As a Silicon Valley corporate attorney who often represents the selling company in mergers and acquisitions, I know that a huge amount of effort goes into signing an acquisition agreement. As I have discussed in past blogs, issues from earnouts to preparing exceptions schedules will have turned into countless hours of negotiations, documentation, and late night telephone calls for both the seller and the acquiring company and their corporate lawyers. In the end, the agreement is signed and everyone gets some well-needed sleep, only to wake up to the final sprint to closing.
In this blog, I will discuss what happens when a deal does not close simultaneously with the signing of the acquisition agreement. Similar to a contract for buying a house, many merger and acquisition deals require the buyer and seller to sign an agreement, and then perform additional items before the final closing.
At the same time as the deal team pours over the necessary closing tasks, there is still a business to run. Even though the seller remains in control of the business, the buyer wants to make sure it eventually acquires a company that is in good working order. For this reason, commitments are designed to guide business operations pending the closing.
Many aspects of the "operational covenants," as they are sometimes called, are fairly standard. Material actions, such as entering into major contracts or making substantial capital expenditures, are called out as matters requiring the buyer's consent before proceeding. The parties will negotiate the thresholds that are required for materiality and will typically allow exceptions for activities in the ordinary course of business.
In addition to the operational issues, there are a number of deal-oriented provisions. The first is our old friend the no-shop provision, explained in a prior blog ("Merger and Acquisition Letters of Intent - Binding the Nonbinding," May 30, 2011). These provisions may become more involved than those in a letter of intent, and arguments revolve around, among other things, exceptions for unsolicited offers which a board believes must be accepted to satisfy its fiduciary duties, and the length of time the no-shop restriction will exist.
A buyer will typically want to continue to have access to the seller's books and records. Once the deal is signed, the desire of the buyer to speak directly with the seller's employees and customers increases. Sellers are reticent to allow a buyer to speak directly with the seller's material customers, even if the deal has been publicly announced. To the extent the buyer needs to speak with the seller's customers, the specific customers to whom the buyer can speak are usually specifically negotiated. The buyer will also want to speak directly with the seller's key employees. Negotiations often focus on the buyer's ability to terminate the transaction if certain key employees do not continue with the business.
A key aspect of deal-oriented provisions is the parties' commitments to secure the necessary stockholder and regulatory approvals. As part of the stockholder approval process, the buyer will usually require that the seller's Board of Directors unanimously recommend stockholder approval. Often, voting agreements are signed as part of the acquisition agreement signing to lock-up the votes of the major stockholders.
Regulatory approvals can run the gamut from simple bulk sales notices and escrows (for small, asset-based transactions), to Premerger Notifications to the Federal Trade Commission and Department of Justice (for multi-million dollar acquisitions). Timing issues on these matters need to be considered carefully, due to the need to prepare necessary filings and provide appropriate notice.
A critical post-signing activity is the Seller's need to secure consents to the transaction from important suppliers and customers. Often, a seller's material contracts will contain provisions that require the other party to approve a transaction to prevent the contract from being breached. Securing this consent can be a quick formality, or a delay ridden nightmare. It is very important for the seller to determine which contracts require the approval of the other party to the contract, and the process, and time required, to secure the necessary approval. The best approach is for the seller to review all of its materials agreements even before the deal starts, so that the approval process can begin very quickly after the acquisition agreement is signed.
Although signing an acquisition agreement is a giant step forward in any transaction, there can be a number of tasks ahead that must be handled very carefully to ensure the long sought closing actually will occur. An experienced team is essential in this regard
The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific Questions relating to this article should be addressed directly to the author.