M&A Legal Strategy That Creates Value

The terms mergers and acquisitions are often used interchangeably but there are major differences between the two.

Mergers are a business transaction that occur when two business entities consolidate into one. Mergers will generally end amicably with the reduction of power between two companies in an effort to create a more profitable and successful business under one legal entity.

An acquisition is when one company purchases and takes over ownership of another company—often referred to as a takeover—meaning one company will end all operations and not exist after an acquisition. A company may seek to acquire another company in order to corner the market, expand product offerings, grow internal technology services, obtain intellectual property, reduce production costs, optimize tax strategies, as well as a number of other reasons.

Often the terms “acquisition” or “takeover” have a negative connotation and thus businesses have started to refer to acquisitions as “mergers” even if the term is not technically true. Also, recently, there has been the emergence of the term “mergers and acquisitions,” or “M&A” has become a term more commonly used as a general consolidation or combining of companies through a financial transaction whether that be through an acquisition, merger, tender offers, etc.

A hostile takeover is an acquisition made by the acquirer (company making a purchase of another company) of a target company (company that is being bought). The acquisition will occur when the acquirer goes through the shareholders to purchase stake in the target company or combat the target company’s management to gain ownership. This type of acquisition is considered hostile because the target company’s management does not wish to be acquired but are forced into an acquisition because the acquirer has purchased controlling interest of the company. In a hostile takeover situation, the target company will often seek legal counsel to fight off the acquirer.

The first part of the process in deciding which is the appropriate M&A strategy for your company is to review the most up-to-date financial reports, annual reports from the past three to five years, tax returns, shareholder agreements, a fair valuation of the company, and company structure (e.g., number of employees, structure of the company) of each company that will be potentially involved in the transaction. Once his information is carefully reviewed and analyzed a determination of the suitable M&A strategy can be made.

A merger must be approved upon by the majority or two-thirds of shareholders owning stake in a company.

When a merger occurs, the surviving organization will own all assets and liabilities of the two or more companies that have merged together. When an acquisition occurs, the acquirer can create a structure to transfer assets (and those assets’ liabilities) from the target company it has acquired without taking on other liabilities of the target company.

Companies must do their due diligence on the financial side of the business before approaching negotiations for acquisitions. By reviewing the most up-to-date financial report, year-over-year financial reports, tax returns, shareholder agreements, a fair valuation of the company, and structure of the target company, as well as other factors, can help mitigate overpaying in an acquisition.

It cannot be expressed enough that when going through a M&A deal a strong team needs to be set in place in order to do the company’s due diligence to avoid failure. An organization will need to put together a team of legal, financial and business professionals with expertise specifically in the M&A strategy that is being proposed. Often, these teams can consist of in-house and outside professionals. Legal counsel outside of the company are favorable as M&A lawyers have expertise in intellectual property, negotiations, contracting, cross-border negotiations, tax implications, M&A strategy, identifying regulatory issues, plus much more related to merger and acquisition deals.