an investment strategy). Every deal structure has different legal ramifications, such as tax consequences, transferring liability, shareholder approval, and third-party contractual consent requirements.
Mergers and acquisition law specialists tackle these issues and help to determine the most appropriate deal structure.
4. Due diligence
Legal due diligence is one of the key processes that law specialists are involved in during the deal. This is a process of thorough analysis and review of the target company’s documentation to make sure it’s ready for the deal and to reduce any legal risks that can lead to litigation. Often, companies have their own ready-to-use legal diligence template to follow that makes the due diligence process even more straightforward.
5. Equity and cash consideration
This stage of the legal M&A process involves consideration of the deal payment method. It can be either cash or equity. Naturally, lawyers take part in such negotiations.
6. Working capital adjustment
The process of working capital adjustments is often a part of the purchase price negotiation during mergers and acquisitions. This is because the acquiring company wants to make sure the target has adequate working capital that enables it to meet its before- and post-closing requirements, including obligations to trade creditors and customers.
Working capital calculation helps to avoid such problems as best collection or delayed inventory purchasing.
7. Representations and warranties
Representations and warranties are essential for the acquisition process.
An acquiring company expects a target to include representations and warranties in the definitive agreement. This means that the target has addressed such issues as taxes, financial statements, authority, capitalization, legal compliance, intellectual property, data privacy, and material contracts.
Mergers & acquisitions law specialists should carefully consider this area with the target to avoid indemnification claims from the acquirer in case of breaches.
8. Non-competes and non-solicits
These regulations are important legal aspects of almost every large M&A deal.
Non-compete and non-solicit agreements are the target company’s or acquirer’s legal promise not to engage in any competitive business activity for the defined time frame. This is a kind of legal insurance that allows for protecting intellectual property, which is unique to specific industries, such as tech and medicine.
9. Target indemnification
This is the essential part of the closing conditions negotiation in mergers acquisitions law.
Target indemnification is another opportunity for the acquiring company to protect itself against contractual breaches from the target company.
These terms describe what types of indemnification clauses lead to the deal’s annulment and specify the procedure of the target company repaying the pre-agreed amount up to the value of the closing price.
10. Closing conditions
Closing conditions are usually a section in a definitive agreement that lists all the conditions which must be met by both sides to close the transaction. Sometimes the list of required closing conditions is included in the letter of intent.
Typically, closing conditions list such requirements as board approval, shareholder approval, absence of any material changes in the target company’s business, and certain financial conditions.
Acquirers usually require at least 90% of shareholder approval to avoid potential complications such as appraisal claims.
11. Definitive purchase agreement
This is the final agreement between an acquirer and the target company, which represents the deal’s closure.
Given its irreversible nature, legal specialists on both sides should carefully draft this legally-binding document carefully before signing it.
Mergers and acquisitions litigation
This part of mergers and acquisitions law deals specifically with types of litigation that can occur during the pre- and post-signing process:
- Hostile tender offers
A hostile tender offer is an offer being made directly to the shareholders, without consulting it before with the board of directors.
- Central banks
Will central banks abandon their tightening cycles as an answer to the financial stability risk increase or will they keep policy tight to lean against inflationary pressures?
- Breach of fiduciary duty
Such a breach happens when a fiduciary behaves in a manner that contradicts their duty, for example when someone who has the responsibility to act in the interests of another fails to do so.
- Appraisal claims
In M&A, appraisal rights defend shareholders’ interests, guaranteeing that they receive adequate compensation in case the merger or acquisition process overrides their wishes.
- Poison pill cases
A poison pill case is a defense strategy put in place by the directors of a public company to avoid third parties (such as competitors, activist investors, or other would-be acquirers) get control of the company itself by acquiring large amounts of its stock.
- Proxy contests
A proxy contest is when a shareholder or a group of shareholders attempt to gather enough shareholder proxy votes to win a corporate vote.
- Material adverse effect
In M&A, a material adverse effect is a change in circumstances that negatively impacts the value of a company.
Legal specialists would be the ones to consult an acquirer or target company on various issues such as conflicts of interest, disclosure obligations, change-of-control payments, or required deal protection measures.
Role of M&A legal firms in the M&A process
M&A legal firms deal specifically with mergers and acquisitions and, therefore, have the expertise required to conduct deals smoothly and efficiently.
M&A legal firms provide various services to their clients, including assistance with the due diligence process, negotiation, and contract drafting. They assist the buyer or the target company with all the legal aspects of the M&A transaction and all types of possible litigation.
Key takeaways
- Mergers and acquisitions law deals specifically with the legal aspects of M&A transactions. These usually include everything from the letter of intent to the closing conditions and definitive purchase agreements.
- M&A legal firms assist the buyer and the seller at every stage of the transaction and handle legal issues to avoid possible complications, such as all types of litigation.
