Top Reasons M&A Transactions End Up In Litigation: How Can You Reduce Your Risk of Deal Disputes?

AdobeStock_602180598-300x207While people often associate the individual terms in the phrase “mergers and acquisitions” (M&A) as essentially meaning the same thing, they are actually quite different. An acquisition describes one company taking over another company to establish itself as a new owner, while a merger refers to two companies of similar sizes joining forces to move forward as a single new entity.

M&As are extremely common in today’s business environment, but they are also incredibly complex, and many hopeful deals instead end up in litigation. You can avoid many of the struggles associated with M&As when you work with an experienced M&A attorney in LA.

Why M&A Transactions End Up in Litigation

Specific reasons why M&A deals end up failing can always vary, but some of the most common reasons our LA business attorney sees include the following:

Larger Offers

McKinsey & Company reported that its review of more than 2,500 deals between 2013 and 2018 found 265 canceled deals of varying sizes, industries, and geographies. McKinsey reported that the larger a transaction was, the more likely it was to cancel before close, and the average value of canceled deals was roughly twice as much as the value of completed deals. It is important to remember that deals involving larger sums of money also mean potentially higher damages for the parties.

Hostile Takeovers

A hostile takeover often involves a company attempting to acquire another company against the wishes of its management or board of directors. In such scenarios, there may be an effort to replace management, board members or both. allegations of board enrichment motives are common and litigation typically results.

Termination Fees

Also known as a breakup fee, a termination fee is a penalty that a potential seller must pay in M&A transactions if the seller backs out of the deal. The purpose of the fee is to compensate a purchaser for the time and resources they invest in negotiating the deal. These fees are more common when sellers have the option to receive bids from other potential buyers. Some buyers then use the breakup fee to limit the number of competing bids. Litigation can be a common result when the seller believes the fee is too high.

Offers With a Higher Percentage of Cash Financing

Cash deals are attractive because they are relatively simple. The roles of the parties will be clear-cut, and an exchange of money for shares will complete a basic transfer of ownership. Roles will also be fairly cut and dry since the purchaser will largely dictate everything. Of course, the problem can be if financing falls apart and potentially dooms the deal. There also may be additional issues with unknown liabilities such as taxes. Furthermore, shareholders can be on the hook to pay potential capital gains taxes, whereas the taxes would be deferred under all-stock transactions.

Shareholder Squeeze-Outs

Also known as freeze-outs, a squeeze-out usually involves majority shareholders pressuring minority shareholders to sell their stake in a company. Majority shareholders in M&A transactions may favor actions opposed by minority shareholders, and litigation becomes common because lawsuits challenging controlling shareholder squeeze-outs have a higher probability of settlement with cash consideration resulting for the plaintiff shareholders.

Reducing Your Risk of M&A Disputes

Here are some ways an LA M&A attorney can help make sure the deals are completed:

Offer the Ability to Seek Injunctive Relief

The ability to obtain injunctive relief can help force the other party to close the deal. Many parties in M&A agreements will agree that either party could suffer significant harm should the transaction not close. It is therefore in the best interest of both parties to seek injunctive relief to prevent a breach that could threaten the deal.

Contractual Provisions Relevant to Pre-Closing Relief

These may include so-called “efforts clauses” which include reasonable efforts, best efforts, or commercially reasonable efforts. These clauses require parties in an M&A transaction to take steps to fulfill different conditions to closing; consider also material adverse event clauses that allow one party to walk away when there is a major deterioration in the business of the other party; representations and warranties that may not have as much force after closing; reverse breakup fees that protect companies from being purchased if the buyer suddenly reverses course; letters of credit that can help provide funding for a purchase or payment of a breakup fee; and escrow arrangements to help guarantee that funds agreed to will be available at the time of closing.

Call Us Today to Schedule a Consultation With an M&A Attorney in LA

When you are trying to negotiate a possible M&A transaction, you are going to want to make sure that you have competent legal representation so the deal will be completely in line with your hopes and expectations. Structure Law Group, LLP, can help you navigate all of the complexities of these agreements and hopefully avoid any litigation concerns.

Our firm represents companies of all sizes throughout California, so we are well aware of what it takes to get these deals done. We invite you to call (408) 441-7500 in Silicon Valley or (310) 818-7500 in Los Angeles or contact us online to set up an initial consultation so we can take a closer look at your situation and put you on a path to success.