Mergers and acquisitions (M&A) are a fascinating industry with so many possibilities. M&A is also a powerful tool that large companies can use to exponentially grow their businesses in a short amount of time.
What is M&A law?
M&A is a branch of corporate law that deals with companies purchasing and/or merging with other companies. Corporate law comprises all the legal issues corporations face in daily transactions, and some lawyers specialize in this field. M&A is more than just buying companies, it also includes joint ventures, partnerships, and minority investments. M&A lawyers must be familiar with all of these legal areas in order to navigate a transaction successfully.
In addition, M&A lawyers must communicate effectively with clients, other lawyers, and business executives to achieve the best results for their clients.
What legal activities occur at each stage of a deal?
A transaction typically involves a prospective buyer conducting due diligence on a target company, negotiating price and deal terms, and then executing a definitive purchase agreement. The entire process can take several months to complete. Here are the legal activities that occur during each deal stage:
- Non-Disclosure Agreements (NDA)
NDAs are the first legal document that a buyer and seller will agree upon. An NDA serves as a protection that enables both parties to share sensitive information with one another. Non-disclosure agreements are an industry standard prior to due diligence.
- Letter of Intent (LOI)
A letter of intent is a non-binding contract that buyers hand out to sellers to show their interest and make a formal offer for a company. An LOI usually includes the exclusivity period, proposed deal structure, and initial price range.
- Due Diligence
Due diligence is one of the most tedious tasks for M&A lawyers. Due diligence is the process of investigating and analyzing everything there is to know about a target company in order to validate the purchase. Normally, due diligence requires a massive number of teams such as finance, law, and HR.
- Deal Structure
Contrary to popular belief, the deal structure is not just a financial activity. Every deal structure will have different legal ramifications, such as tax consequences, transferability of liability, and regulatory issues. For instance, a stock deal and an asset deal will have massive differences from a legal standpoint.
- Representations and Warranties
Due to high competition which promotes a faster transaction speed, reps and warranties have become extremely popular in M&A. Reps and warranties are statements of facts made by the seller, that the buyer relies on, to make the purchase. Any breach in reps and warranties can result in indemnification claims from the acquirer and can destroy deal value.
- Definitive Purchase Agreement
A definitive purchase agreement is the final agreement that supersedes any other prior agreement made by both parties. A definitive purchase agreement finalizes all terms and conditions and is often referred to as the "signing" phase. M&A lawyers from both sides must carefully examine and draft this agreement, because once it's been finalized, neither side can turn back, except in special circumstances.
The Role of M&A Law Firms in M&A Deals
Several law firms specialize in M&A. These firms provide various services to their clients, including assisting with due diligence, negotiations, and contract drafting. M&A law firms also provide advice on regulatory compliance.
In addition, M&A law firms often have a network of contacts in the business community that can help identify potential acquisition targets. The role of an M&A law firm is to provide expert guidance to its clients throughout the entire M&A process.
The deals that top M&A law firms have helped close in the past are a testament to their importance.
What Does an M&A Lawyer Do?
M&A lawyers play an important role in transactions. M&A lawyers must be involved from the beginning of a deal to help protect clients from risks and execute the deal with proper documentation. In many cases, M&A law firms offer their services to manage the entire deal from start to finish.
Today, M&A management tools are available to make the deal more efficient and manageable. Paul Koenig is one of the first people to realize this, who left his two-decade M&A law practice to develop a management tool that will enable parties to execute deals more efficiently.
“One of the things we saw was, why does someone have to be the shareholder representative when nobody wants to do it? Why can't you hire someone to manage that process professionally?
And then we also saw billion-dollar mergers get closed with paper. Some of the most sophisticated and largest deals in our society and you're doing it in outdated ways. It just didn’t make sense to us.
Inefficiencies in knowledge management and project management make it more cumbersome to get a deal done. But if you had knowledge management where you can very quickly and efficiently show six samples of prior deals where we had this provision or where we were able to successfully navigate some tough issue or whatever it might be, then you're going to be able to deliver something faster and potentially with a better outcome.
These tools will lead to better client experience, and more profitability for law firms because they will save time.
