Mergers & Acquisitions

Godfather Revisited Part I: Making an offer he can’t refuse

Ever watch Finding Nemo? In the great halcyon oceans, big fish swim around in the blue unknown, gobbling up smaller fish. That’s aquatic M&A for you.

 

On land, M&A, or mergers and acquisitions, is a broad term that refers to a group of corporate activities. Some companies want to buy up other businesses (acquisitions), some believe there might be economies of scale to be gained if they combine their businesses (mergers). There are also Joint Ventures where two companies decide to collaborate while keeping their identities separate. This section mainly uses the term M&A to refer to acquisitions.

 

Key Players

  1. Buyer
  2. Seller
  3. Target
  4. Lawyers – includes Buyer and Seller’s counsel as well as bank’s counsel
  5. Banks – it costs money to acquire a company so Buyers will usually need to borrow funds
  6. Courts

 

Key Stages

 

Definition – In Our Own Words Lawyer’s Role (Some Examples)
1. Engagement Letter As the name suggests, an engagement letter is meant to engage someone. Legal advisors sign such letters with their clients, as do investment banks which often buy or sell on behalf of their clients. Agreeing on fees – the letter sets out the advice which will be provided to the client, the fees of the engaged firm and proposed timelines.
2. Letter of Intent You survey the string of beads in your hand and hesitantly inquire about the price. You then proceed to haggle with the road side vendor for the rest of the day. Between large corporate entities, a letter of intent is often used to formalise the whole haggling process between Buyer and Seller. Drafting – you help to flesh out this initial document, setting out the proposed timeline and parties involved.
3. Due Diligence (DD) As a Buyer, you want to make sure what you’re buying is worth the price. So just as you check an apple for bruises before buying it (hopefully), the Buyer will conduct research and come up with a valuation of the company which is to be acquired. DD – Buyer’s counsel usually performs the research (checking financial statements, litigation history etc) and also requests for extra information from the Seller.

 
Merger regulations – M&A transactions of a certain size are regulated. Examples of regulations include the UK Takeover Code as well as the HK SFC’s Takeover Code. Lawyers help to ensure that the deal complies with the relevant rules.

4. Sign Share or Asset Purchase Agreement (SPA or APA, depending on what’s being sold) The central document in an acquisition. It contains clauses stipulating the purchase price, warranties, restrictive covenants, guarantees and conditions precedent. SPA – many terms have to be customised (by you) to the transaction at hand. Buyers may want warranties from Sellers. The Sellers may want non-compete restrictive covenants.

 
Banks – if the Buyer is borrowing money to acquire the Target, the lender usually requires a guarantee from another entity related to the Buyer. That guarantee is also be drafted by lawyers.

5. Closing The parties sign the SPA and exchange other documents, such as the share certificates which will be transferred to the Buyer. The purchase price is paid. Deal management – prepare a checklist of the documents which both sides will sign and exchange.
6. Post-Closing After Closing, there may be loose ends that need tying up. For instance, if the Target company uses proprietary software, then the outgoing staff might need to train the Buyer’s incoming staff before leaving. Follow up – some less important documents may not be signed at closing. These have to be subsequently acquired and both parties should have a copy. Lawyers also gather all information related to the M&A and bundle them into a Deal Bible for future reference.