1) The structure of the deal. When arranging a stock purchase, asset sale or merger, it’s important to consider the transferability of liability, which is transferred to the acquiring company in a stock purchase but designated between the companies in an asset sale. A pre-closing consent to assignment may have to be obtained, and stockholder approval may be necessary. The deal may also be structured to avoid tax consequences.
2) Financing the deal. Although cash is a convenient and assuring option for the target company, it may affect the acquiring company’s debt rating or capital structure. The other financing option is equity, which offers more flexibility all around.
3) Working capital adjustments. A working capital adjustment will probably have to be made to ensure the business can continue to fulfill its requirements and protect the acquiring company from target initiating, increased debt collection, delayed inventory acquisition or selling inventory to make payments.
4) Contingencies to paying the purchase price. If an escrow is included, the terms should be carefully defined. An earn-out may be needed to moderate the gap between the valuation of the acquiring and target companies.
5) Representations and warranties. It is imperative for the target company to review the acquirer’s representations, warranties and disclosure schedules to ensure there are no breaches of authority, capitalization, compliance with law, employment, ERISA, financial statements, intellectual property, material contracts, tax and other matters.
6) Caps to target indemnification. The provisions of target indemnification should include minimum claim amounts required for the acquirer to seek indemnification, any caps at the escrow or other level and any exceptions to the caps, including breaches of fundamental representations like tax or intellectual property.
7) Stockholder liability. Regarding indemnification, the liability of the target company’s stockholders has to be determined as either joint (in which the individual stockholders are liable for 100 percent of future damages) or several (in which individual stockholders are only liable for their proportion of contribution to the damages).
8) Conditions of closing. For the companies to close the transaction, a list of closing conditions should include the absence of litigation, delivery of the target’s legal opinion, the stockholder voting threshold for approval, appropriate board removal and the absence of unfavorable material change in the target’s conditions.
9) Review of long-term lead items. The companies should determine whether a Hart-Scott-Rodino filing is required and whether its filing will be delayed. They should also figure out how any necessary third-party notices or consents will be made.
10) Covenants against competing and solicitation. The selling shareholders must draw a covenant not to compete against or solicit clients from the target and acquiring companies for a designated period of time.
If these considerations are carefully evaluated and followed, a merger or acquisition should be able to move along efficiently and easily. Working with a skilled attorney can provide additional benefit to facilitate the transaction.
BoltNagi is a respected and established business law firm serving companies and organizations throughout the U.S. Virgin Islands.