What Is Mergers and Acquisitions Law?

Deciding to merge with or purchase another company is a big step for any business. It will require a lot of research, due diligence, and negotiation to ensure the process goes as smoothly as possible. The following overview will give you a look at basic things you should know before starting your merger or acquisition.

While your business team may be able to accomplish some parts of an M&A transaction independently, having a lawyer’s guidance is essential to many steps of the process.

Understanding Mergers and Acquisitions Law

Mergers and acquisitions (M&A) is an area of corporate law involving “transactions between two parties, where one is selling and the other is buying,” says Stan Doida, a mergers and acquisitions attorney at Doida Crow Legal in Denver, Colorado. “Typically, the buyer is purchasing a controlling share, if not all, of an existing company’s assets or equity interest.”

There are three predominate structures of an M&A deal, Doida adds:

1. Mergers;
2. Asset sales; and
3. Stock or membership interest sales.

When two companies merge, they form one new company, and the original companies cease to exist. Acquisitions occur when one larger company takes over another smaller company. While a new company is not formed in an acquisition, the smaller company ceases to exist, and its assets become part of the larger company.

How Long Do M&A Transactions Take?

Deals often take at least a couple of months to complete, but the timeframe varies depending on the size of the companies involved and the deal’s complexity.

For example, large publicly traded companies “will have a bunch of different things to do for regulatory approval that small companies wouldn’t have to worry about,” says Doida. “My firm practices mainly in the lower-to-middle market — what I refer to as ‘main street M&A.’ Generally, small businesses are those with assets from a couple hundred thousand dollars to a couple million. The middle market would be companies in the five-to-100-million-dollar range.”

In “main street M&A” transactions involving small-to-midsize companies, “We generally try to get a deal closed in 60-90 days, though we recognize that some may take longer. For example, I’ve had some that took 6-9 months to get a deal closed, while others we were able to close in as little as 30 days.”

Generally, “We’re trying to close in under 90 days. But that doesn’t always happen, either by circumstances or intention. For instance, we may get a client in May who says they want to close in December. We’ll get everything ready but won’t finalize things until the client wants to. Typically, though, when clients come to a lawyer, they’re ready to make a deal as soon as possible.”

Four Things That Can Delay an M&A Deal

Doida says that in his experience as an M&A lawyer, the biggest delayers of M&A transactions include:

1. Attorney Delays

Attorneys inexperienced in M&A transactions can unnecessarily prolong a deal by failing to get to the “meat of the issues or not turning in documents in a timely manner,” says Doida. The upshot is that you want to find an experienced M&A lawyer for your transaction.

2. Due Diligence Delays

Of all the potential sources of delay, Doida says this is probably the most significant. “Either the seller has not done a great job of getting all their materials organized and prepared for analysis by the buyer, or the buyer finds things during the due diligence process that they want to be addressed before closing the deal.”

3. Third-Party Delays

Doida gives an example from his practice of how third parties can be a major source of delay. “We were selling a company with a customer that made up a huge part of their business. Naturally, the buyer wanted to make sure that the customer was going to stick with them. So, we needed to assign that customer contract to the buyer at the closing. And it took the seller’s customer about nine months to get around to approving that two-page assignments agreement.”

The same thing often happens if you’re trying to assign a lease and a landlord drags their feet.

4. Finance and Lending Delays

Lenders or investors financing the transaction can slow down the process as well. “Lenders may want to have a lot of due diligence and analysis done on whether they can underwrite and lend money to finance the company.”

Doida adds that in addition to these specific delays, “There can be simply user error, where people just take a long time to complete tasks.”

Two Ways To Mitigate Delays and Increase Efficiency

Some delays are out of your control as a business owner. Others are within your power to mitigate. The best way to avoid problems and delays in your M&A transaction is to prepare as much as possible beforehand.

1. Have a Due Diligence Checklist

Consulting with an M&A attorney early on is one way to ensure you’re well-prepared. They will provide you with a helpful checklist of the tasks you need to complete.

“For any prospective client we talk to, we’re happy to share what we think is a very thorough due diligence checklist,” says Doida. “A due diligence checklist basically says: Here are all the things that a buyer is going to ask you. Furthermore, as a seller, you may not have all the due diligence materials you need since they aren’t relevant to your day-to-day business. A checklist helps you get organized and have everything ready to show a potential buyer.”

2. Review Your Customer Contracts Ahead of Time

“Having to go get permission from every customer during the transaction can really bog things down,” says Doida. But there’s an easy fix: Have a lawyer review all of your customer contracts before starting an M&A transaction.

“You can make sure the assignment permissions in your customer contracts are favorable and flexible for an M&A closing. For example, if you and I enter a contract, there may be terms in the boilerplate section that say, ‘Neither party can assign this contract to another without the consent of the other party.’ Under such terms, an M&A seller can’t assign a customer to their buyer without the customer’s permission,” Doida explains. “But if you consult with a lawyer several months before selling, they can get all of your customer contracts fixed up. The boilerplate terms can be changed to say: ‘We can assign this customer contract to a buyer without your consent and just with notice to you,’ or something to that effect. A lawyer can also adjust your customer contracts going forward, so you don’t have to worry about it being a problem at closing.”

As with all aspects of running your business, “Being proactive can help solve a lot of issues.”

