The COVID-19 pandemic has had a widespread impact on businesses of all sizes, with some companies forced to cut operations, limit hours or reviewing other strategic alternatives. Many distressed companies are considering all options to relive the pressures, which include raising operating capital, downsizing office space, laying off staff, and/or applying for Small Business Association Loans or other loans. Alternatively, companies and management searching for an exit plan may seek an opportunity to be acquired by or combine with another company, fund or portfolio of companies. On the other side of this situation are the companies that are in a position to acquire those distressed company’s assets, shares or operations in furtherance of their operational and investment objectives.
Mergers and Acquisitions can be complicated, time consuming and expensive. Whether it is a share exchange, asset purchase, share purchase, or merger, it is important to ensure that business transactions are done correctly while minimizing as much risk as possible. Following are nine (9) considerations that may help ensure a smooth transition.
1. Building Your Team
Even if you have the most effective and experienced General Counsel and executive team, compiling a team of specialists from the beginning of the transaction process will help ensure that your company is protected. Depending on the industry and size of the transaction you should consider:
- M&A Outside Counsel: hiring an outside attorney that specializes in Mergers and Acquisitions and that has experience working on similar deals should help the entire process to go as smooth and as quickly as possible. The right attorneys can help you through the negotiations, navigate common pitfalls, avoid closing delays and provide steady counsel as challenging issues are resolved.
- Investment Banker: depending on the size of your company and the value of the assets or the shares, your firm may want to involve an investment bank to establish a “fair market value” for the company’s assets and/or securities. They can also help prepare and decipher financial models relating to the business. Most importantly, an investment bank can introduce buyers to sellers and help match compatible parties and strategic partners. They often charge a percentage-based fee, so having your outside M&A Counsel review investment banking contracts prior to execution is key.
- Other Outside Counsel: If your company does not have General Counsel that is knowledgeable in transactional matters, your firm may need to consider outside experts in Financial Services and Regulatory, Employment and Labor, Intellectual Property or other regulatory counsel (i.e. cannabis, privacy, Department of Transportation, State Contractors Board, ERISA, alcohol and tobacco compliance, etc.) to help with issues that are specific to the company’s industry, operations and contracts.
2. Confidentiality Protections
While building your team and before divulging any key, non-public information about your company, you need to prepare an iron-clad Confidentiality or Non-Disclosure Agreement (“NDA”). Before any meetings, conference calls, data or document sharing, both parties should execute an NDA that protects the company’s trade secrets and confidential information such as pricing and customer lists, sales history, financial projections, and other private data that adds to company value. It is important to work with your counsel so that the type of information, the way it is transmitted and stored as well as the jurisdiction of each party, is taken into consideration when drafting an NDA.
3. Outlining the Key Terms in a Letter of Intent
After the parties are identified and an NDA is signed, negotiations begin! With the help of your advisory team, the parties will exchange one or more offers, counterproposals and/or term sheets. Once the parties are closer to an agreement on primary deal terms, a Letter of Intent (“LOI”) may be prepared and executed. Your M&A Counsel will help to confirm and define key terms at this stage, which should avoid disagreements or other issues later in the transaction process. Major deal points such as purchase price, the number of shares to be issued or exchanged, the method and manner of payment, and any contingencies that may exist after closing (among others) should be outlined as clearly and concisely as possible in the LOI. The LOI is signed by both sides to memorialize the parties’ initial agreement and to provide a basis for the transaction steps to move forward.
4. Due Diligence
Depending on the size of the business, due diligence may be one of the most burdensome and costly parts of the transaction process. Each side will need to gather all corporate formation documents, employments agreements, leases, license agreements, stock grants, stock option plans, warrants, copies of litigation files, tax records, securities offerings, and any and all other documents related to the company and its operations, and assets. In order to provide the large volume of documents to the other side in the most efficient manner, the team may consider creating an online Data Room. There are several cost effective and secure options designed to facilitate a collaborative effort on the review of relevant information and the preparation of any necessary disclosure schedules. It is important to ensure you have gathered and analyzed all documents for the key terms and provisions that are important to the other side.
