If you have been following financial news, you have probably seen a lot of buzz for mergers and acquisitions (or “M&A”) as more and more companies seek to consolidate or diversify their business operations. This has been especially true post-pandemic.  This article provides a simplified overview of the legal considerations involved in M&A and why it is necessary to seek legal guidance before taking this step. 

What is it?

In basic terms, a merger or acquisition involves the combination or acquisition of one company by another. They are complex transactions, requiring careful planning and rigorous compliance with various legal requirements.

How does it work?

Viewed from a macro level, the M&A process begins with a negotiation phase, leading to a definitive agreement between the parties involved. Thereafter, the target company’s assets are either integrated into the acquiring company, or they operate as a separate entity. The process is more intricate in reality and demands the presence of experienced legal counsel to ensure the deal is legally sound.

Legal Necessities for Mergers and Acquisitions

One fundamental necessity in M&A is the due diligence process, which uncovers any potential legal liabilities of the target company. Legal due diligence involves an exhaustive review of all legal documents, contracts, litigation records, regulatory compliance, and intellectual property.

Moreover, the merger or acquisition transaction must comply with all applicable laws, including corporate laws, antitrust laws, securities laws, and foreign investment laws if applicable. Depending on the industry, other sector-specific laws might also be relevant.

Potential Risks of Mergers and Acquisitions

M&A transactions aren’t without their risks. As per the US Bureau of Labor Statistics, around 1 in 5 businesses fail within the first year after a merger or acquisition, a figure that rises to nearly half by the fifth year. Various factors such as integration challenges, culture clashes, and unforeseen financial burdens can lead to this failure. Parties involved must carefully evaluate these risks and be prepared for potential difficulties.

A failure to meet the legal requirements of an M&A transaction could also result in significant penalties, regulatory scrutiny, or even the invalidation of the deal. This underscores the need for comprehensive legal due diligence and advice throughout the process.

Additionally, M&A transactions may bring about a change in the management structure, which could cause discomfort or confusion for some stakeholders. It’s important to manage this transition smoothly and transparently to avoid unnecessary turmoil.

Lastly, the legal costs associated with M&A transactions can be substantial. It’s recommended to seek out experienced legal counsel, and companies must be prepared to shoulder these expenses for the assurance of a legally compliant process and that they gain the expected value out of the M&A process.

Conclusions

Whether you are an established business entity or a budding entrepreneur, the decision to undertake a merger or acquisition must be taken after careful thought. The legal landscape is complex and fraught with potential pitfalls, underscoring the need for expert legal advice. If you are considering an M&A, please don’t hesitate to give our office a call and let us show how we can support you!

All articles presented on this website are considered general information should not be construed as legal advice. No attorney/client relationship is established or intended from simply reading this article.