Mergers and Acquisitions Law Basics

In 2022 and 2023, regulators globally challenged $361 billion in announced deals. Of the $255 billion that closed, nearly all needed remedies. For example, concerns from the European Commission and the UK Competition and Markets Authority led Microsoft to restructure its $69 billion acquisition of Activision Blizzard.

Source: Regulation and M&A: How Scrutiny Raises the Bar for Acquirers | Bain & Company

If you are on the verge of M&A and need essential insights into the legal facets of the deal, read our post to find answers to the following questions:

• What is M&A law?
• What is the structure of M&A law?
• What are M&A legal activities?
• What are the most common risks of M&A?
• What is the role of M&A lawyers in a successful deal?

What is M&A law?

Mergers and acquisition law is a legal framework governing the sale and purchase of businesses. It covers various aspects of mergers and acquisitions, including deal structure, corporate governance, tax implications, regulatory compliance, litigation risks, and conflict resolution.

M&A law maintains transparency, fairness, and legality throughout the deal-making process. Specifically, it ensures that both parties adhere to legal obligations, protects their interests, and facilitates the negotiation, execution, and completion of mergers and acquisitions. 

Although M&A transactions are time-consuming, often taking several months to over a year, they progress more smoothly and quickly when carried out according to the law and with the support of a skilled business lawyer. Otherwise, regulatory issues, undisclosed liabilities, and other factors we mention later in our post may extend the transaction timeline.

What is the structure of M&A law?

M&A law structure may vary but mainly it relies on the following areas that collectively govern the transaction process:

• Corporate law governs the creation, operation, and dissolution of corporations and other entities involved in M&A. Also, it specifies the duties and responsibilities of boards and shareholders in decision-making processes.
• Securities law deals with issuing, trading, and regulating stocks, bonds, and other financial instruments related to M&A transactions.
• Antitrust law prevents anti-competitive practices and ensures fair competition, which is particularly important in large mergers that may affect market competition.
• Tax law addresses the tax implications of M&A transactions for the acquiring and target companies, including issues related to corporate structures, gains, and losses.
• Contract law governs the negotiation, drafting, and enforcement of agreements between M&A parties, such as purchase agreements, confidentiality agreements, and employment contracts.
• Regulatory and administrative law involves obtaining regulatory approval from governmental agencies, such as securities regulators, antitrust authorities, and industry-specific regulators.
• Employment and labor law ensures compliance with labor laws and protects employee rights during corporate mergers or acquisitions.
• Intellectual property law addresses the ownership, licensing, and protection of intellectual property assets, which may be critical in technology and innovation-driven mergers.

M&A activities extend beyond mere compliance. They encompass a strategic approach to structuring deals, mitigating risks involved, and maximizing value for all parties involved. So, our next step is to guide you through the mergers and acquisitions process.

M&A legal activities step-by-step

The M&A process typically begins with initial discussions between potential buyers and sellers, during which preliminary terms, strategic fit, and mutual interest are explored. These early conversations lay the foundation for the following legal activities:

1. Non-disclosure agreements

A non-disclosure agreement as a legal document protects sensitive information exchange between buyers and sellers, establishing confidentiality for subsequent negotiations and due diligence.

2. Letter of intent

Following initial discussions, the buyer issues a letter of intent (LOI) to express interest and outline preliminary terms formally. While non-binding, the LOI specifies critical elements such as the proposed deal structure and price range. Also, it often includes an exclusivity period, marking the beginning of structured negotiations.

3. Due diligence

Arguably the most comprehensive phase for M&A lawyers, the due diligence process involves meticulous investigation and analysis of the target company’s financial, operational, regulatory, and legal aspects. This rigorous investigation, coordinated across finance, legal, and HR teams, verifies information accuracy and assesses potential risks.

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Source: M&A Due Diligence: 2023 Guide and Checklist 

4. Deal structure

Beyond financial arrangements, the deal structure is crucial for legal considerations in M&A transactions. Whether structured as a stock acquisition or asset purchase, each approach carries distinct legal implications concerning tax obligations, liability transfer, and regulatory compliance. So, careful structuring is essential to optimize benefits and mitigate risks for both parties.

5. Representations and warranties

Representations and warranties have become pivotal in expediting transactions amid competitive pressures. They are statements of facts made by the seller that the buyer relies on to make the purchase.  Breaches in these representations can lead to indemnification claims, impacting the overall deal value and post-closure relationships.

Source: ANALYSIS: Reps & Warranties Insurance: M&A Lawyers Weigh In 

6. Definitive purchase agreement

The culmination of negotiations is the definitive purchase agreement, which supersedes all prior agreements and formalizes the transaction’s terms and conditions. Commonly referred to as the “signing” phase, this legally binding document requires meticulous drafting and review by M&A lawyers from both sides. Once executed, barring exceptional circumstances, it commits both parties irrevocably to the transaction. 

Successful completion of each step relies on clear and continuous collaboration between the buyer and seller. Also, M&A law firms are critical in guiding the deal through complex legal environments and fostering a smooth transaction process.

Before we discuss the importance of engaging a law firm in the deal process, explore some typical legal risks of M&A and learn how to address them.

The most common legal aspects and risks of M&A

Whether you are a large or medium-sized firm involved in acquiring and selling public companies, the following information about risks and solutions can help you manage challenges and move your deal forward.

