‘Mergers and acquisitions’ (M&A) is a broad term that covers any transaction in which one business is absorbed into another, or in which one party buys the controlling shares or business of another party. The transactions may be simple, or they may be complex, requiring a number of interlinked agreements.

The terms “mergers” and “acquisitions” are often used interchangeably, but they differ in meaning. In an acquisition, one company purchases another outright. A merger is the combination of two companies, which subsequently form a new legal entity under the banner of one corporate name. The umbrella of Mergers and Acquisitions, however, encompasses the selling, buying, consolidation, merging and/or separating of shares, assets, businesses or companies and all respective laws, guidelines, strategies and intricacies that govern these transactions.  There are many different ways to skin a cat, however, and the goal is always to find the strategy, structure and protections that adequately cover all parties to the transaction.

The following are some of the key legal concepts that are important in mergers and acquisitions:

Competition and Antitrust Laws: Antitrust laws are designed to prevent anti-competitive behaviour and promote fair competition in the market and adequate choice for consumers. In M&A transactions, antitrust laws require companies to notify the relevant regulatory authorities of their intent to merge or acquire another company. These regulatory authorities will review the transaction to ensure that it does not result in lessened competition in the  market or violate other antitrust laws.

Securities Laws: Securities laws regulate the sale of securities, including stocks and bonds, in public markets. In M&A transactions, securities laws require companies to disclose relevant information about the transaction to their shareholders and potential investors. The disclosure requirements may include financial information, details about the merger or acquisition, and any potential risks associated with the transaction.

Contract Law: Contract law governs the terms and conditions of the agreement between the merging or acquiring companies. The agreement may include provisions related to the purchase price, payment terms, representations and warranties, and any other terms agreed upon by the parties.

Employment Law: Employment law may be relevant in M&A transactions, particularly if the transaction involves a change in ownership or control of the company. Employment law may require the new owner or controlling entity to offer employment contracts to employees of the acquired company or may require the payment of severance to employees who are terminated as a result of the transaction.

Intellectual Property Law: Intellectual property law protects the rights of companies with respect to their patents, trademarks, copyrights, and other intellectual property. In M&A transactions, intellectual property issues may arise if one of the companies owns valuable intellectual property that is being acquired.

Tax Law: Tax law can have significant implications for M&A transactions. The parties must consider the tax consequences of the transaction, including the tax treatment of any assets or liabilities being transferred as part of the transaction.

Different types of mergers

As mentioned, a merger is the combination of two companies, which subsequently form a new legal entity under the banner of one corporate name. Generally, mergers can be divided into five different categories:

Horizontal merger: Merging companies are direct competitors operating in the same market and offering similar products and/or services.

Vertical merger: Merging companies operate along the same supply chain line.

Market-extension merger: Merging companies offer comparable products and/or services but operate in different markets.

Product-extension merger: Merging companies operating in the same market offer products and/or services complementary to each other.

Conglomerate merger: Merging companies offer completely different products and/or services.

Reasons for a merger

Mergers & Acquisitions (M&A) are often the most effective way for companies to transform their businesses, whether through acquiring or divesting of businesses or subsidiaries, acquiring technology or supply chains, investing in new product lines, or entering or exiting markets. In each case, there may be a number of reasons that a company would choose to embark on a merger or acquisition:

Synergies: One of the main reasons for mergers is to achieve synergies, which are benefits that result from the combined strengths of the merging companies. Synergies can come in various forms, including cost savings, increased revenue, and enhanced market power.

Market Expansion: Mergers can also be used as a means of expanding into new markets or geographies. By combining with another company, a business can gain access to new customers, distribution channels, or product lines that it did not have before.

Diversification: Another reason for mergers is to diversify a company's operations or portfolio. By merging with another company that operates in a different industry or market, a business can spread its risks across a broader range of products or services.

Increased Financial Resources: Mergers can also be used to increase financial resources, such as capital or borrowing capacity. By combining with another company, a business can access additional resources that it may not have had on its own.

Strategic Reasons: Finally, mergers can be pursued for strategic reasons. For example, a company may merge with a competitor to eliminate competition and increase market share. Alternatively, a business may merge with a complementary company to create a stronger, more competitive enterprise.

How to get ready for Mergers & Acquisitions

Regardless of the level of complexity, transactions of this type have a number of things in common. The key elements are price, payment terms, subject matter (what is being bought), and warranties. Applicable regulatory requirements can come into play as well, and it is important to have a team of legal M&A specialists at your side to assist.

Price and Payment Terms

Whilst price is always a matter for negotiation, the manner in which the agreed price is calculated and paid will often depend on the nature of the business being acquired. Many transactions include a portion of the price that only becomes payable if certain future performance targets are met by the business concerned. This creates a risk for the seller, especially if they have limited involvement in the business after the deal is done. It is also not uncommon for payment of a portion of the agreed price to be deferred and paid at certain dates in the future. Whilst this can assist the purchaser from an affordability and cash-flow perspective, it creates a risk for the seller which should be mitigated by appropriate security.

Subject Matter - what is being bought?

The majority of businesses are housed in companies. The acquisition of a particular business (a company acquisition) can take the form of a purchase of the shares in the company in which such business is housed, or the purchase of the business itself as a going concern, from the company in which the business is housed. A company merger can be vertical (two companies at different levels of the same supply chain), horizontal (two competing companies, sometimes triggering competition regulation), or concentric (two companies with slightly differing product offerings). The nature of what is being bought (shares in a company, or a business as a going concern) will affect the terms of the transaction agreements, as well as the respective levels of risk for the parties involved.

Warranties

Regardless of the nature of the transaction, the purchaser will almost always request warranties. Warranties are simply promises given by the seller to the purchaser about the nature and the condition of what is being bought. The warranties serve to reduce the purchaser’s risk because they enable the purchaser to bring a claim against the seller for compensation should any of the warranties later prove to be incorrect. Warranties are often a great source of anxiety for a seller, as they create a scenario in which the seller may become liable to the purchaser further down the line, should a skeleton come out of the business’ closet. The risk which warranties create for a seller can be mitigated by including in the transaction agreement limitations on the seller’s potential liability. The most common of these is a cap on the maximum amount of the seller’s potential liability to the purchaser and a maximum time period within which warranty claims may be brought against the seller.

In any transaction, each party must bear some risk – what’s important for each client is to find a path between bearing too much risk and being so risk-averse as to back away from an attractive deal.

How can Caveat Legal help?

Our experienced, strategic and innovative Merger and Acquisitions  specialists work hand-in-hand with you, across the full scope of an M&A transaction, from preparing a company for purchase and negotiating the upfront commercial terms,  to conducting the due diligence investigation,  structuring the transaction in an optimal manner and drafting comprehensive transaction agreements, to providing project management and implementing legal closing.  We also offer pragmatic and sound advice in relation to the regulatory requirements and the risk factors at play.  

Our services include sales of businesses, sales of shares, share swaps, corporate restructurings, private equity transactions, broad-based black economic empowerment transactions, share buy-backs, mergers, schemes of arrangement, takeovers and management buyouts, both locally and cross-border.

Mergers and acquisitions involve nuanced structuring, negotiating, documenting and implementation, tasks best done by experienced M&A lawyers, often with the input of tax and IP specialists. Lawyers with experience in these high-stakes transactions, like the team at Caveat Legal,  are able to ensure that the parties they represent are properly protected, allowing for a higher chance of success in the long term.

If you are about to embark on a merger or acquisition, reach out to our team to discuss your options, and ensure the best outcome for you and your business. For more information or to contact the team at Caveat Legal, visit the website at www.caveatlegal.com

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