5. Disclosure Schedules
Full disclosure of key terms and provisions of contracts and other corporate documents is of the utmost importance in a corporate transaction. There is an old saying that “sunlight is the best disinfectant” which applies most directly to an M&A transaction with regard to Disclosure Schedules. The Disclosure Schedules usually take the form of exhibits to the definitive agreement and can take significant time to draft. The Disclosure Schedules are important because they help the parties fully understand key terms such as promissory note maturity dates, balloon payments registration rights, restrictions in leases, vendor contracts, golden parachute provisions and other items that could have material negative consequences on the acquirer. Also, listing and disclosing any threatened or pending litigation, state or IRS tax issues, or any other areas of possible liability in the Disclosure Schedules is typically required. Unfortunately, failing to disclose material contracts, events or information could result in defaulting on certain contracts, increased fees or interest payments, or even costly litigation.
6. Make Yourself Available for Closing
Your team will finalize the definitive transaction documents (e.g. Asset Purchase Agreement, Share Purchase Agreement, Merger Agreement, etc.). Once all due diligence is completed and both sides have performed and produced everything required by them, the deal will “close.” You should be sure to set at least a few hours aside on the closing day to allow for the signatures that will be required to finalize documents. Most closings now are done electronically, with signatures being digital and emailed to each side’s legal team, but senior executives or other signatories should be accessible to address last minute items that inevitably arise. Certain transactions require documents to be notarized, and, on rare occasions, parties may be asked to sign documents in person.
7. Challenging Employee Issues
Firms need to consider how a merger or acquisition will affect employees. Will the acquirer have its own team that it wishes to run the combined operations after closing? If there are redundant positions and terminations or lay-offs are to be considered, companies will need to navigate complex state employment laws and employee rights contained in employment contracts. Contract provisions that can be particular difficult include, among others, burdensome termination requirements, rich payout obligations (i.e. the “golden parachute” provision), options vesting acceleration. An advance, detailed review of all employee matters will allow your company to proceed more smoothly through a transaction.
8. Intellectual Property Issues
For some companies, the most valuable asset is intellectual property. Logos and slogans can have a tremendous amount of value and business goodwill associated with them. Patents for novel inventions can be invaluable. Post-closing, it is important to remember to transfer ownership of the trademarks, copyrights or patents with the USPTO, U.S. Copyright office or state. Also, ensuring any parties to existing license or royalty agreements are notified and updated regarding the transaction is critical. Firms may need to amend existing contracts to continue intellectual property arrangements. Of course, if your company owns service marks or patents that are not yet formally protected through registration, securing those protections before a transaction is likely to benefit your transaction.
Some transactions will require shareholder approval before closing. Others, depending on the bylaws, operating agreement, or state statutes, require a simple notice to the shareholders after a transaction is complete. Private companies have more flexibility with these types of communication, as publicly traded companies need to make sure they comply with any Securities and Exchange Commission requirements (usually a series of Form 8-K’s being filed in the EDGAR system). The parties should agree upon a press release strategy to announce transaction information to the public and consumers. Either way, it is important that your team properly reviews all public communications to avoid any misrepresentations or other legal pitfalls, and to ensure that the proper message reaches your customers and the broader marketplace.
Generally, each merger and acquisition will require focused oversight by your legal, accounting and management teams and should be entered into thoughtfully, deliberately and with a smart strategic plan. Each transaction is unique and while the 9 considerations above are important and useful, having a solid team on your side is mandatory to minimize the potential liabilities and to successfully navigate the transaction process.
For more information on these and other considerations mergers and acquisitions, please contact us at email@example.com or at (619) 298-2880. We are here to support you.
JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters. For more information, please visit https://www.jackolg.com/.
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The Risk Management Tip is published solely based off the interests and relationship between the clients and friends of the Jacko Law Group P.C. (“JLG”) and in no way be construed as legal advice. The opinions shared in the publication reflect those of the authors, and not necessarily the views of JLG. For more specific information or recent industry developments or particular situations, you should seek legal opinion or counsel.
 An LOI is often also called a Term Sheet or Memorandum of Understanding.