Six Top Due Diligence Considerations

Before merging with or acquiring another company, you and your business law attorney will want to make a special effort to gather as much information as possible about the other company to catch any problems you should be aware of. As Doida says, having a due diligence checklist can help your M&A deal go smoothly. Some things you should consider looking into include:

1. Evaluate Business Synergies

Do you and the other company both have a strategic purpose for going through with a merger or acquisition? Successful transactions will add benefit to your company instead of merely creating overlap with what your company already does.

For example, your company and the other might do similar work but in different regions or territories, and merging will offer more territory to both businesses. This may be preferable to combining with a company that operates in your same area.

2. Ensure Compliance with Laws and Regulations

An M&A lawyer will be able to advise you on whether your proposed M&A deal complies with federal and state laws and, if not, how to make it compliant. Important regulations include:

• Whether the proposed consolidation is compliant with antitrust and fair competition laws as enforced by the Federal Trade Commission (FTC) and other regulatory bodies;
• Whether the purchase agreement and transaction is compliant with federal securities laws as enforced by the Securities and Exchange Commission (SEC).

3. Protect Your Company’s Intellectual Property

You will want to make sure you are aware of the other company’s patents and intellectual property (including patents, trademarks, and trade secrets), as well as the steps they have taken to protect their intellectual property in relevant jurisdictions.

This will help you ensure that you are not merging with or acquiring a company that has potential patent infringement problems.

4. Understand Your Target Company’s Customer Base

Make sure you understand the target company’s client base. Who are their biggest clients, and will there be any problem with client retention after the merger or acquisition? If you foresee potential problems, you may want to work out a retention plan before the combination to prevent client loss instead of trying to make up for it later.

5. Determine Your Litigation Risks

When you merge with or acquire another company, you will take on their assets, but you will also take on their legal obligations and liabilities. Be sure to understand any pending litigation against the other company and the terms of any settlements the other company has entered.

You may also want to investigate judgments and liens against the company or its property, and you may want to speak with a lawyer to understand how those things will affect you after the combination.

6. Assess the Target Company’s Property Holdings

Finally, you want to consider what real estate or other property the other company has. What leases or deeds does the company have to pay? Will you keep them after the combination? If there are multiple office buildings, you may want to consider whether you will keep employees in separate buildings or whether you want to have all your workforce in one place.

When To Get an M&A Lawyer Involved

“The sooner, the better,” says Doida. “The latest you should be hiring a lawyer is when you get to the letter of intent (LOI).”

While the LOI isn’t a binding agreement, it sets the terms for subsequent negotiations. If there are major issues with the LOI that you don’t address, “You risk not having an agreement at closing,” cautions Doida. “Without a lawyer, I’ve seen LOIs where the parties only agreed on price — not even how the price is going to get paid. While that’s an extreme example, it’s not uncommon for a lay businessperson to say, ‘I got a LOI, and I like the price, so let’s move forward.’ Well, there’s a lot you didn’t even talk about.”

Invariably, when Doida works with clients who did their LOI without a lawyer, “I have a direct conversation with them where I say, ‘Great, you caught five of the 10 most important issues — but you didn’t even know to ask about these other five major issues.’ In these circumstances, I suggest that we go back a step, hammer out those remaining issues, and then proceed with the transaction.”

Having a lawyer review your transaction as early as possible saves money as well as time. “If you choose to go forward without a lawyer and we find out late in the process that we don’t even have a deal because of a poorly negotiated LOI, you got to know there’s no deal in the most expensive way you could. We could’ve gotten to ‘no deal’ in four or five emails — we didn’t have to labor through hundreds of documents to learn that.”

Ultimately, says Doida, “The lawyer’s job is to get the deal closed. And the cheapest way to find out if you have a deal is through a thoroughly negotiated LOI. Spend a few thousand dollars there to find out if you have a deal before you spend tens of thousands of dollars to fix problems in the last leg of the deal.”

Find the Right Attorney for Your Needs

Mergers and acquisitions are delicate transactions and require careful planning and attention to detail. They also involve a fair amount of research and investigation into the company you are combining with, from valuation to corporate governance. A lawyer in the M&A practice area can anticipate potential problems with your deal, advise you on navigating obstacles, keep track of deadlines, file all necessary paperwork, and ultimately help you make informed legal decisions for your business. Visit the Super Lawyers directory to find an experienced M&A attorney in your area.

M&A Lawyer FAQs

Below are some common questions you might want to consider when meeting with an attorney to discuss your merger agreement or other M&A transaction:

What is your experience negotiating M&A transactions and purchase prices?

It’s important to hire a lawyer with experience in M&A specifically. You may have a lawyer you really like and trust, but if they haven’t done M&A transactions before, it’s wise to get someone who has. A lawyer without previous M&A experience might not know the right questions to ask or understand how the process works. This can bog down the deal and lead to unfavorable results.

Does your law firm handle M&A for private companies or public companies?

Even within an M&A practice, attorneys have different areas of expertise. You want to try to get a lawyer who has worked with companies and transactions similar to yours in terms of size and complexity. You can get information about a lawyer’s experience from their website, reviews, and third-party directories like Super Lawyers.

What if the target company’s board of directors or shareholders don’t agree to the acquirer’s deal?

Generally speaking, a company’s board of directors or shareholders must approve of a merger or acquisition deal. If they don’t, the buyer might pursue a hostile takeover to acquire the company. This means the buyer gradually acquires the company by purchasing large shares of it.

How do you make sure your business is strong after a merger?

Once an M&A deal is finalized, your work as a business owner and employer is just beginning. You want to make sure you have legal counsel for any issues that arise post- company integration.