Mergers & Acquisitions

Mergers and acquisitions are different ways of structuring the purchase and sale of a business. The choice of one over the other depends on the circumstances and goals of the parties.

Mergers are less common than acquisitions in transferring business interests because of their complexity. In a merger, two companies join or consolidate their businesses creating a new company. The previous entities no longer exist. Mergers can offer significant financial benefits, including additional revenue, diversifying the business, cutting operating costs, improving efficiency, and reducing competition.

The process generally takes two forms:

• Merger. In a typical merger, the buyer’s and seller’s management and board negotiate with each other and agree to terms. Shareholder approval is also needed, but management and the board will recommend the merger.

• Tender offer. With a tender offer, the buyer bypasses the seller’s management and board and goes directly to shareholders with an offer. This is usually used in a hostile takeover. The acquirer directly and publicly offers to buy shares from shareholders, who might accept if the shareholders view the offer to be significantly above market value for the shares, or are disapproving of the target company’s current management.

Except in the following situations, in an asset purchase acquisition, the purchasing company does not take on the purchased company’s liabilities and debts:

• When the purchaser is an extension of the seller, i.e. when the directors, officers and the shareholders for the purchaser and purchasee remain the same through the sale.
• Where the sale is fraudulent, for example: if the seller cannot pay its debts off to creditors.
• Lastly, when the purchaser, usually for a lower sale price, agrees to assume the purchasee’s debts.

Lastly, the shareholders of the purchasee must approve the sale of all or most assets.  As a caveat, the shareholders do not need to approve all sales of company assets.  Regardless, where the acquisition is for all or most of the purchasee’s assests, the shareholders have a right to an appraisal of their shares by a neutral third party.

Acquisitions that occur through stock purchase usually see the purchaser continue the business of the purchasee.  The purchaser takes on all liabilities and debts, even if the purchaser was not aware of such debts at the time of purchase.  To avoid such surprises, it’s vital to conduct due diligence before entering into an agreement to acquire a company.

Although often paired together, mergers and acquisitions create significantly different rights and liabilities post merger or acquisition.

Mergers and acquisitions typically involve multiple parties who help facilitate a successful transaction. The primary ones include:

• Business brokers. Brokers can help evaluate the business, develop materials needed to show to interested buyers, and list the sale.
• Investment bankers. Investment bankers often get involved in larger transactions and like brokers may solicit and talk with potential buyers and put together the seller’s financial information. They may also run an auction of the business.
• Appraisers. Business appraisers assist in valuing the business in smaller transactions or may be hired by the bank financing the transaction.
• Attorneys. Corporate lawyers can help with due diligence as well as reviewing, negotiating and drafting the purchase and other ancillary legal documents.
• Other advisors. Accountants, consultants (business, IT, environmental, etc.) and other professionals may also play a role in merger and acquisition transactions.

The purchasing company usually retains and pays a proxy solicitor who will gather the votes and shares necessary for the purchase. The purchaser will also have to pay an exchange or paying agent who will accept and pay for the shares acquired with an exchange or tender offer, and, in the case of a merger, pay the agreed-upon consideration to the shareholders. Further, the purchasing company will pay for printing and mailing the necessary documentation to the shareholders. If the merger or acquisition is hostile, the purchaser may also have to hire a public relations agent.

Various federal and state agencies may regulate mergers and acquisitions. The Federal Trade Commission (FTC) and Antitrust Division of the Department of Justice review transactions for compliance with competition and antitrust laws, while the Securities and Exchange Commission (SEC) regulates the sale and transfer of securities. Mergers and acquisitions also must comply with state laws governing shareholder and board approvals, takeovers, fiduciary duties, and other requirements. The laws of the state where the business is incorporated apply.

Additional regulations apply to certain types of transactions or parties. These include:

• Tender offers. Such transactions must comply with disclosure and other requirements if they involve registered securities, U.S. security holders, or securities offered as consideration.
• Foreign buyers. The Committee on Foreign Investment in the U.S. reviews foreign investment in U.S. companies which may pose a risk to national security. Such transactions have mandatory filing requirements.
• Highly regulated industries. Certain industries are subject to rules governing business combinations. These include insurance, banking, public utilities, transportation, gaming, mining, and others.

While small transactions may rely on business appraisers to value a business, larger ones determine value based on information uncovered during the due diligence process, industry knowledge, and negotiation. Relevant factors that are generally considered include:

• Comparable sales in the market
• Valuations done for other purposes (e.g., bank financing, 409A evaluation of common stock, etc.)
• Company’s past and projected performance and operations
• Risks to the business
• Industry trends
• Number and type of bidders
• Intellectual property owned

Every business transaction should be preceded by due diligence. Legal due diligence is a review and analysis of relevant information about a party its business. It enables the parties to assess potential risks by examining the other side’s assets, liabilities, operations, legal documents, and business relationships. The parties must share relevant information requested by the other party so that they can make informed decisions about moving forward. Prior to providing information, the parties should sign a nondisclosure agreement to protect the confidentiality of information shared by the parties during the negotiations and due diligence phase.

Mergers and acquisitions can take months to complete depending on the structure of the transaction, applicable legal requirements, approvals needed, conditions on the sale, and whether the acquisition is hostile or friendly. Sellers can speed up the process by compiling all necessary documentation and presentation materials before offering the company for sale. Both sides should also employ experienced advisors to facilitate the transaction.

Transactions may be friendly or hostile depending on how the target company feels about being acquired. Hostile takeovers are more time-consuming and difficult because of anti-takeover provisions in shareholder agreements and state law as well as federal securities law requirements.

Regardless of whether the target company was looking to sell the business, the board has a fiduciary duty to evaluate in good faith any bona fide offers as well as to obtain the best value for shareholders. If the board rejects the offer, a buyer may try to proceed with a tender offer instead. However, the board can take reasonable steps to resist the takeover, subject to a court’s enhanced scrutiny of the reasonableness of the board’s actions.