Mergers and acquisitions are business transactions that result in the purchase or takeover of one company by another. When companies complete a merger or acquisition, they combine businesses or absorb one business entity into the other. The transaction allows a business to become larger or smaller or change their business structure. Mergers and acquisitions law involves advising companies about potential mergers and acquisitions. It also involves negotiating the transaction and preparing the necessary paperwork to complete the merger or acquisition.
What is a merger in business?
A merger is when two companies combine to form a new company. When a merger occurs, the two companies consolidate to do business together. Although each merger results in a unique business structure and climate, the nature of a merger is that both companies involved are on an equal playing field during and after the merger. When a merger occurs, typically the old shares from each company are transferred to form new shares in the name of the new entity.
There are a number of types of different business entities that merge. For example, two companies that compete directly to offer the same product or service might combine to compete together. Two companies who offer similar products in different markets might combine in order to expand the size of their market. Alternatively, a producer might merge with a supplier, or companies that offer different but related products might merge to offer combined products in a single market.
What is an acquisition in business?
An acquisition occurs when one company buys another company and takes over operations. An acquisition is also called a takeover. Acquisitions can involve both private and public companies.
The acquired company may or may not want the transaction to occur. When the management of the acquired company opposes the transaction, it’s a hostile acquisition. Most acquisitions involve a larger or older company acquiring a smaller or newer company. In a reverse takeover, a younger or smaller company takes over a larger company but keeps the name of the larger company going forward.
Why do companies pursue a merger or an acquisition?
A company might consider a merger or acquisition in order to improve their business position. One or both companies might increase the value of their company because of the transaction. The transaction might allow a company to diversify their interests or increase the geographic locations where they conduct business. For the company that’s purchased in an acquisition, the transaction can result in a payday for shareholders or owners.
The process of a merger or acquisition
A merger or acquisition often begins with a tender offer. A tender offer is an offer by the acquiring company to purchase stock. The goal of the acquiring company is to get enough shares to have a controlling interest in the company.
A tender offer is public. The buying company typically publicizes their offer to purchase shares. The company makes an offer to buy shares from existing shareholders. They offer a purchase price that’s above the market value as a way to entice shareholders to accept their offer.
The acquiring company can purchase up to five percent of a company’s stock before they have to file documents with the Securities and Exchange Commission (SEC). When they file with the SEC, they must state whether they want the shares as part of an acquisition or if they’re only making an investment in the company. An acquiring company can make a tender offer that’s conditioned on the acquiring company owning at least 51 percent of the shares after their purchases are complete.
Letters of Intent
A merger often involves a letter of intent. A letter of intent states the basic intent of the parties before they’re able to negotiate the final details of the agreement. Using a letter of intent can help the parties make sure that both parties are serious about pursuing the merger and that negotiations are going to be worth their time.
Although a letter of intent might not require the parties to reach a final agreement, there are aspects of a letter of intent that might be binding. For example, if the parties agree to confidentiality or exclusivity during the negotiation process, those aspects of the letter of intent might be binding. Attorneys who practice mergers and acquisitions law must be careful not to overlook carefully ironing out the terms of the letter of intent in order to ensure it has the effect their client is looking for.
After a letter of intent, both sides of a merger have the opportunity to undertake due diligence. Due diligence involves learning about the other company and providing information about your company. The purpose of due diligence is to give both parties the information that they need in order to fairly negotiate the merger. Lawyers, accountants and officials from both parties are part of the due diligence process.
Securities and Exchange Commission compliance and state law compliance
Parties involved in a merger or acquisition must be careful to comply with regulations from the U.S. Securities and Exchange Commission (SEC). The SEC is a federal government agency whose purpose is to protect fairness and efficiency in business transactions. To comply with SEC regulations, companies that pursue a merger or acquisition must provide information to shareholders using a proxy or information sheet. In addition to SEC regulations, there are also state laws that impact most mergers and acquisitions.
A merger or acquisition that falls apart can result in litigation. If one party believes that the other has violated the terms of a merger or acquisition or even the binding terms of a letter of intent, the parties may end up in court litigating the matter. The damages that may apply are the damages that apply in contract law. The parties may agree to liquidated damages, or they might argue damages to the court. In some cases, damages for a breached merger or acquisition contract can include the benefit of the bargain. That means mergers and acquisitions litigation can involve millions of dollars.
Globalization and the practice of mergers and acquisitions law
The rise of globalization and international business has changed how mergers and acquisitions work. In turn, lawyers must also approach international business transactions from an international perspective. Lawyers in mergers and acquisitions law need to appreciate how international law applies to their client’s transaction. Law firms that specialize in mergers and acquisitions might have offices in more than one country. A large merger or acquisition that involves international companies might impact the currency and economy of an entire country. It’s important for mergers and acquisitions lawyers to consider all of the local, state, national and even international laws that might impact the transaction.
Who practices mergers and acquisitions law?
Business lawyers practice mergers and acquisitions law. Because a merger and acquisition is an involved and time-consuming process that involves nuances and details of business law, most attorneys who work on mergers and acquisitions at least specialize in business law if not focus on mergers and acquisitions completely. However, not all mergers and acquisitions attorneys work for large law firms. A small company that operates in a single geographic area might use a local, solo practitioner in order to pursue a merger or acquisition.
On the other hand, large companies that pursue a merger or acquisition often work with very large law firms. International transactions require a large number of resources and a vast knowledge base that encompasses both the national laws of each country and the international laws and treatises that might impact the transaction. International law firms are often able to provide legal services more comprehensively and cost-effectively than a corporation can accomplish using in-house counsel. Attorneys who work on large mergers and acquisitions can expect to focus their practice solely on this niche area of law.
Why Become a Mergers and Acquisitions Lawyer?
Mergers and acquisitions are some of the most consequential and high-profile transactions in business. Corporations rely on attorneys who specialize in the field to reach their business goals legally and effectively. Mergers and acquisitions lawyers have a high-profile job that’s critically important to the clients that they serve. Mergers and acquisitions law provides a challenge to attorneys who enjoy business and want to help clients achieve their business goals.
Merging business and law
Mergers and acquisitions change the landscape of business. They require both legal and strategic planning. Lawyers who focus on mergers and acquisitions have the opportunity to work on complex business matters that are critically consequential to the business operations of their clients.