M&A isn't just about numbers. It's not as simple as buying or selling a laptop. There are a lot of legal issues that are involved when you are buying or selling a business. One can argue that the legal team has the most crucial role in an M&A transaction. Helping us understand the complete function of the legal team in M&A is Andrew Gratz, associate general counsel.
"If you don't understand the why you can't effectively develop the how." - Andrew Gratz
The legal team needs to understand the rationale behind every deal. If they don't know the deal's strategy, they can't advise or develop proper arrangements and contracts that will capture value drivers.
Furthermore, some strategies have inherent legal risks. The legal team's primary role is to understand the regulatory, legal, and jurisdictional issues and obstacles that may present themselves with any transaction. If you're in a concentrated industry and are looking at acquiring a competitor, then there's going to be an antitrust risk. If you're looking at being acquired by entities in certain countries, there's going to be a national security risk.
You want to avoid spending monetary resources and time looking at a transaction that you shouldn't even be considering in the first place. This is why it is important to involve the legal team in the transaction from the very beginning.
The first document that you will need from your legal team is an NDA. If you're the buyer, you don't want the whole world to know you are looking at targets. If you're the seller, it's even more critical because you don't want the world to know you're looking to sell your company, especially your employees. A distracted workforce will affect productivity, which in turn impacts your transaction.
There are many items that go into an NDA. Your legal team needs to provide or detect the correct language to protect you from litigation or any other unwanted obligation. For instance, hidden non-solicit clauses, unwanted exclusivity, or even a binding partnership agreement that shouldn't even be there.
Once you determine that the target may be a good acquisition, the next document you will need from your legal team is a Letter of Intent.
This is your very first chance to make a pitch as to why the seller should choose you as the buyer. Drafting your LOI thoughtfully and methodically will help you secure the transaction.
Usually, an LOI is a non-binding, formal document that lets the seller know that you are interested in purchasing their company.
However, there is such a thing as a binding LOI. If you, as the buyer, insist on exclusivity, the seller will force you to pay a down payment or a fee if you walk away. If they are going to forego all other bidders, they will need something in return to give you complete exclusivity.
After an LOI has been made, it's time to do the diligence. According to Andrew, this is the most crucial aspect of any deal because you confirm what you think you're buying. You're ensuring that what you're buying advances your strategy. The legal team has to verify if the seller has the proper ownership of the asset that you are buying. Do they have the right licenses, intellectual property, and the appropriate documentation needed for that asset to be sold?
The legal team is the one that finalizes the sale. The Purchase Sale Agreement should include what you are buying, what the sellers warrant, what they are repping their own, and everything else needed to transfer the asset's ownership.
Besides, it also needs to include the things you are not buying—for instance, their legacy litigation, environmental issues, or other specific assets. The PSA needs to make that very clear to avoid any issues down the road.
"What matters at the end of the day is what's in those four corners of that (purchase sale) agreement." - Andrew Gratz
It also needs to include a language that whatever was said before, any emails or text messages back and forth, is meaningless. The PSA is going to be the final agreement between both parties.
Another role of the legal team is to help you stay focused on the deal strategy. Every agreement and decision needs to advance the strategy, and the legal team will always remind you of that.
Executing a bad deal can be devastating for the company. Deal fever tends to lead certain companies to assume risk disproportionate to the reward. The legal team can help mitigate deal fever by detecting liabilities that you might unintentionally assume.