The Ins and Outs of M&A Transactions
California attorneys discuss which aspects of M&A may require legal adviceBy Carly Nairn | Reviewed by Canaan Suitt, J.D. | Last updated on June 23, 2023 Featuring practical insights from contributing attorneys Allison Leopold Tilley and Alan S. Nopar
Use these links to jump to different sections:
- Agreements & Due Diligence
- Negotiating the Key Terms
- Considering Noncompetition
- Find an Experienced California Mergers & Acquisitions Lawyer
“I don’t think you should sell your business or acquire a business without a lawyer involved,” says Allison Leopold Tilley, a partner with Pillsbury Law in Silicon Valley who specializes in mergers and acquisitions.
“There are so many ins and outs,” she continues, “and just a small mistake could cost you a lot of money if you don’t properly disclose things; if you don’t truly understand what the acquisition agreement says; if you don’t focus on what your obligations are to indemnify the buyer if you’re the seller; or, if you’re the buyer, get protected against issues with the seller.”
In short: When it comes to a merger, holding acquisition, or buying/selling a company wholesale, many questions may come up in many different disciplines. You need a broad base of expertise to answer questions that even an in-house counsel may not have the expertise to answer.
Agreements & Due Diligence
An M&A lawyer might investigate many parts of a deal, but one of the main documents they handle is a purchasing agreement.
“Generally, there are two fundamental ways to structure a purchase transaction,” says Alan Nopar, of Nopar & Associates in San Jose and Palo Alto. “One is an equity purchase, which would be either if you have stock, it’s a corporation, or a membership interest in an LLC, if it’s an LLC. The other way is an asset purchase.”
There are pros and cons to each, Nopar adds. “Buyers prefer to buy assets. The reason is that when they buy the equity in an entity, they’re taking over with the entire history that that entity has, including all potential claims that might be brought against the entity for previous conduct.”
Another important aspect of an M&A lawyer’s job is due diligence—verifying the business is what the seller claims it to be. “That needs to be done on a confidential basis, clearly,” Nopar adds, “because the seller is not going to want to open its books and records to the buyer unless the buyer is bound by a covenant to keep things secret.”
It’s important to keep deals discreet, and it’s also just good business to thoroughly look through a company’s history—and make sure all documentation is up to date.
“When someone buys you, they want to look through all your records and all your contracts and your stock holdings and everything,” says Tilley.
“And a lot of small companies don’t focus a lot on the paperwork as they’re growing because growing your business and selling your product and developing your products is a lot more interesting than working with lawyers to make sure your paperwork is correct,” she adds. “Often you can clean it up or fix anything that’s missing in advance versus, if you wait until you’re in the middle of the diligence process, then it can become more of an issue.”
Negotiating the Key Terms
During M&A deals, Tilley says, the seller often has an advantage.
“If you’re negotiating a term sheet, letter of intent, heads of terms, memorandum of understanding—they’re the same thing, but called different names—that’s when your best leverage is,” she says.
The key here is to not negotiate all the key terms of your own deal, then reach out to an attorney. “Because they might have had good suggestions for you of different things you could do,” Tilley says. “If you wait until you sign the term sheet, then it’s too late… A good lawyer is not going to over-lawyer it. They’re going to tell you the things that you need and work with you.”
If you are selling or buying in California, competition is a factor to consider.
“One of the big areas is a non-competition covenant,” says Nopar. “Typically, the buyer doesn’t want the seller to be able to open up a business that’s in competition with the existing business within a certain radius, within probably a two-year time period.”
Noncompetition covenants are enforceable and valid as part of a transaction in which the goodwill of the business is being sold or transferred in California, he says. “They have to be reasonable in terms of the time period that’s covered, in terms of the geographical area, and in terms of the scope of what’s prohibited.”
Ultimately, though, mergers and acquisitions are all about being ready for all potentialities.
“It’s accurate to say that good business lawyers are paid pessimists,” he says. “We’re paid to think about what can go wrong, and then draft documents to protect the interests of our clients in case things ultimately do go wrong.”
Find an Experienced California Mergers & Acquisitions Lawyer
If you’re seeking legal assistance with your company’s merger or acquisition activity, including buyouts, consolidations, or restructuring, visit the Super Lawyers directory and search for an M&A attorney in your area.
Working with the dealmakers on your management team, an attorney can assist with a wide range of issues throughout the M&A process, including:
- Deal structure, restructuring, and valuation
- The due diligence process
- Assessing synergies and efficiencies with the target company
- Regulatory compliance, filings, and financial reporting
- Intellectual property
- Reps and warranties
- Purchase agreement and purchase price
- Post-closing legalities and allocation
If you would like to learn more about this legal area, read our overview of mergers & acquisition law.