“Mergers & Acquisitions” – the phrase in some peoples’ minds conjure up notions of sophisticated, breath-taking cloak and dagger activities carried-out under obscure code-names shrouded in secret electronic data rooms. From personal experience, many are just that; but many others are much less dramatic in nature.
Regardless, there are fundamental matters that need to be considered in each transaction. In essence, each seller and each buyer has its own objectives; the “art of the deal” is to find the common ground that enables each to sufficiently achieve its objectives so as to enable the transaction to occur. Anticipating and understanding the other parties’ objectives is key to finding the common ground.
Similarly, there are many factors that can or may need to be considered such as the industry/ sector, securities laws, foreign investment and competition laws, tax, IP, labour relations and employment, pension and benefits matters, international or multi-jurisdictional matters, etc. Some or all of these (plus others) may or may not be relevant depending upon the circumstances.
There is also the negotiation and drafting of the documentation and, although the details of the deal will dictate, over the next few posts we will examine a few of the provisions typically considered for inclusion in the principal documentation:
- Shares Versus Assets – the general rule is sellers want to sell shares; buyers want to buy assets. Experienced advisers assist in analyzing the pros and cons of each plus the consideration of alternative “hybrid” solutions. Earn-outs are often considered to assist the parties in bridging discrepancies between the price asked and offered and focus on the target achieving specified financial or operational results post-closing; but care and skill is required in assessing whether to use such a mechanism as there are potential risks in application given the ease of manipulation of revenue recognition and related costs and expenses, particularly the allocation of general admin and operating expenses.
- Due Diligence – regardless of whether or not electronic data rooms are used, the “quality” and “quantity” of the seller’s records impacts the environment in which the parties operate. Up-to-date financial, corporate and other records, material customer, supplier and employee contracts, etc. provide a foundation upon which the deal can be built. Conversely, lack of proper records creates anxiety and uncertainty and often leads to more onerous terms due to the perceived increased risk on the buyer.
- Indemnities and Escrows – Similarly, out-of-date, missing or inaccurate records typically impact not on only the structure of the deal but also essential elements such as indemnification and escrow provisions, including “holdbacks”, “baskets”, “caps” and “sandbagging” versus “anti-sandbagging” provisions. The development of using a “hybrid” deductible has added increased flexibility to indemnity considerations as it combines both the “1st dollar” model and the “deductible” models. “Sandbagging” is the concept describing the purchaser’s ability to claim a breach post-closing even if it has knowledge of that breach prior to closing. In contrast to the USA, in Canada, the majority of agreements are silent on “sandbagging” although increasingly the trend is to include such a clause.
- Transition Planning – this is often overlooked or at least inadequately addressed during the negotiations stage because, frankly, it often has “emotional” or “cultural” elements that some parties would prefer to ignore or defer to a later date. Such ignoring or deferral, however, typically does not “solve” the issue and may even compound it. The adage “measure thrice implement once” is appropriate as skills can be taught; culture can’t.
We will continue these observations in a future post. Suffice it to say that “no one size fits all” and so no one precedent should be expected to fit all circumstances. Experienced advisors are a valuable resource in both structuring and implementing transactions.