Mergers and acquisitions, whether from the perspective of the Seller or the Buyer entail considerable preparation, research, adjustment, and due diligence. In most jurisdictions, including the UAE, in spite of the market’s relatively small size, only a minority of mergers and acquisitions successfully conclude without snags.
While the legal considerations are varied, there are many relevant practical considerations any corporate officer, director, executive, partner, shareholder, or manager needs to keep in mind before embarking on a transaction which can help to smooth the path of the sale or divestment. Some apply to both parties, such as:
- the explicit conviction to transact.
- the need for both parties, depending on the transitioning business structure and especially if either party has subsidiaries, to update their corporate structure and keep their corporate secretaries and directors duly informed so that their respective roles are streamlined and harmonized, so as to eliminate redundancy.
- the need to guarantee/strictly define the scope and quality of Buyers’ and Sellers’ shareholders’ variable rights post-acquisition.
- the need to predict the impact on Buyers’ and Sellers’ interested third parties (creditors), along with other outstanding pertinent matters.
We can explore a few of the primary concerns that apply individually to Sellers and Buyers, regardless of any latent overlap.
- Ask for proof of funds: A serious Acquirer will be typically solvent, financially sound, and well capitalized. However, a cautious Seller must ascertain whether the Acquirer also possesses enough liquidity to finance the transaction. Any M&A negotiation involves constant middle-men/business-intermediaries activity. They are the ones to sustain communication channels vital to the transaction, such as procurement of qualifying prospects, conclusion of confidentiality agreements, business detail valuation via literature or prospectuses, further communication and information exchange, followed by a preliminary agreement and finalization of contractual elements etc. While the cost for the Acquirer there might prove minimal, the time and effort a Seller invests is not recoverable should the acquisition not go through. A Seller is best advised to evaluate the financial durability and security of the acquiring entity.
- Do not disclose documents right away: A Seller should ascertain that Acquirers are not of the variety that exit negotiations pursuant to the transaction midway. Uncertain Acquirers cost eager sellers time and morale. Conversely, any such disclosure should not affect the standing rights or entitlements of the Seller’s employees and clients.
- Increase the seller entity’s value: Having cultivated awareness of key priorities that potential Acquirers value, reciprocal internal adjustment on the part of the Seller is crucial. Streamlining of the Seller’s services and adjudicating as to which of the Seller’s own products are likely to dissuade potential Acquirers or derail potential acquisition is material.
- Quitting while you’re ahead: Sellers should never discount the value of bowing out on a high note. A successful well-established business is more appealing to ‘monied’ Acquirers as opposed to a Seller on the verge of liquidation or in the throes of a downturn. Prudent practice militates in favor of proactive marketing, and the stronger the Seller entity’s business position/proposition appears, the more it can dictate the pace and terms of the market and the negotiations themselves.
- Organization: This is the overarching concern of any Buyer, and a test for whether a prospective M&A transaction is pursuable. Buyers will characteristically inspect not only whether the Target entity is a good fit, but if it is organized. Issues such as registration, licenses, financial statements, assets/property, equipment and inventory, employment files and benefits, management and administrative structure (including listing shareholders and assembly minutes), internal regulation, suppliers, clientele & Good Will, IP entitlements, books, etc are central indicators of a Target’s financial health and market viability. Depending on its size and structure, if the Target requires 6 months to compile corporate documentation and deliver on the promise of “clean business records”, and other pertinent information, then the Buyer could discern that the Target is not adequately organized. This can be fatal to the transaction.
- Transparency: Buyers value that which they can confidently discern and assess. Buying entities will typically investigate to see if the Target has engaged in exhaustive process documentation and/or resolution of outstanding issues or pending legal liabilities. Professional third-party advisory review is advisable in that it allows impartial assessments to govern the details pertaining to various target’s strengths and shortcomings, upon which negotiations are premised. The more informed the Buyer, and the more it can confirm the Target’s good-faith conduct, the less the likelihood it will withdraw the offer. Critically, this step preempts and anticipates all the potential points of contention resulting in attrition-litigation – an eventuality all parties have an interest in avoiding.
- Prioritization: Buyers should isolate and delineate what they value in a Target acquisition. Formal internal organization within the corporate structure of the Target entity, like substitutive training for new employees, tends to catch unwary Targets off-guard mid-negotiation, and further dampen Buyer interest. Buyers must rigorously isolate those unique qualities, virtues and features for which they went shopping to begin with, and not shy from expressly communicating them find more. Some Targets may appear only superficially appealing because of a singular market strength, only to be offset by myriad other unidentified deficiencies. Resisting that initial allure, while moving fast enough in a rapidly fluctuating market so as not to torpedo a lucrative opportunity takes as much operational savvy as it does intuition. This leads us into the next point…
- Synergy: Buyers will seldom neglect the inconsistency of a Target’s business model and end product/service with their own operational structure. To what extent will the Target’s business integrate with the Buyer’s system? Does the Target compliment or compete with the Buyer’s business? What is the end purpose of the M&A – is the Buyer simply buying out the competition, or is it looking to expand and diversify its own market share and portfolio through the acquisition? As a reliable method to determine the feasibility of the acquisition, Buyers would seek to affirm whether the Target already has in place a systematized training manual or work culture that adequately reflects the Buyer’s values and strategic goals. Buyers would have to examine Target’s integration potential on a case-by-case basis pursuant to a well understood operable and tenable minimal cut-off point the Buyer must be equipped to identify.
- Compliance: Buyers should be cognizant of the condition and status of Target’s compliance records and status. Many an M&A process is frustrated after the Buyer accidentally discovers that the Target’s internal regulatory structure is not compliant with applicable regulatory/legislative regimes, industry standards and practice both intra and cross-jurisdictionally, should the transaction involve multi-national or cross-border functionaries. Buyers should vigilantly but amicably monitor any misrepresentation or misfeasance on a Target’s part in that respect.
- Conflict of Interest: This is intrinsic to a Buyer’s risk-assessment and germane primarily to M&As involving professional activities. The merging of Buyer’s and Target’s books may ignite concerns for the Buyer’s clients. It often happens that a Buyer acquires or merges its books with those of a Target whose activities contravene the latter’s laws or business conventions in their home jurisdictions, e.g., an American or European firm acquiring a company with ancillary or incidental business ties to sanctioned or blacklisted entities. Alternatively, a Buyer may acquire a Target entity whose clientele compete with its own. Post-M&A adjustment that follows on the heels of such negative exposure is beset with hidden costs, and Buyers may often have to relinquish or drop those clients much to their reputational detriment.
- Validity of Warranties: Buyers need to meticulously examine a Target entity’s warranties validity, representation and category. If they are invalid, defective or even nonexistent – more egregiously in the case of Target’s misrepresentations – then protracted litigation is sure to ensue.
The above considerations are not exhaustive. Various other legal issues could arise before or during the process of the M&A. Notwithstanding the above, should any such concerns occur, parties contemplating a merger or acquisition are encouraged to seek legal advice so as to correctly predict and navigate themselves into a successful transaction for better placement in the market.
|Title:||Mergers and Acquisitions – the legal considerations|
|Authors:||Jimmy Haoula, Akram Rashid|