Know your way around M&A: What are the legal considerations in M&A transactions?

Mergers and Acquisitions (M&A) are complex transactions that involve the consolidation of companies or assets through various types of legally binding agreements. M&A transactions are among the most significant strategic decisions a company can make, and they require careful planning, negotiation, and legal oversight. Given the various complexities involved, it is essential to have the support of experienced legal advisors to navigate the legal landscape to avoid pitfalls and ensure a smooth transition whether you are buying or selling. Below are some of the key considerations involved in transactions:

1. Due Diligence

Due diligence is one of the most critical aspects of any M&A transaction. It involves a comprehensive review and analysis of the target company’s financial, legal, and operational aspects. Legal due diligence primarily focuses on uncovering any potential legal liabilities or risks that could impact the deal. It includes reviewing contracts, leases, intellectual property rights and regulatory compliance. Undertaking an effective due diligence exercise allows better informed decisions to be made and the possibility to negotiate more strategically. 

2. Transaction Structure & Negotiating Deal Terms

The structure of an M&A transaction significantly influences the legal obligations, tax implications, and liabilities involved. The three primary structures include:

- Asset Purchase: where the buyer purchases the target company’s assets but does not automatically assume its liabilities. This structure provides more control over what is acquired but may involve more complexities for example in assigning contracts and licenses to the buyer.

- Share Purchase: The buyer acquires the target company's shares, inheriting all assets and liabilities. This structure is typically more straightforward but may expose the buyer to unknown or contingent liabilities.

- Mergers: Two separate companies combine to form a new entity or one company absorbs the other.

Negotiating deal terms is a critical phase of the journey. Various factors need to be considered such as, purchase price, payment structure, indemnities, non-competes and post completion obligations for example. Whether buying or selling, it is important to work closely with a legal professional to ensure interests are protected and to ensure terms are favourable.

3. Contractual Considerations

The success of an M&A deal hinges on the careful drafting and negotiation of the purchase agreement. This document outlines the terms and conditions of the sale, including:

- Purchase price;

- Representations and warranties;

- Covenants;

- Conditions precedent; and

- Dispute resolution mechanisms.

It is imperative that an experienced legal advisor undertakes the drafting to ensure that a comprehensive and well structured agreement is in place, which carefully defines rights, obligations and remedies that take into consideration the parties interests and ensures clarity for all parties focusing on minimising future risk with a view to avoiding potential disputes.

4. Corporate Governance and Shareholder Rights

Corporate governance and shareholder rights play a key role as shareholders’ generally need to approve significant transactions. The board of directors has fiduciary duties to act in the best interests of the company and its shareholders’, and they must ensure that the transaction reflects fair value.

5. Employee & Employment Considerations:

The impact of employees can sometimes be overlooked in M&A transactions and it is important that employee contracts, benefits, restrictive covenants and employment-related issues are reviewed and considered. In addition, to ensure a smooth transition of the business, it is important to communicate and be transparent with employees throughout the process to maintain morale. It is important to engage with experienced legal advisors to navigate any employee related matters to help mitigate risk.

6. Confidentiality and Intellectual Property

Commercially sensitive information is often shared during the course of a transaction, particularly at the due diligence stage and therefore you should ensure that protective measures are in place to preserve confidentiality and business interests.

Depending on the nature of the business, the portfolio of intellectual property (IP) assets for the target should also be reviewed including trademarks, copyrights and trade secrets to protect and preserve their value if they are included in the transaction. 

M&A transactions are legally intricate and involve navigating a myriad of legal considerations, from due diligence and regulatory compliance to employee rights. Legal advisors play a vital role throughout the process, ensuring the transaction is legally sound and minimising the risks involved. A thorough understanding of the legal framework and potential liabilities is essential for both buyers and sellers to achieve a successful and seamless M&A transaction.

Our corporate team has in-depth knowledge and has assisted client’s across a wide variety of industries including pharma, tech and professional services. Our team of experienced corporate lawyers are here to provide the expertise and support you need. Please do not hesitate to get in touch with our Corporate team by telephone on 0207 052 3545 or by email info@kaurmaxwell.com