A staple for business life, in this week’s blog we are looking at Mergers and Acquisitions or – for short – M & A.
As a business goes through the phases of M & A, recommended guidance is required, due to the ownership of the business being consolidated or transferred. When a business goes through this change it can include stages, including:
- Combining with another business
- Absorbing assets of another business
When asset ownership is part of a change, it is important to seek legal guidance or assistance, as there are many variants and nuances that can sometimes have hidden clauses, leading to potential misunderstandings or – at the very worst – accusations of aggression and takeover.
An instance of lawyers working on the combining of one business with another, or on acquisitions, could be where one business obtains a larger stake in the other without any major changes made to the structure of name of either company.
Mergers tend to be on good lines. Often the business actively chooses to merge for mutual benefit. However, in other cases as mentioned above, mergers can be more divisive. For example, in the case of recession, there could be a company trying to maintain in adverse economic conditions, which can lead to mergers leading to a level of defensive acquisition, which tends not to be so easy going. Often some businesses do not want to publicise they have been acquired, making the line between merger and acquisition hard to determine, and this can often lead to bad feeling. In the worst case scenario, a company who is aggressively seeking to merge might be cynically trying to ‘take-out’ the competition.
Lawyers who take on the work of M & A liaise with many professionals, including the client, boards of directors, financial directors and wider stakeholders (including shareholder representatives). The process is extensive, with all relevant documents needing to be drafted and signed off before the completion of a merger or acquisition, including due diligence and drafting agreements for all involved. In some cases, the merger or acquisition is relying on multiple layers of trust, and it would be very easy for that trust to be undermined should irregularities be spotted. Once trust on a mutual benefit merger has been tested, it can cause a lot of delay, and even cessation of the whole M & A process.
Understanding mergers and acquisitions
A simple way to understand M & A is by identifying it as the process of two or more companies that hold separate ownership seeking to operate under a ‘safe-roof’ to attain an objective, often either strategic or financial. On the surface, the distinction between mergers and acquisitions does not really make much difference – since the net result is often the same – although the transactions can differ. The important distinction to make is that it requires an opening that is more often economic to occur, which in turn leads to negotiations around the key principles of M & A and the identification of red lines and points of mutual agreement – essentially leading to a larger company holding a greater proportion of their respective market.
The merger – also called a consolidation – is a process where more than one company joins together with the larger entity continuing to exist. With the merger, the two or more individual companies no longer remain independent, but become one new enterprise. We have seen in the not-so-distant past times when the brand of a company being acquired is so significant that the larger company must preserve the image and name of that company. We have also seen examples when the holding company remains largely dormant – or out of the public eye – with the brands themselves taking up the market and advertising space.
These acquisitions – also known as takeovers – involve a process by which one company takes the assets from another. An acquisition is the purchase of a company by another and can be divided into various outputs. These are largely dependent on whether the stocks of the company are publicly or privately traded. Depending on how the company being targeted perceives the acquirer, acquisitions are not always nice. In fact, they can also be hostile. You might consider a significantly sized hedge fund that acquires on the one hand large stockholdings of prominent companies, whilst buying smaller businesses – with no plans to fundamentally change how they operate – but that are owned nonetheless. The value of the private equity companies significantly broadens the portfolio of the public owned stocks and shares based on the economic returns on investment and stability in their respective marketplace. Security brings larger offerings to a broader number of customers. Everyone wins.
There are positives and negatives in every process – even winners and losers – and that is why at the outset of this article we urged all involved to ensure they take the commensurate number of legal advices when going through the process of M & A deals, being ever aware of the legal implications affecting the purchase (acquisition) of a business by another or the combining (merging) of two or more businesses resulting in one potential new entity.
Key recommended points to address are:
Legal issues – these can be identified as the contract elements. What do the deeds of transfer and trust look like and how are they weighted between the entities seeking M & A? It is worth acknowledging that legal issues differ and arise at different stages of the acquisition process needing separate sequential treatment, and it is essential that your legal team are largely in the driving seat for these matters, as their guidance will literally mean the difference between success and failure for all involved. They are looking for the most equitable result for the party they represent, and even when you think that a point might be too much to concede, trust that they will be working out what will be lost on the swings will be gained on the roundabouts.
Due diligence – this can be defined as the process that identifies, denies or approves business reasons for proposed merger and acquisitions transactions. The key here is linked to the above. Your legal team will be there every step of the way to support your decision making based on a) the law, and b) the most equitable result for all.
Legal considerations to be acted upon:
- Have proof the target business owns key assets such as property, equipment, intellectual property, copyright and patents.
- Obtain details of past, current or pending legal cases.
- Understand the details of the businesses current and possible future contractual obligations with its employees (including pension obligations), customers and suppliers.
- Consider the impacts of a change.
For this, it is very important that you seek expertise to deal with due diligence.
Finalising the deal
Whenever looking at a potential deal, it is important to get confirmation and commitments from the business that is looking to sell. With this comes a level of comfort and assurance about this deal and asserts the commitment. This will ensure the selling business has confidence in their own company and the process. Indemnity is a commitment from the selling business. They will reimburse you in certain situations. This being said, you may need to get indemnities for things such as unreported tax liabilities. Warranty however is a written statement from the selling business that will confirm the factual information about the business. One of many examples of why warranty is important is that you may need it to protect business assets, debtors and creditors – especially if they have charges, wider security or personal guarantees against a particular director or set of directors/guarantors.
Within an organisational change, deals are often being made between corporate players, so strong commercial awareness is important. Understanding the ins and outs of a business is crucial alongside a particular set of market conditions that may have the ability to provoke M & A. There can be a lot of confusion with this transitional change, therefore expertise in areas of communication is essential. Details are imperative to remain in control and being extremely, overly organised is an absolute must. The client must receive an informative point of reference and be given the prerequisite time to analyse the documents before them.
Mergers and acquisitions can be very complex, therefore, to be well versed in business and commercial law is crucial. Working with a legal team that is understanding of the latest trends in business law, being able to liaise with you around professional preventative, and proactive legal advice that brings noticeable values to you and your business, will be the difference between success and failure.
If you are looking for advice around mergers and acquisitions, we would love to talk to you. Email us on email@example.com or call us on 0161 491 3933.