There are many legal aspects of mergers and acquisitions since it is the process of unifying or consolidating two different companies through various financial transactions. Awareness of the legal aspects is a must for any two companies who are willing to go through the process.

The process of merger and acquisition requires deep analysis and careful planning, and a successful merger and the acquisition process sometimes takes years to be completed.

Timeline for Legal Aspects of Merger and Acquisition

It is true that the tasks and the timeline are driven by the circumstances surrounding each transaction, but specific legal aspects are applicable to all of the transactions in the merger and acquisition process.

Getting a Deal

Getting an agreement with a company takes a lot of hard work and time. Negotiations with other companies could be faced with failure, whether that means total rejection by the target company or wasting a lot of time and effort without getting close to an agreement. In either case, the acquiring company may decide to move on and try another company that could be successfully acquired.

Due Diligence

Initial planning helps to identify the right target company by analyzing information about the company from public sources, but the initial planning stage is not very effective when it comes to more specified information about the company, like its financial status, strategies, employees and management issues, legal issues, taxes, environment, and governmental matters, etc. Due diligence covers all of this more specified information about the target company.

The due diligence process is arguably the most important part of a merger and acquisition, as it can prevent financial or legal problems in the future. Due diligence only begins after an agreement is reached between the acquiring and the acquired company and should be completed before signing the official papers.

Purchase and Sale Agreement

A purchase and sale contract could be signed between the acquiring and acquired company, this is in case certain material issues are not totally uncovered by due diligence, or if the driving force behind the issues uncovered through due diligence is only to the satisfaction of the acquiring company.

Issues in Merger and Acquisition Transactions

Certain issues must be addressed during any merger and acquisition transaction negotiations, both acquiring and acquired companies should consider the following issues:

1. Deal Structure

Building a transaction includes three main procedures:

  • Stock purchasing - In this procedure, the acquiring company buys shares in the acquired company.
  • Asset purchasing - In which all of the assets of the acquired company are purchased by the acquiring company.
  • Merger - Within the merger procedure, both the acquiring and acquired companies reach an agreement on enjoining the assets of both of the companies, which in turn makes it a single entity that is larger and more powerful and will increase the chances of more success and expansion in the future.

2. Equity and Cash

The importance of how the payments are processed for the transaction shouldn't be neglected. The two ways of payment processing are:

  • Cash - The easiest method of payment, the safest payment method for the acquired company, and a very easy and flexible payment method for the acquiring company.
  • Equity - The acquiring company pays its equity, issuing to the stockholders of the acquired company at a certain ratio relative to the company's value. Issuing equity may reduce all costs of debt financing by improving the debt rating of the acquiring company.

3. Working Capital Adjustments

A working capital adjustment is considered a part of the purchase price within the merger and acquisition transaction processes. Acquiring companies must always ensure that their target company has adequate working capital in order to be able to deal with all obligations before and after closure.

Adjustment of working capital helps to avoid problems like acceleration in debt collection, or a delayed inventory purchasing.

Certain unusual and eccentric factors are considered part of the working capital calculation, these include one-offs, addbacks, and cyclical items.

There are many details to the merger and acquisition process, regarding both the laws or the transaction process, so anyone who is willing to go through it should give it enough time in order to do it the right way.

If you need help with merger and acquisition, you can post your legal need (or post your job) on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.