And then the project management, as these deals are increasingly complex and you need to make sure that everything is proceeding on track. And if you are not aware the third-party vendor doing technical due diligence is two weeks behind, then that can add risk to a deal that you didn't really need to have there.”
M&A lawyers work with buyers and sellers to negotiate the terms of the sale, draft contracts, and ensure that all relevant laws are followed.
One of M&A lawyers’ main roles is also to advise their clients on a deal’s tax implications and help structure the transaction in a way that minimizes taxes. In addition, M&A lawyers often have experience with regulatory issues, which can be complex in certain industries.
If you want to learn more about M&A from an attorney's point of view, click here.
Executing M&A from Legal Perspective
For lawyers, everything revolves around risk management, and M&A is no different. M&A lawyers’ primary approach is to identify, foresee, and mitigate risks for their clients, whether the buyer or the seller. M&A lawyers need to be involved from the very beginning of a transaction in order to predict and mitigate risks.
According to Brett Shawn, Senior Vice President, Assistant General Counsel at Warburg Pincus, the most common risks that M&A lawyers are looking for that can immediately stop a deal are:
- Diligence Risks
Verifying everything about the target company during diligence is one of the main roles of M&A lawyers. This process is also called legal due diligence.
The purpose of legal due diligence is to gain a legal perspective of the target company. The ultimate goal is to ensure everything is in order and determine if there are any legal reasons why the acquisition shouldn’t proceed.
Most companies use a legal due diligence checklist to ensure efficiency and speed. Having a checklist helps keep everyone organized and on-task during due diligence.
M&A lawyers also draft representations and warranties, that serve as extra protection, for buyers.
- Financial Risks
There are instances where the buyer is securing a loan from a bank to fund the acquisition, but the bank wants to assess the target company. M&A lawyers put covenants in place to ensure that the seller cooperates with the deal’s funding.
- Antitrust Risks
Antitrust is a governing body that ensures market competition and prevents monopolies. Strategic acquirers often trigger antitrust since they buy competitors from the same market. M&A lawyers prepare the necessary documents and remedies to ensure the deal goes through without violating antitrust laws.
- Deal Jump Risk
A deal jump risk is quite common if the seller is a public company. Board members have a fiduciary duty to get the highest price for their stakeholders, often resulting in deal jumping. M&A lawyers mitigate this risk by placing a termination fee on the contract or matching rights.
M&A lawyers are always on the lookout for red flags in every phase of a deal. If you want to know more about executing M&A from a legal perspective, catch the full episode here.
How can M&A Science Help?
M&A is a highly specialized industry. There are risks at every part of the deal lifecycle, which is why buyers and sellers need to involve their M&A lawyers from the very beginning.
In addition, M&A lawyers can greatly affect a deal’s outcome, which is why choosing the right lawyer is also vital to success. To help you navigate legal M&A, visit some of the following resources:
Working with Legal to Dial in Your M&A Strategy - In this interview, you will learn how early M&A lawyers should be involved in a transaction and their importance throughout the deal, with Felipe Heiderich, Senior Counsel at Moderna.
Risk Allocation Between Signing and Closing an M&A Deal - In this interview, you will learn the risks involved when deals take longer to close, featuring Brett Shawn, Senior Vice President, and Assistant General Counsel at Warburg Pincus LLC.
Divestitures from a Legal Perspective - In this interview, Andrew Gratz, Chief Privacy Officer, and Associate General Counsel at LyondellBasell talks about what a divestiture looks like from a legal perspective.
The Legal Team's Role in M&A - In this course, learn the key tasks that a legal team is responsible for in M&A from Andrew Gratz, Associate General Counsel at LyondellBasell.
Legal Due Diligence Playbook - Legal due diligence is one of the most important steps in closing the deal. Collect the right information in order to successfully assess the legal risks during your M&A transaction with our legal diligence template.
Architecting your M&A practice - M&A is becoming increasingly complex. The traditional approaches don’t cut it anymore. We can help ensure greater success by building a clean, scalable M&A process from the ground up.
For a free assessment and assistance with the right legal or other M&A solution, training, and expertise, please visit the M&A Science concierge.