An Overview of Mergers & Acquisition Legal Services

What Are Mergers & Acquisitions?

Mergers and Acquisitions (M&A) are significant aspects of corporate law, especially in the context of business growth and restructuring. In South Carolina, as in other states, these processes are guided by specific legal frameworks and regulations.

A merger typically involves the union of two business entities, resulting in a single surviving entity, while the other ceases to exist as a separate legal entity. South Carolina law for corporations, partnerships, and associations governs this process, although the precise requirements for merging entities can vary from state to state. Our focus here is on the specifics of business acquisitions within South Carolina.

In a business acquisition, one company takes over another’s assets and, in some cases, its debts and liabilities. This essentially means that a business owner is either on the path of selling or buying a business. An acquisition might also involve purchasing stock, partnership interests, or membership interests in another company. Generally, asset purchases are more common because buyers often find the assumption of an existing business’s liabilities less appealing.

Understanding the nuances of M&A is crucial, as these business transactions can be complex, involving thorough due diligence, valuation assessments, negotiation of terms, and compliance with legal and regulatory requirements. Effective M&A strategies often require navigating through legal intricacies such as antitrust laws, securities laws, tax implications, and employment laws. Each of these elements can significantly impact the structure and success of the transaction.

Whether you’re considering a merger or an acquisition in South Carolina, it’s vital to have knowledgeable legal counsel. Our attorneys are equipped to guide you through every stage of the process, from initial consideration and strategic planning to due diligence, drafting agreements, and closing the deal. Our goal is to ensure a smooth, compliant, and advantageous transition for your business.

Stock Purchase vs. Asset Purchase

Business acquisitions typically take one of two forms: asset purchases or stock purchases. Each structure has its own implications and nuances, important for both buyers and sellers to understand.

In a stock purchase, the buyer acquires ownership of the business entity by purchasing its stock directly from the shareholders. This type of transaction results in the transfer of the business entity’s ownership, but the entity itself continues its operations, retains its assets, and remains liable for its existing debts and obligations. Stock acquisitions are essentially about buying control of the company as it stands, with all its inherent elements.

On the other hand, an asset purchase involves the buyer acquiring most, if not all, of the selling entity’s assets. This type of acquisition is typically outside the normal scope of the seller’s regular business activities. One key aspect of asset purchases is that the acquiring entity generally does not assume the past or existing liabilities of the seller, unless explicitly agreed upon in the transaction. This means the buyer gets the assets they want without taking on the seller’s legal and financial burdens.

Deciding whether to structure a business acquisition as a stock or an asset purchase involves carefully considering the pros and cons of each approach. Factors such as tax implications, liability concerns, and the transfer of contracts and legal obligations play a significant role in this decision.

Advantages & Disadvantages

The decision between an asset acquisition and a stock purchase involves weighing their respective advantages and disadvantages, which can significantly impact the value and feasibility of the transaction.

In asset acquisitions, a key advantage is that the buyer typically does not assume the seller’s liabilities, except in cases where they are expressly transferred. This means the buyer can acquire desired assets without the burden of past debts or legal issues tied to the business being sold. However, this transaction type does come with complexities. Transferring assets often involves reassigning titles, deeds, commercial leases, and contracts with customers and vendors to the acquiring entity. This process can incur additional costs and complexities for both the buyer and seller. Furthermore, business licenses, registrations, and certifications may not be directly transferable, requiring the buyer to reapply for these post-closing, which can be a cumbersome and time-consuming process.

Conversely, in a stock purchase, the buyer acquires the company as a whole, including its liabilities. This could mean inheriting unknown liabilities that might diminish the stock’s value. To mitigate this risk, buyers often negotiate indemnification provisions. However, these are only as reliable as the seller’s ability and willingness to honor them. On the upside, a stock acquisition means that the entity’s existing assets, including licenses, registrations, certifications, leases, and contracts, remain within the acquired company. This generally eliminates the need for individual asset transfers, potentially streamlining the process.

Both transaction types have their unique challenges and benefits. In asset acquisitions, the separation from the seller’s liabilities comes with the hurdle of asset transfers and reapplications for necessary operational credentials. In stock purchases, the continuity of business assets and credentials is balanced against the risk of inheriting unknown liabilities.

Early Stages of The Merger & Acquisition

The early stages of a merger and acquisition (M&A) process are characterized by their variability and the absence of a one-size-fits-all approach. Each business acquisition is unique, influenced by factors such as the nature of the business, its assets, and the stakeholders involved. This distinctiveness means that both the process and the transaction agreements will differ significantly from one deal to the next. Here’s a general overview of the typical anatomy of a business acquisition.

Initially, the process begins with the identification of potential acquisition targets or interested buyers, which involves careful strategic planning. This stage is crucial for aligning the acquisition with the overall business goals and objectives.

Following this, there’s typically a preliminary assessment or due diligence phase. This stage involves a thorough investigation of the target company’s financials, operations, legal standing, and other critical factors. The goal is to uncover any potential risks or liabilities that could impact the valuation or feasibility of the transaction.

Negotiations then ensue, where terms such as price, structure of the deal, and other key conditions are discussed. This phase is intricate and requires skillful negotiation to ensure a fair and beneficial outcome for all parties involved.

Drafting the acquisition agreement is another critical stage. This legal document outlines the specifics of the deal, including representations, warranties, indemnifications, and covenants. It is tailored to suit the unique aspects of the transaction and requires expert legal input to safeguard the interests of the parties involved.

Finally, obtaining the necessary approvals and finalizing the transaction is the concluding step. This might involve regulatory approvals, shareholder consents, and other legal compliances, depending on the nature of the business and the transaction.

