The Role of Merger and Acquisition Lawyers
Mergers and acquisitions is an umbrella term that refers to the combination of two businesses. It gives sellers the reward of a newly formed business or an opportunity to cash out or share in the risk. When a merger and acquisition is successful, it offers enhanced value to both the buyer and seller. Mergers and acquisitions are complex transactions that require significant legal due diligence. An experienced merger and acquisition lawyer can guide you through the legal areas that govern merger and acquisition law.
So, what do merger and acquisition lawyers do? Merger and acquisition lawyers represent companies that are the acquirers or the targets in mergers, acquisitions, spinoffs, joint ventures, and other similar transactions. Some lawyers focus on one side and work with either acquirers or targets or on deals involving either public or private companies, while others work broadly across many types of transactions.
It is crucial for merger and acquisition lawyers to have a deep understanding of corporate law, business financing, and how businesses operate. They should be able to conduct high-stakes negotiations and understand how their actions will play out in court. Keep reading to learn more!
What Are Merger and Acquitision Lawyers?
Lawyers are often either transactional lawyers or litigation lawyers. Transaction lawyers deal with the negotiation, drafting, and execution of legal agreements and documents. Litigation lawyers focus on resolving disputes through the court system. Merger and acquisition lawyers must be both transactional and litigation attorneys.
Mergers and acquisitions, commonly referred to as “M&A,” are two forms of business transactions that result in the consolidation of two companies into one. Mergers and acquisitions are a major event for any company and as such have dramatic implications for all stakeholders–owners, management, employees, and customers.
The early phase of exploring a potential merger and acquisition requires legal preparation. In the early stage of exploring a transaction, you should consider entering into a confidentiality and non-circumvent agreement.
A confidentiality and non-circumvention agreement is appropriate when two parties are considering a potential transaction and only one party will disclose confidential information. It also includes provisions preventing the party from receiving confidential information from circumventing the disclosing party.
If you are the seller in the transaction, a business broker engagement agreement will establish the terms for the exclusive representation of a business owner that desires to sell a business in the context of a merger and acquisition transaction.
Mergers vs. Acquisitions
The terms “mergers” and “acquisitions” are frequently used interchangeably but they hold slightly different meanings. When one company takes over another and establishes itself as the new owner, the purchase is called an acquisition. On the other hand, when two companies join forces to move forward as a single new entity, rather than remain separately owned and operated, the purchase is called a merger.
Unfriendly or hostile takeover deals, where target companies do not want to be purchased, are regarded as acquisitions. How the deal is communicated to the target company’s shareholders, board of directors and employees determines whether it can be classified as a merger or acquisition.
What is a Merger?
A merger happens when two or more separate companies combine to create a single company. Mergers can be structured in multiple ways, based on the relationship between the two companies involved in the deal.
Five types of mergers are the most common:
- Conglomerate: Two companies that have no common business areas.
- Horizontal: Two companies in direct competition with each other and share the same markets and product lines.
- Vertical: A supplier and company or a customer and company.
- Product Extension: Two companies that sell different but related products in the same market.
- Market Extension: Two companies selling the same products in different markets.
A merger of two or more companies where there is no designated acquiring company is referred to as a merger of equals. An example of this is when an individual is selling a dental practice to another dentist.
The combined companies will have equal or close to equal board representation on the new board. The shareholders of each company have to surrender their shares and will receive new shares from the new company.
A true merger of equals is rare. Typically, one company acquires another, but out of deference to management and employees or as a marketing tactic, the companies will refer to the union as a merger instead of an acquisition.
What is an Acquisition?
An acquisition is the purchase of one company (the target) by another company (the acquirer) which can occur through the purchase of the stock or other equity interests of the target company or through the purchase of all or a substantial amount of the target company’s assets.
In a stock purchase, the acquirer buys the shares of the target company from its shareholders. The acquirer then takes on all of the target company’s assets and liabilities. One of the big complex factors of a stock acquisition from a legal perspective is the number of shareholders in the target company.
In an asset purchase, the acquirer purchases some or all of the assets of the target company, which can include equipment, vehicles, stock, inventory, or facilities. The acquirer has the option to choose which assets and liabilities to take. There isn’t a requirement to purchase all of the target company’s assets, which is considered one of the advantages of an asset purchase over a stock purchase.
What is a Consolidation?
A consolidation is created when a new company combines core businesses and abandons the old corporate structures. Stockholders of both companies must approve the consolidation and receive common equity shares in the new firm.
Who Does a Merger and Acquisition Lawyer Work With?
Merger and acquisition lawyers work with a variety of different types of clients–companies of all sizes and in all industries. They work with either the acquiring company or the target company to make the merger or acquisition process as quick and smooth as possible. Sometimes merger and acquisition lawyers are brought in to represent shareholders. They may also represent the target company if they resist a potential transaction.
Merger and acquisition lawyers can also represent lenders and investors who are interested in funding a merger or acquisition.
Several different stakeholders and entities benefit from legal counsel during a merger and acquisition transaction:
- Target company
- Acquiring company
- Majority interest shareholders
- Minority interest shareholders
- Boards of directors
- Select committees
- Investment bankers
- Partnership interests
- Dissident shareholders
- Financial advisors
Due to each group having its own interest, duties, and rights, they need their own independent merger and acquisition lawyers. In some situations, lawyers are retained to use the legal system to derail a deal that is unfair or undesirable to a particular group. In many instances merger and acquisition lawyers try to make the transaction go as smoothly and quickly as possible.
Who Approves the Sale?
Management and the board aren’t enough to approve a merger and acquisition transaction. A decision as significant as the sale of an entire company is left to the target shareholders.
The transaction can only go through if 50 percent of the target company’s shareholders vote to approve it. Acquirer shareholders may be required to approve an acquisition when an acquirer issues more than 20 percent of its own stock in the transaction.
How Can a Merger and Acquisition Lawyer Help?
A merger and acquisition lawyer ensures that your merger and acquisition transaction complies with relevant state and federal laws that govern business transactions. They will help you draft and negotiate the terms of the transaction and obtain any third-party consent. They will also help you decide on the right structure for your deal, complete the transaction, and perform post-closing tasks.
Often merger and acquisition transactions involve specialized lawyers including finance, tax, executive compensation, or business lawyers. The merger and acquisition lawyers generally serve as the quarterback, supervising or organizing the specialists.
Some people think of merger and acquisition lawyers as closers—only being brought in to help seal the deal. They are usually involved from the earliest days of a proposed merger or acquisition.
Once a business has set its sights on a target its in-house legal team will retain an outside firm with merger and acquisition expertise to help advise on the potential transaction. These outside merger and acquisition lawyers will help in the negotiations with the target company.
Once a company realizes it is an acquisition target or potential merger partner, it will also retain its own merger and acquisition lawyers to help advise on the transaction and negotiate the details.
In many complex transactions, there will also be a third side, the lenders or investors that will fund the merger or acquisition. This third group will also want merger and acquisition lawyers to help negotiate the structure and terms of any financing deal.
When You Should Hire a Merger and Acquisition Lawyer
The sooner you have a merger and acquisition lawyer on your team the better your chances of success. Merger and acquisition lawyers specialize in helping all of the different sides of a transaction come together and remove obstacles that may delay the deal.
The best way to ensure a potential transaction is to hire a merger and acquisition lawyer as soon as possible. They can help reduce the costs of a transaction by warning of potential liabilities. They can also create an organized plan to deal with objections from regulators or shareholders.
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