As your company grows, you may need to navigate the many legal aspects of mergers and acquisitions. Because M&A law is a complex area of business law, business owners turn to experienced Houston corporate attorneys to represent them during the transaction. In this blog, our Houston business lawyers discuss several legal aspects of mergers and acquisitions that business owners should know before they begin the process.
Are Mergers and Acquisitions the Same?
The terms merger and acquisition are often used together and interchangeably. However, there is a significant difference that business owners must be aware of when negotiating a merger versus an acquisition.
An acquisition occurs when a company purchases another company or substantially all of the assets of another company. The purchased company (or the assets thereof) becomes a part of the acquiring company. Therefore, if your company is “acquired” by another company, your company as an operating entity ceases to exist.
A merger occurs when two companies combine to create a new company. The two companies cease to exist as they create a new legal entity. There are several types of mergers, including vertical, horizontal, congenic, and conglomeration. The type of merger depends on the roles each company plays in their market.
Legal Aspects of Mergers and Acquisitions
There are many legal considerations companies must address during mergers and acquisitions. M&A is a complex process that includes, but is not limited to:
Regulatory Considerations
Companies subject to government regulations may need approval to merge with another company or acquire a company. The M&A is reviewed to determine how it will impact the market and consumer welfare. Businesses must comply with all regulatory guidelines and requirements from the applicable regulatory agency.
Due Diligence
A thorough review of the company being acquired or being merged with is essential. The goal is to identify potential liabilities or risks of the acquisition or merger by understanding the company’s operational, financial, and legal positions. Due diligence involves a thorough analysis of aspects including, but not limited to:
- Financial statements, audits, and projections
- Customer base, relationships, contracts, and satisfaction
- Liability, tax matters, and contingencies
- Regulation, legal compliance, and licenses
- Business plans, strategies, and operations
- Infrastructure, technology, security, and systems
- Company culture, human resources, compensation, and management
- Competition, market position, and opportunities
The nature of the transaction and other factors determine the length and scope of due diligence. Due diligence may require hiring various professionals to provide expertise and insight regarding the information obtained during due diligence.
Structuring the Deal
Negotiating an M&A agreement requires the parties to determine the terms for the key elements of the transaction. Key elements in the deal structure include:
- Purchase price and payment method (including in the case of a merger, the resulting ownership percentages of the newly formed entity)
- Closing conditions that must be met
- The type of structure for the deal, such as stock purchase, asset purchase, or merger
- Representations and warranties the parties have made regarding tax, legal, and regulatory compliance, financial statements, business operations, and other material information
- Indemnification and remedies for losses and damages either party incurs because of a breach of the agreement, misrepresentation, fraud, or other wrongdoing
- Post-closing covenants, such as employee retention, non-compete clauses, etc.
Both parties should be represented by separate legal counsel throughout the M&A process, including negotiating the deal structure. An attorney helps ensure that your interests are protected and you achieve your objectives.
Schedule a Consultation With Our Houston Business Law Attorney for More Information
Mergers and acquisitions can be profitable for businesses. Working with experienced Houston business lawyers is the best way to ensure the process is fair and legal. Contact Capstone Legal Strategies, PLLC, to schedule a consultation with an attorney to discuss a merger or acquisition.