Legal Implications and Challenges

Challenges and Legal Implications of Mergers and Acquisition

The merger and acquisition process is not a smooth one. There are many roadblocks, and companies must be prepared to deal with each one of them. The number of failed deals (more than 50% of all transactions) sheds light on the fact that merger and acquisition is not a piece of cake.

As companies prepare to take this bold step, they need to evaluate the problems that might arise.

On that note, here are the common challenges for mergers and acquisitions and an insight into the legal aspects of the process.

Merger and Acquisition Challenges

• Technology

Companies follow a specific process and rely on technologies that get their work done fast. So, when they plan to merge with a company or acquire a company, they must also consider the technology the other company uses and zero in on the one that gets the work done for both. Companies also need to upgrade their systems to support the new technologies and have a smooth run going forward.

• Adoption

In addition to the technical problems, adapting to new technologies is a major challenge. Companies must consider how their stakeholders and employees will react to changes before moving forward with the process. Learning new technologies is not a solution to the problem. Organizations need to work on helping employees understand the need for change and reassure them about their importance in the company after the process is complete.

• Coexistence

Coexistence after the process of merger and acquisition can be pretty challenging. Apart from coping with multiple email IDs, the employees have a hard time understanding the hierarchy and whom to report, and who is responsible for what. Organizations must acknowledge the issue and take steps to ensure the problems are solved without any delays.

Legal Aspects of Mergers and Acquisitions

• Due diligence

It is crucial to gather specific information before companies initiate the merger and acquisition process. The initial planning stage is not enough. Companies cannot rely solely on information from public sources. Organizations need specific information, such as the financial status of the target company, its strategies, employees and management issues, legal issues, taxes, environment, governmental matters, etc., before they proceed.

Due diligence allows organizations to gather all this information. But the process can start once there’s an agreement between the acquiring and the acquired company.

• Deal structure

While most of you might think that deal structure is a financial aspect, you must understand that deal structures carry both financial and legal elements. The acquiring company or the merging companies must understand the tax structures, get the necessary approval from shareholders and work on transferring the liabilities to ensure the process is smooth.

The M&A lawyers investigate all these elements and suggest whether to buy an entire company or just the assets.

• Representations and Warranties

Representation and warranties have been made mandatory for acquirers. It is crucial to include them in the transaction terms. These elements help companies avoid the litigation threat for the acquiring firm in issues like:

• Compliance
• Tax
• Authority
• Capitalisation
• Material contracts

These need to be taken into consideration while making the agreement. There are cases where even the most honest target companies have been found guilty on these grounds as they were not fully aware of it.

• Equity and cash

The mode of payment is one of the crucial aspects of the merger and acquisition process. Acquiring companies must take into account various factors before they decide on the mode of payment. While cash is the safest mode of payment, equities can help reduce debt financing costs as it helps improve the acquiring company’s debt rating. Lawyers can evaluate the various aspects and share the right advice to acquiring companies regarding the mode of payment.

• Working capital adjustments

Reviewing the working capital of the acquired companies is crucial in the transaction process. The acquiring companies are not responsible for taking care of the money necessary to complete the process. Adjusting working capital affects the purchase price and can help avoid problems like accelerated debt collection, delay in inventory purchases, etc. The legal processes are not restricted to agreements between two companies, and it is equally necessary to evaluate the transaction processes.

• Joint and several liabilities

Once the merger and acquisition are done, there's no turning back. So, to avoid problems in the future, the acquiring company must evaluate the liabilities and who will be responsible for managing them. In the case of joint liability, shareholders from both companies are responsible for future damages. On the other hand, several liability is defined as the target company's shareholders' responsibilities to take care of the damages to the extent they have contributed to it.

• Closing conditions

The closing conditions are the ones that need to be fulfilled to close the transaction. The conditions remain the same throughout the process and include approval from the board, material changes to the company's trading conditions, and approval from shareholders. Generally, acquiring companies demand approval from more than 80% of shareholders to avoid any complications in the future.

Conclusion

Mergers and acquisitions have played a major role in businesses across the globe. Notable examples of mergers and acquisitions are Verizon and Vodafone, Heinz and Kraft, Pfizer and Warner-Lambert, AT&T and Time Warner, Exxon and Mobile, Google and Android, and Disney/Pixar and Marvel proving how mergers and acquisitions have played a major role in businesses since decades. Hence, it is crucial for companies to consider all the challenges and legal implications mentioned above to ease the process and be in a win-win situation.