A merger is when two business entities agree to continue as a single form. An acquisition is when one entity takes over another and establishes itself as the new owner. For legal purposes acquisitions can be characterised as either ‘asset purchases’, in which the seller sells business assets to the buyer, or ‘share purchases’, in which the buyer purchases equity interests in a target company. Naushad Rahman, solicitor and head of company and commercial at Colemans, takes a look at some key pre-transaction considerations.
The pre-transaction considerations are essentially the business version of a pre-flight checklist for a commercial airliner. Some of the most salient issues include:
- Consider signing certain documents designed to ensure there will be no subsequent flight delays, through misunderstanding what the initial deal was. These include i) heads of terms (which set out the basis of the deal in broad pre-contract terms; ii) a confidentiality agreement (a promise that information conveyed to the prospective purchaser will be maintained in secrecy); and iii) an exclusivity agreement (where parties will over a limited period of time only conduct business with each other on an exclusive basis).
- Basic ‘permission to land’ in the form of legal due diligence, aimed at assessing risks (consequently risk apportionment in the legal documentation in the form of warranties and indemnities can then be drafted) and identifying if any regulatory requirements or third-party consents (eg in relation to intellectual property and trademarks) need to be obtained or assignments entered into. Don’t be that ‘air-traffic controller who nodded off on the job’.
- Price considerations – price may be made up of a cash payment or satisfied by interest being acquired in the entity owning the merged business. If the price is based on net asset value consider adjustments to that price, eg by reference to full completion accounts. Don’t let apathy in this area lead to your company being the ‘in-flight entertainment’ of your counterpart. Having your solicitors be privy to pre-contract negotiations will cut the chances of a ‘sudden loss of cabin pressure’.
- Consider the need for any purchase price retention as security for warranty claims
- Consider also tax consequences.
While any good commercial law firm worth its salt will have a safe pre-flight checklist pre-acquisition or merger, we’re confident that ours is the most comprehensive. Colemans Solicitors has leading commercial experts with a deep understanding of how businesses work, thus enabling us to guide our clients through their mergers and acquisitions.
Contact Naushad Rahman for vital early advice on your potential merger or acquisition.