Risks	Potential consequences	Best practices
Due diligence failures	Buyer: Acquires undisclosed liabilities. Seller: Risk of reduced valuation or deal collapse.	Conduct thorough due diligence early in the process. Engage experienced advisors.
Regulatory compliance	B: Risk of regulatory scrutiny, fines, or deal failure. S: Delay or failure to obtain regulatory approvals.	Anticipate regulatory requirements. Plan for regulatory approvals in advance.
Contractual obligations	B: Assumption of unfavorable contracts. S: Breach of contract claims post-transaction.	Review contracts for change of control provisions. Negotiate indemnification clauses.
Intellectual property	B: Risk of IP infringement claims. S: IP ownership disputes or loss of key assets.	Verify ownership and validity of IP assets. Draft robust IP warranties and indemnities.
Financial and tax issues	B:  Unexpected tax liabilities or financial discrepancies. S: Inaccurate valuation or tax penalties.	Conduct detailed financial due diligence. Plan tax-efficient transaction structures.
Data privacy and security	B: Risk of data breaches or non-compliance with privacy laws. S: Exposure to privacy-related claims.	Assess data security measures. Ensure compliance with data protection laws.
Litigation and disputes	B: Inherit pending litigation. S: Risk of post-transaction disputes.	Identify and assess litigation risks early. Negotiate indemnification provisions.

Now, we invite you to explore a few real-world examples that showcase the M&A complexities some large companies have faced.

✔️Real-life lessons from AT&T, Pfizer, and Amazon 

1. AT&T and Time Warner

AT&T’s $85 billion acquisition of Time Warner faced significant regulatory hurdles and antitrust challenges. The Department of Justice sued to block the merger, arguing it would harm competition. Despite AT&T winning the case, the lengthy legal battle underscored the importance of antitrust laws in M&A transactions.

2. Pfizer and Allergan

Pfizer’s proposed $160 billion merger with Allergan was structured as a tax inversion to benefit from lower Irish tax rates. The U.S. Treasury Department introduced new rules to curb tax inversions, leading to the deal’s cancellation. This case shows the critical role of tax law in structuring M&A.

3. Amazon and Deliveroo

Amazon sought to expand its presence by acquiring a minority stake in Deliveroo, a UK-based food delivery service. The UK Competition and Markets Authority launched an investigation into the deal over concerns it could harm competition in the food delivery sector. Regulatory scrutiny and potential antitrust issues delayed the acquisition. However, the COVID-19 pandemic significantly affected the competitive environment, and the CMA approved the transaction.

Role of M&A lawyers in a successful deal

In high-stakes deals like mergers and acquisitions, where billion-dollar deals can make or break a company’s future, the spotlight often falls on the CEOs and executives. Yet, behind every successful transaction, there’s a team of dedicated M&A lawyers who guide the procedure to make the deal go smoothly.

Here is what M&A lawyers do:

• Determine the client’s business objectives
• Provide legal counsel
• Identify legal issues
• Create a deal road map from start to finish
• Provide advice on deal strategies and negotiation tactics
• Perform due diligence on the other party
• Assess tax implications, consulting with tax attorneys to determine if special structuring is needed
• Collaborate with antitrust attorneys to evaluate regulatory challenges, secure regulatory approval, and analyze other necessary regulatory clearances
• Work with local counsel in cross-border deals
• Secure third-party consent from lenders or other contractual parties
• Negotiate the agreement, sign it, make a public announcement, and finalize the deal
• Attorneys for the target company decide whether to engage in negotiations, reject the buyer’s proposal, sell, or pursue a deal with another company 

Also, a mergers and acquisitions lawyer may come in a few roles with various duties. The most common ones are as follows:

1. Adviser

As advisers, M&A lawyers conduct comprehensive due diligence to identify legal risks and liabilities. They ensure compliance with security, antitrust, and foreign investment laws, and structure M&A deals to align with the client’s business objectives, factoring in tax implications and other legal considerations.

2. Mediator

Mediators facilitate the resolution of disputes related to purchase price adjustments, representations, and indemnification. They address conflicts of interest, manage stakeholder communication, and support effective negotiation.

3. Negotiator

M&A lawyers, as negotiators, formulate negotiation strategies. They analyze relevant documents and assess legal risks before negotiations, ensuring that their clients are well-prepared. During negotiations, they secure favorable terms.

4. Drafter

Drafters prepare and review various essential transaction documents. They create and evaluate M&A due diligence papers, employment agreements, corporate governance documents, etc. Besides, they document the terms of the deal, such as purchase agreements and representations, and produce post-transaction documents necessary for finalizing M&A transactions.

FAQ

What are mergers in M&A corporate law?

A merger in corporate M&A law involves one corporation being absorbed into another. The surviving corporation takes on all the assets and liabilities of the absorbed one. The amalgamation of non-corporate entities like associations may also be called a merger.

Does a mergers and acquisitions law firm handle M&A for private companies or public companies? 

Law firms handle mergers and acquisitions for both private and public companies. Their expertise spans a wide range of transaction types and sizes, addressing the unique legal and regulatory requirements associated with each. For private companies, law firms often focus on issues like shareholder agreements, confidentiality, and due diligence. For public companies, they successfully navigate additional complexities such as securities laws, stock exchange rules, and public disclosures.

What if the target company rejects the deal?

The acquirer may continue negotiations to address concerns or revise the terms of the offer. In some cases, if the acquirer is determined to proceed, they may attempt a hostile takeover by directly approaching the target company’s shareholders. Ultimately, if negotiations fail to reach a satisfactory resolution, the deal may be terminated, and both parties would explore other opportunities.

When to hire an M&A lawyer? 

Engage an M&A lawyer when contemplating an acquisition or merger to receive expert guidance on structuring the deal and assessing its feasibility. This way, you optimize transactional outcomes, mitigate legal pitfalls, and streamline the complex mergers and acquisitions process.