FREE online courses on Mergers & Acquisitions - Chapter 2
Legal and Regulatory Considerations
When one company decides to acquire another company, a series
of negotiations will take place between the two companies. The acquiring company
will have a well-developed negotiating strategy and plan in place. If the Target
Company believes a merger is possible, the two companies will enter into a
"Letter of Intent."
The Letter of Intent outlines the terms for future
negotiations and commits the Target Company to giving serious consideration to
the merger. A Letter of Intent also gives the acquiring company the green light
to move into Phase II Due Diligence. The Letter of Intent attempts to answer
several issues concerning the proposed merger:
- How
will the acquisition price be determined?
- What
exactly are we acquiring? Is it physical assets, is it a controlling interest
in the target, is it intellectual capital, etc.?
- How
will the merger transaction be designed? Will it be an outright purchase of
assets? Will it be an exchange of stock?
- What is
the form of payment? Will the acquiring company issue stock, pay cash, issue
notes, or use a combination of stock, cash, and/or notes?
- Will
the acquiring company setup an escrow account and deposit part of the purchase
price? Will the escrow account cover unrecorded liabilities discovered from due
diligence?
- What is
the estimated time frame for the merger? What law firms will be responsible for
creating the M & A Agreement?
- What is
the scope of due diligence? What records will be made available for completing
due diligence?
- How
much time will the Target Company allow for negotiations? The Letter of Intent
will usually prohibit the Target Company from "shopping itself" during
negotiations.
- How
much compensation (referred to as bust up fees) will the acquiring company be
entitled to in the event that the target is acquired by another company? Once
news of the proposed merger leaks out, the Target Company is "in play" and
other companies may make a bid to acquire the Target Company.
- Will
there be any operating restrictions imposed on either company during
negotiations? For example, the two companies may want to postpone hiring new
personnel, investing in new facilities, issuing new stock, etc. until the
merger has been finalized.
- If the
two companies are governed by two states or countries, which one will govern
the merger transaction?
- Will
there be any adjustment to the final purchase price due to anticipated losses
or events prior to the closing of the merger?
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