Post-closing disputes in many private mergers and acquisitions (M&As) can quickly turn once beneficial business decisions into sources of complete frustration and possible value destruction. When you are considering a merger or acquisition in Texas, it’s important to have the right legal representation on your side to ensure the process goes as smoothly as possible. At Structure Law Group, LLP, our experienced Austin mergers and acquisitions attorneys have the expertise and knowledge to provide you with the best possible legal advice and guidance to ensure a successful transaction.
Several post-closing disputes result from proper planning and insufficient forethought before people execute acquisition agreements. When you exercise the necessary diligence and retain legal counsel, you will be far less likely to end up in a dispute.
The earnout is a contractual mechanism in a merger or acquisition agreement that provides for additional contingent payments to a seller’s shareholders from the buyer of a company. They typically apply when a business being acquired satisfies certain financial or other milestones after an acquisition closes.
Earnouts can be useful when parties are having difficulty reaching an agreement on an upfront cash price, but post-sale targets can also be tricky because buyers may assume the targets cannot be reached while sellers take them for granted. To avoid possible earnout disputes, parties should be sure that a specific portion of a business will be measured (unless the parties agree to base an earnout on the performance of the target company as a whole), certain metrics and accounting methods will be employed for measuring a company’s performance, and also impose certain limitations on a buyer’s performance that can impact the way the business is run and possibly the financial performance.
Working Capital Purchase Price Adjustments
Even though it is somewhat customary for parties to estimate a working capital target in pre-closing activity, the estimate will not always reflect the reality of a situation at closing. Certain gaps that are not addressed can often lead to post-closing litigation.
Before closing, a seller will usually deliver an estimate of its working capital as of the closing date, and the estimate is used to adjust the purchase price paid at closing. After closing, the buyer typically determines the actual amount of working capital of a target company at a closing date, and the amount of actual closing date working capital that is above or below the pre-closing estimate is then paid by the buyer or seller as an adjustment to the purchase price.
All issues concerning accounting methodology need to be addressed to avoid possible disputes about working capital later on. An acquisition agreement should make clear that the accounting methodology used to determine actual post-closing working capital will mirror that used by the seller in preparing its pre-closing estimate so the parties can use generally accepted accounting principles (GAAP) applied consistently with the seller’s past practices.
Breaches of Representations and Warranties
Virtually every acquisition agreement will contain detailed representations and warranties (R&Ws) made by a seller that establish several facts about a target company and its business, such as its financial condition, its legal, tax, and environmental compliance, and the adequacy and suitability of the company’s assets to operate. R&Ws will be used to allocate various risks between the parties and will be relied upon by buyers in supporting an agreed-upon purchase price for the business.
Buyers typically want R&Ws to be as comprehensive as possible, while most sellers try to do the opposite. As a result, R&Ws are extensively negotiated with regard to their scope, limitations, and exceptions.
When post-sale issues arise between what was represented in the deal documents and what actually turned out to be true, the value of the transaction may be negatively impacted and lead to litigation. Many acquisition agreements can provide a seller will indemnify a buyer for any losses they suffer because of a breach of a seller’s R&Ws, although acquisition agreement indemnification provisions are also heavily negotiated.
Call Us Today to Speak with an Austin Mergers and Acquisitions Attorney
When you are in the process of negotiating a merger or acquisition in Texas, do not try to handle all of the processes on your own. Make sure that you have a skilled Austin mergers and acquisitions attorney serving your best interests and working to make sure that you can avoid headaches later on.
Structure Law Group, LLP knows how complex these types of agreements can be, and we know how to help companies of all sizes achieve the most favorable outcomes in their ongoing negotiations. Please call (512) 881-7500 or contact us online to schedule a consultation with our Austin mergers and acquisitions attorney.