Letter of Intent; Indication of Interest

After initial interactions between interested parties and their respective teams in a business acquisition, there often follows a more personal engagement. Senior members and executives typically meet to establish a firsthand impression of each other and the business in question. As these discussions evolve, sensitive and confidential information about both the seller and the buyer begins to circulate. To safeguard this information, it’s common practice for both parties to agree to confidentiality or nondisclosure agreements. These agreements are crucial as they ensure that sensitive details remain private, irrespective of whether the deal proceeds to completion.

During these early talks, one party usually requests to formalize their understanding through a letter of intent (LOI) or an indication of interest. An LOI acts as a more concrete expression of the term sheet. While it doesn’t necessarily detail every term and condition, it should outline the major aspects of the acquisition. A well-structured LOI can significantly aid both parties in moving towards a final agreement by highlighting the key terms and pinpointing potential areas of disagreement.

Typically, an LOI contains provisions, often non-binding, such as the assets or stock being sold, the purchase price and any adjustments, payment forms and timelines, confidentiality terms, termination fees, exclusivity clauses, indemnification, closing conditions, and legal jurisdictions, among others. The legal and professional communities often debate the usefulness of LOIs, given their generally non-binding nature and lack of substantive commitment.

However, there are several reasons why an LOI can be beneficial:

  • Clarity and Understanding: An LOI is usually straightforward, helping avoid misunderstandings in the early stages of negotiation and ensuring all parties are aligned.
  • Foundation for Final Documents: It outlines the substantive terms that will be reflected in the final acquisition documents, aiding in the drafting of the asset or stock purchase agreement.
  • Financing Requirements: Buyers often need an LOI to present to third-party lenders financing the transaction.
  • Commitment Evidence: Both parties may use an LOI to gauge the seriousness of the other side. Buyers may be hesitant to invest in due diligence without an LOI, while sellers may request a nonrefundable deposit as proof of the buyer’s commitment.

It’s important to note that while there are common practices in business acquisitions, every deal is unique and tailored to the specific circumstances of the parties involved. Each LOI should be customized to suit the particular transaction, reflecting the unique aspects of the business acquisition.

Due Diligence

Due diligence is a critical phase in the merger and acquisition process, involving a comprehensive analysis of the seller’s business. This step entails a meticulous examination of the company’s operations, management structure, employees, contractors, financial health, and legal standing. The main goal of due diligence for the buyer is to determine an appropriate purchase price, which requires assessing the seller’s current operational and financial status and projecting future performance. This investigation also reveals any undisclosed issues that may not have come up in preliminary discussions between the buyer and seller.

In our Charleston law firm’s experience with mergers and acquisitions, due diligence is an ongoing process rather than a one-time task. While it is commonly initiated before the drafting of acquisition agreements, it often continues alongside the preparation and negotiation of these agreements, and sometimes even after the agreements are signed, particularly if the finalization of the transaction is contingent on certain conditions.

The buyer and their team need to thoroughly review various aspects of the seller’s business, including the articles of incorporation, operating agreement or bylaws, shareholder agreements, meeting minutes, liabilities, financial statements, accounts receivable and payable, inventory, customer lists, tax returns, employment agreements, benefit plans, intellectual property, mortgages, insurance policies, assets, and business contracts. This detailed scrutiny provides insights into several critical questions:

  • Integration and Operation: Can the buyer effectively integrate and manage the acquired business?
  • Seller’s Expertise: Does the seller possess the necessary skills to operate the acquired business successfully?
  • Synergy Realization: Can the buyer leverage existing synergies in the newly acquired business?
  • Risk Assessment: What risks will the buyer face post-acquisition?
  • True Business Value: What is the actual worth of the business being acquired?
  • Tax and Other Liabilities: What are the tax obligations and other liabilities that come with the business, and which of these will the buyer assume?

Performing thorough due diligence is vital not just for pricing accuracy but also for the buyer’s strategic planning and risk management.

Hiring Business Brokers and Other Professionals

In the context of business acquisitions, leveraging the expertise of reputable business brokers can be invaluable, especially when they specialize in specific corporate industries. Business brokers often serve as a vital source for acquisition leads. Typically, their compensation is contingent on the successful completion of a transaction. However, for business owners in South Carolina seeking to purchase a business, it’s crucial to conduct thorough due diligence before engaging a business broker.

Key factors to consider when selecting a business broker include:

  • Reputation: Evaluate the broker’s reputation. Can it be verified through reviews, testimonials, or industry recognition?
  • Location: Consider whether the broker is based in the state where the business transaction is occurring. Local knowledge can be advantageous.
  • Licensing: Verify if the broker is licensed by the relevant state regulatory agencies. This ensures compliance with legal standards.
  • Fee Structure: Understand the broker’s fee arrangement. Typical fees range between 5% to 10% of the total purchase price.
  • Responsiveness and Commitment: Choose a broker who is responsive and willing to dedicate sufficient time to your acquisition process. A broker’s level of engagement can significantly influence the transaction’s outcome.
  • Broker’s Fees: Be wary that smaller businesses, especially those in urgent need of funds, might agree to higher broker fees. It’s crucial to negotiate and finalize the broker’s fee agreement before exchanging any sensitive or confidential information.

Apart from business brokers, business attorneys and accountants are also valuable resources for acquisition leads. These professionals often have clients who are considering buying or selling their businesses. Their early insights into these opportunities can provide a significant advantage. Business attorneys and accountants not only understand the intricacies of such transactions but can also offer leads that are well-suited to your specific needs and interests in South Carolina.

Engaging with these professionals can open doors to promising acquisition opportunities, complemented by expert advice and guidance through the transaction process.