Mergers and acquisitions
Legal aspects of mergers and acquisitions
Different legal issues can arise at different stages of the acquisition process and require separate and sequential treatment.
Carrying out due diligence
Due diligence is the process of uncovering all liabilities associated with the purchase. It is also the process of verifying that claims made by the vendors are correct. Directors of companies are answerable to their shareholders for ensuring that this process is properly carried out.
For legal purposes, make sure you:
- obtain proof that the target business owns key assets such as property, equipment, intellectual property, copyright and patents
- obtain details of past, current or pending legal cases
- look at the detail in the business' current and possible future contractual obligations with its employees (including pension obligations), customers and suppliers
- consider the impact of a change in the business' ownership on existing contracts
Always use a lawyer to conduct legal due diligence.
Completing the deal for a merger or acquisition
When you are considering general terms of a potential deal you will probably seek certain confirmations and commitments from the seller of the target business. These will provide a level of assurance and comfort about the deal and are indications of the seller's own confidence in their business.
- Warranty - a written statement from the seller that confirms a key fact about the business. You may require warranties on the business' assets, the order book, debtors and creditors, employees, legal claims and the business' audited accounts.
- Indemnity - a commitment from the seller to reimburse you in full in certain situations. You might seek indemnities for unreported tax liabilities, for example.
Your professional adviser can assist in reviewing the content and adequacy of warranties and indemnities.
For more information about the legal aspects of partnership agreements, see joint ventures and business partnerships.