During a merger and acquisition (M&A), the in-house counsel and legal team are responsible for most of the arduous processes involved in due diligence. Issues always arise during the transaction — and preparing for everything is never on the table. However, there are several strategies the team can implement to ensure a smooth and successful M&A due diligence process.
1. Prioritize Confidentiality
Keep the entire transaction as confidential as possible during the planning, drafting, negotiation and initial deal finalization stages. While you may need to rely on several employees to gain specific insights or information, try to limit the number of individuals involved. Rumors about the deal and employee anxiety can be detrimental to the entire due diligence process.
Best practices when it comes to merger and acquisition due diligence confidentiality include:
- Involve non-disclosure agreements (mutual or non-mutual NDA) in all confidential interactions, with individuals involved listed by name. Non-solicitation provisions may also be necessary in some cases.
- Ensure the existence of a virtual data room that includes “black box” measures to guarantee data stays confidential and secure.
- Have a secure ‘deal room’ where physical papers, meetings, and conversations can take place, and restrict access only to those who need it.
2. Leverage the Letter of Intent
Negotiation power is at its peak before that first signature on the Letter of Intent (LOI). The leveraging power is especially high if multiple bidders are involved in negotiating a deal. The in-house counsel must draft the LOI with utmost attention to detail, keeping in mind that the acquirer will leverage additional clauses and limits once the LOI is signed and becomes legally binding.
Best practices when it comes to the LOI include:
- Define basic key terms and ensure agreement for both the internal team and the acquirer.
- Pay special attention to determining the non-binding terms, such as purchase price, structure and closing conditions, and binding provisions, like exclusivity and confidentiality.
- Prevent potential liability by clearly defining the LOI as generally non-binding before an official deal.
3. Plan the Disclosure Schedule Early
One of the most important aspects of M&A due diligence from a GC perspective is the disclosure schedule. A disclosure schedule contains factual information relating to the acquisition agreement — from taxes and internal/external contracts to employee information. Typically, the document serves as an extension of the acquisition agreement, listing supplemental information not included in the main document and including legal exceptions.
Best practices when it comes to disclosure schedules include:
- Begin the disclosure schedule drafting early, even before finalizing the acquisition agreement. The assessment and gathering of information for the document is a lengthy process; avoiding liability in that regard requires plenty of time for drafting and redrafting several times throughout the process.
- Don’t over-disclose. A lengthy schedule may seem like a great way to avoid liability, but, in reality, it may become a point of concern. Ensure that everyone on your team is on the same page — the disclosure schedule should not include brand new, previously undisclosed items, but act as a supplement to the main document.
- Check your data privacy obligations. Different jurisdictions have varying laws on sharing personal information across borders. GDPR in the EU, POPI in South Africa and CPPA in the US, for example, mean GCs should be aware of and comply with, specific information that can be shared.
4. Negotiate the Acquisition Agreement
One of the final critical steps to protecting the company is a well-drafted acquisition agreement document. To ensure that finalized agreements go in your favor, the first draft of the acquisition agreement should be done early and must be optimized within the realm of negotiation feasibility.
Best practices when it comes to negotiating an acquisition agreement include:
Know your risk appetite. Understand and negotiate internally with stakeholders what the boundaries are for the deal and preplan how far you are willing to go on specific aspects. This helps speed up the process and gives you a stronger negotiating position.
Explore the possibility of making adjustments in the following areas: basic purchase agreements, closing conditions, provision of consent for post-deal changes, the treatment of employee options, and other provisions where further negotiation is possible.
Create a provision for unknown liabilities to protect the company and shareholders in the post-deal period.
Understand the potential risks around Intellectual Property, including any non-compete and non-solicitation details into the due diligence.
5. Know the employment landscape
Although pastoral care might be out of the traditional realm of GCs, during M&A due diligence GCs must understand the legalities around employment laws. Employment laws can derail an M&A or at the very least delay proceedings, and it’s up to a GC to assess the risks involved at the due diligence stage. Every country has its own regulations on redundancies, transfer of staff and employee contracts, and understanding this at the due diligence stage can make for a smoother deal.
Best practices when it comes to knowing the employee landscape include:
- Work with HR to better understand the potential employee overlap between the two firms and assess the risk of redundancies
- Help HR with legal advice – while they understand the employee relations and cultural fit, they may require additional assistance when understanding the legal aspect of the employee landscape within a due diligence framework.
- Understand completely the employment laws and how they apply to you, regardless of whether you’re the buyer or seller.
6. Utilize an Outside M&A Due Diligence Expert
Ultimately, accomplishing due diligence best practices can be difficult and time-consuming for many in-house legal teams to do alone. By retaining an outside expert M&A counsel with a team of specialists in various areas of law and business, they can help highlight and solve any issues and challenges that will come up during the process. It’s best to create a collaborative process with the outside counsel to combine your intimate in-house knowledge of the business with their M&A expertise and team of specialists. Include the outside counsel and team in all team communication.
Best practices you should expect from a third-party M&A expert:
- Applicable legal and extensive, full-time M&A experience.
- Outstanding skills for advising, negotiating and legal drafting.
- Ability to observe the deal, the risks and the opportunities with fresh eyes.
- Thorough knowledge of market regulations and laws, and the ability to implement them throughout the due diligence process.
To continue as a strategic guide for how to move forward post-deal to ensure integration success.
A speedier due diligence process and more time for your team to focus on strategic work.
If you want smooth and successful M&A transactions, especially when involving complex matters like cross-border transactions and intellectual property, it’s crucial to leverage available assistance.
Your company’s future is at stake here — make the wise decision and contact us for the right guidance. With Exigent by your team’s side, you are fully equipped to face any challenges that M&A due diligence has in store.