Buying a Business: Merger & Acquisition Transactions

Contact Neufeld Legal PC for corporate transactional and legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Understanding the law and the business deal to facilitate the optimal results from mergers and acquisitions.

Acquiring an existing business is rarely, if ever, a straightforward process; instead, it tends to require considerable investigation and analysis, so as to identify and address existing issues and potential concerns that have the very really possibility of devaluing the merger or acquisition, among a range of immediate and latent effects that might well arise from undertaking the transaction improperly. And even with considerable due diligence, scrutiny and investigation, combined with intense negotiations and the drafting of very decisive legal agreements, there is still no certainty that the proposed business target will in fact perform as intended. Nevertheless, that is the challenge with almost every corporate merger and acquisition, such that the appropriate investigation needs to be undertaken, followed by its integration and advancement within your own business efforts, that will hopefully result in the realization of the intended potential that was the very basis for undertaking the original merger or acquisition.

Legal Work involved in Acquiring a Business

The legal work involved in acquiring a business is a complex, multi-stage process that requires meticulous attention to detail. It is designed to identify and mitigate risks for the buyer, ensuring the transaction is legally sound and that the value of the deal is what the buyer expects. Here is an overview of the key legal stages and tasks in a business acquisition:

A. Pre-Acquisition

• Initial Legal Agreements: Before any deep dive into the target company's information, the buyer and seller need to establish a legal framework for confidentiality and the initial terms of the deal.

  • Non-Disclosure Agreement (NDA) / Confidentiality Agreement: This is often the first legal document signed. It legally binds the parties to keep all information shared during the M&A process confidential. This is crucial for protecting sensitive business information, such as financial data, customer lists, and trade secrets, before the buyer has committed to the deal [more about Non-Disclosure Agreements].

  • Letter of Intent (LOI) / Term Sheet: While often non-binding on its main commercial terms (e.g., price), the LOI outlines the proposed terms and conditions of the transaction. It signals a serious intent to proceed and usually contains legally binding provisions such as an exclusivity period (where the seller agrees not to negotiate with other parties) and a commitment to confidentiality [more about Letters of Intent].

B. Legal Due Diligence

• This is the most extensive and critical legal phase of the acquisition (e.g., legal due diligence, financial due diligence, operational due diligence, commercial due diligence). The buyer's legal team conducts a thorough investigation of the target company from a legal perspective, seeking to uncover any potential risks or liabilities. The scope of due diligence varies depending on the deal structure (asset vs. share purchase) and the nature of the business.

• Key areas of legal due diligence include:

  • Corporate Records: Reviewing corporate governance documents, such as articles of incorporation, by-laws, minute books, and shareholder agreements to confirm the company's legal status and authority to sell.

  • Contracts and Agreements: Examining all material contracts, including customer and supplier agreements, leases, loan agreements, and employment contracts. Lawyers will look for "change of control" clauses that could be triggered by the acquisition and require third-party consent.

  • Intellectual Property (IP): Verifying the ownership and validity of the target's IP, including patents, trademarks, copyrights, and trade secrets. This is especially important for businesses where IP is a core asset.

  • Litigation and Disputes: Checking for any pending or threatened lawsuits, regulatory investigations, or other legal disputes that could result in significant liabilities.

  • Regulatory and Environmental Compliance: Ensuring the business has all necessary licenses and permits and is compliant with all federal, provincial/state, and local laws and regulations.

  • Employment and Labor Issues: Reviewing employment agreements, collective bargaining agreements, and benefit plans to assess potential liabilities related to employees, such as wrongful dismissal claims or pension obligations.

C. Drafting and Negotiation of the Purchase Agreement

• The purchase agreement is the central document of the entire transaction. The legal team drafts a comprehensive agreement that formalizes all the terms and conditions of the deal, including the sale price, payment structure, and a host of other critical provisions.

• The type of purchase agreement depends on the deal structure:

  • Asset Purchase Agreement: Used for asset purchases, this agreement meticulously lists every asset and liability being transferred.

  • Share Purchase Agreement: Used for share purchases, this agreement focuses on the transfer of shares and includes provisions to protect the buyer from the target's pre-existing liabilities.

• Key provisions in the purchase agreement that tend to demand significant negotiation include:

  • Representations and Warranties: These are a series of statements of fact made by the seller about the business (e.g., "the financial statements are accurate," "the company owns all its assets free and clear"). Any breach of these statements can lead to an indemnification claim by the buyer.

  • Covenants: Promises by both parties to perform certain actions (e.g., the seller promising to operate the business in the ordinary course until closing) and to refrain from others.

  • Conditions Precedent to Closing: A list of conditions that must be met by each party before the deal can close (e.g., obtaining regulatory approvals, no "material adverse change" in the business).

  • Indemnification: This is a key legal protection for the buyer. It outlines the seller's obligation to reimburse the buyer for losses arising from a breach of the representations, warranties, or covenants.

D. Closing the Transaction

• The closing is the final stage where ownership of the business legally transfers from the seller to the buyer. Legal work involved in the closing process includes:

  • Finalizing Ancillary Documents: Preparing and finalizing all documents required to execute the deal, such as bills of sale for assets, assignment agreements for contracts, and director and officer resignations.

  • Obtaining Consents: Ensuring all required third-party consents (e.g., from landlords, key customers, or lenders) have been obtained.

  • Fund Transfer: Overseeing the transfer of the purchase price, often through an escrow agent.

  • Corporate Filings: Making the necessary corporate and governmental filings to register the change of ownership and, in the case of a statutory merger, to legally create the new entity.

E. Post-Closing Legal Work

• The legal work doesn't always end at closing. Lawyers often have a role with:

  • Integration: Helping to integrate the acquired business into the buyer's operations, including transferring licenses and permits, and negotiating new employment agreements.

  • Post-Closing Adjustments: Resolving any post-closing purchase price adjustments (e.g., based on working capital calculations).

  • Indemnification Claims: Assisting the buyer in making or defending any indemnification claims that arise after closing.

When it comes to the legal component of corporate mergers & acquisitions, that is when the law firm of Neufeld Legal P.C. comes into play. Such that when your company is seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

Investigating Business Owner's Reasons for Selling: All too often, prospective business purchasers have not looked into the underlying reasons behind the existing business owner's interest in selling their corporate enterprise, even though such information could have proven highly beneficial to their negotiations related to the business acquisition and the purchase price. Read more.

 

Factors Impacting Determination of Purchase Price: The determination of the purchase price for a business acquisition is a complex process influenced by a variety of factors, with the application of those factors both in the computation and negotiation process being essential to realizing an acceptable purchase price to advance the business transaction. Read more.

 

Readiness for a Merger / Acquisition: If you are considering engaging in a merger or acquisition so as to increase your business' results through expansion, you need to thoroughly determine if your business is truly ready for a merger or acquisition. Prematurely moving to undertake a corporate merger or acquisition can adversely impact the realize return from entering into the transaction following appropriate pre-merger / pre-acquisition preparation. Read more.