Mergers and acquisitions (M&A) can be a powerful means to grow a business and inflate your market share potential – if done appropriately. Numerous corporations have successfully relied on a merger and acquisition strategy and thrived, however, history reminds us that some corporations have not been so fortunate, mismanaging this important business pivot, resulting in significant losses. Several examples of highly successful companies’ that experienced an unsuccessful merger or acquisition, include:
- Microsoft's 2014 purchase of Nokia
- Caterpillar's 2012 purchase of ERA Mining Machinery
- HP's 2011 acquisition of Autonomy
- The 2008 merger of Wendy's and Arby's
- The 2005 merger of Sprint and Nextel
- The 2005 merger of Sears and Kmart
So why do some mergers and acquisitions fail then? Well, the reality is M&As are among the most complex moves a business can undertake, both financially and legally. In this blog, our Houston business lawyers address legal protections business owners should consider to successfully approach a merger and acquisition and avoid legal pitfalls.
Legal protections to consider to successfully approach a Merger and Acquisition
While M&As offer substantial growth and profitability potential, these strategies require a strong and broad-based plan to legally protect your company, particularly in (but not limited to) these areas: Sale of assets versus sale of stock, letters of intent, non-disclosure agreements, due diligence investigations, and closing transactions and post-closing obligations.
Sale of Assets Versus a Sale of Stock:
In making the decision to purchase an existing business, the buyer must first determine whether to purchase the assets of the business, or the stock of the business entity. If the business being bought or sold is a partnership, or sole proprietor, the purchase or sale of the business is frequently structured as a sale of assets and liabilities in lieu of stock. This is mainly so because these entities by their very nature do not have membership stock to sale.
An asset sale often demands a long preparation and negotiation time, however, the benefits of this includes flexibility for the buyer to selectively acquire certain assets and not others – possibly avoiding liabilities the buyer doesn’t want. The process of recording the assets and liabilities at fair market value becomes central to the deal, often requiring legal experience from Texas business lawyers with resources and professional connections to financial experts.
In a stock sale, the buyer acquires stock shares (or member shares) of another corporation or limited liability company. Generally, the name of the selling company, contracts and operations remain the same – just with new owners. This type of transaction requires serious due diligence on the buyer’s end to clearly understand what is owned, borrowed, leased and owed - and the deal can largely depend on the tax implications and future liability.
Letter of Intent:
In mergers and acquisitions, a letter of intent (LOI) is a proposal from the buyer that outlines the specifics and terms of the deal – from what is being sold to how and for how much. Traditionally, these agreements are not binding or enforceable in court (other than the confidentiality clause that may be included), however, LOI’s are still an important step in a merger or acquisition because it lays out the foundation of the final deal, which includes:
- Purchase price
- Terms and inspection(s)
- Closing date
- Length of market exclusivity
Non-disclosure Agreements (NDAs):
Whether the M&A transaction goes through or flops, a non-disclosure agreement, also known as a confidentiality agreement, helps to protect the buyer and/or seller’s company information, trade secrets and similar types of intellectual property assets such as marketing plans, client information and manufacturing processes. As mentioned above, these agreements are often included in a buyer’s letter of intent (LOI). When parties sign an NDA, they make a promise to not release sensitive information that’s shared with them. If this “promise” is broken, then the aggrieved party can pursue a breach of contract claim.
Due Diligence Investigations:
If you are considering any type of acquisition, merger, or major asset purchase or sale, then performing a thorough due diligence investigation is paramount in understanding the legal and financial big picture of the transaction and what you’re ultimately acquiring. The focus of M&A due diligence investigations often include gathering and analyzing these common areas of the target business or assets (in a sale of assets or sale of stock):
- Organization and strategic position
- Financial data, balance sheets, profit and loss statements and taxes
- Operational assets, physical assets and real estate
- Legal matters such as licenses, permits, intellectual property and insurance coverage
In today’s competitive marketplace, a proper due diligence investigation can be a considerable undertaking for a buyer – which is why retaining a skilled Texas business lawyer is highly recommended.
The closing structure of a deal is a means to address consent rights, required signatures, proper documentation, regulatory obligations, omissions, closing deliverables, provisions and determining whether the deal will conclude as a simultaneous signing or deferred closing. Provisions of the sale often include post-closing obligations that must be adhered even after the transaction is complete. This often includes:
- For the seller: A covenant not to compete, otherwise known as a seller non-compete, which restricts the seller from competing with the target company for a reasonable defined period of time and geographic area.
- For the buyer: Covenants to provide similar employee benefits for a period of time or to provide director and officer insurance and indemnification for outgoing directors and officers of the target company for a period of time.
Closing transactions can occur in-person with representatives from both sides and their counsel OR by phone, fax, e-mail or wire transfer.
Getting Started on your Mergers and Acquisition Deal
Houston-based law firm Hendershot, Cannon & Hisey, P.C., is an industry leader in business and health care law. Backed by nearly 30 years of experience facilitating mergers and acquisitions, our Houston business attorneys help our clients in a wide range of industries avoid legal M&A pitfalls, meet regulatory hurdles, and maximize on legal protections available to the transaction. Contact us today to see how our comprehensive, experienced approach to M&As can assist your company’s financial and growth goals.