In 2013, my General Counsel and CEO assigned me the task of overseeing the largest acquisition in company history. At that time, I didn’t know what a Letter of Intent was. I had never seen a Purchase and Sale Agreement. I was clueless as to the differences among a stock purchase, an asset purchase, a traditional merger, and a triangular merger (reverse or otherwise). And I needed to learn, fast.
While that was among the most anxiety-inducing times of my career, I quickly began to love my role in running the acquisition. And after that, I became the lead mergers and acquisitions (M&A) attorney for our department and M&A became my favorite part of my job.
Nine years later, I’ve learned some things that I wish I knew then. So I put together this summary of the key stages of the M&A process and the key agreements involved, along with some tips and key issues to watch out for (all with a contract focus, of course, for my fellow #contractnerds).
Hopefully this article can help other in-house lawyers tasked with running a deal and having little-to-no M&A experience.
The M&A Process
The typical deal process generally involves the below steps. But other than signing a definitive agreement and closing the transaction, many of these steps may be scaled back or even omitted for a given transaction.
Step 1. Identifying the counterparty.
This may be as simple as a seller approaching a potential buyer or vice-versa, or it could be the result of a complex multi-stage auction process run with the assistance of investment bankers.
Step 2. Negotiating a Letter of Intent (“LOI”)
LOIs tend to include binding terms governing the initial process for the deal (e.g., time period for exclusive negotiations and due diligence) and non-binding terms specifying the parties’ current thinking regarding purchase price, deal structure, and similar critical terms.
Step 3. Performing due diligence.
This is where the buyers request various information from the sellers regarding the targeted business. The buyers use this information to test the understandings and assumptions of the business they had when signing the LOI. Depending on what the buyers learn, the purchase price and structure may change or the deal could fall apart altogether.
Step 4. Negotiating a definitive agreement.
The buyer usually prepares a draft definitive agreement for the transaction, often shortly after due diligence has started. This could take many forms such as, a merger agreement, stock purchase agreement, or asset purchase agreement. See the next section of this article for more information on key M&A agreements.
Step 5. Announcing the deal.
This often takes place after signing the agreement (and if either seller or buyer is publicly traded and considers the transaction material, it will need to be announced under SEC rules within a few days). But other times, this may not happen until after closing.
Step 6. Satisfying conditions to closing.
Just like when you sign an agreement to buy a house, there is often (but not always) a period of time in between signing the definitive agreement and actually closing the transaction to buy/sell the business. Oftentimes there are governmental or contractual approvals that must be obtained before the business and money change hands.
Step 7. Closing
Business and money (and sometimes deal trophies) are finally exchanged! Sometimes (usually where critical governmental consents are not required) it is possible to sign the definitive agreement and close the transaction at the same time – so this would be step 5, announcing the deal would be step 6, and no closing conditions would need to be satisfied.
Key M&A Agreements
Below are the key agreements involved in a typical M&A process, in order of where they generally fall in the process. For each, I’ve noted the purpose and some key tips for negotiating.
Nondisclosure Agreement (NDA)
This is largely to protect the seller’s confidential information uncovered during due diligence.
If you’re the buyer, it’s standard to have a one-way NDA where you’re receiving the confidential information, but make sure that the NDA also protects your identity so the seller can’t leak that you’re in negotiations.
The parties often fight over the scope of the non-solicitation clause regarding the seller’s employees. Make sure you get input from the right people so the clause works for your needs.
If the seller is public, it is typical to have a detailed “standstill” provision that prevents the buyer from acquiring seller stock, directly approaching the board, or taking various other actions that could interfere with a negotiated deal.
Letter of Intent (LOI)
As noted above, this sets the key terms for the process and what’s anticipated for the deal.
Almost everything in an LOI is critical since it focuses on the high-level terms, so parse it carefully with your clients.
Be clear on what terms are binding (usually those pertaining to the process of evaluating/negotiating a deal) vs. non-binding (usually those pertaining to the anticipated terms of the deal itself).
If the LOI contemplates a given deal structure, get your tax team involved at this stage because tax impacts can vary greatly based on structure.
Definitive Transaction Agreement
Whether it’s a stock purchase, asset purchase or merger agreement, this is the key document in the entire process. More than 75% of the time spent negotiating agreements will usually be on this contract.
Closing conditions: If you’re the buyer, you want to make sure you don’t have to close if the value of the business post-closing isn’t what you thought it would be, so you’d push for a broad list of closing conditions that give you suitable assurance. If you’re the seller, you (generally) want to make sure the deal happens, so you would prefer a narrow list of truly catastrophic events precluding closing.
Indemnities and limitation of liability: Sellers want to keep their money; buyers want to have broad claims to recover any unexpected issues post-closing. Negotiations usually focus on limitations of liability, types of claims that can exceed a regular damages cap, and the deductible buyers would have to pay before sellers are liable for claims.
Contrary to best practices in negotiations for most other contracts, it’s standard to introduce material changes relatively late in the negotiations if necessitated by facts you learn during diligence or negotiations (e.g., sellers learn of new risks in diligence, buyers learn of sellers’ plans to terminate a large portion of the workforce).
(There are countless more that I could add – this could be the subject of an entire post by itself!)
Also keep in mind that as part of negotiating a definitive transaction agreement, parties often negotiate supplemental agreements, such as an escrow agreement (to hold some of the purchase price to be available to satisfy indemnity claims post-closing), a transition services agreement (if the seller needs to provide temporary administrative services to the buyer until they develop their own functions in house), employment agreements (if there are key seller employees that the buyer wants to retain), and potentially others.
I hope you find this helpful. It’s not going to be a substitute for years of M&A experience or even the experience of going through one deal yourself! But it should help you focus your attention on some critical issues and give you a better understanding of the overall process so that you can work with outside counsel more efficiently and give better advice to your clients.
If you have any feedback or questions on the post or topic generally, feel free to message me on LinkedIn!
Shaun B. Sethna is currently Deputy General Counsel at Altisource, a PropTech and services provider in the mortgage industry. He is a technology and transactions-focused generalist, with a passion for building and developing legal teams.