This is the final article in our series on selling the family business. Our previous articles include advance planning, preliminary diligence, marketing, letters of intent, indemnification provisions, backstopping the deal, dispute resolution mechanisms, and fiduciary duties.
An M&A transaction does not necessarily conclude once the parties have agreed on the terms of the definitive agreement. The parties typically need to satisfy a number of closing conditions and sort through integration details before the merger or sale will be considered "closed." The following article highlights some of the issues that businesses should consider in order to ensure that the closing proceeds smoothly after the transaction paperwork is signed.
Approvals and Consents
There are often numerous approvals and consents that the parties to an M&A transaction need to obtain before consummation. They can be broadly divided into three categories: corporate approvals, third-party consents, and regulatory approvals.
Corporate approvals are those that each party needs to obtain from its governing body and its equity holders before proceeding with a transaction. The specific corporate requirements vary depending on a number of factors including: the structure of the transaction, whether a party is the buyer or the seller, applicable state law, and a company's governing documents. The parties will need to obtain approval of their respective governing bodies (e.g., a board of directors in the case of a corporation, or a manager or board of managers in the case of a limited liability company).
The seller, and in some cases the buyer, will also need to obtain the approval of their equity holders (e.g., stockholders or unit holders). Often the affirmative vote of holders of a majority of the outstanding equity is adequate to approve an M&A transaction, but higher thresholds exist in some cases (e.g., supermajority or 66 and two-thirds percent approval requirements). In the case of a stock sale, in contrast to a merger, a buyer typically expects all selling shareholders to agree to the transaction and transfer his or her shares to facilitate the buyer being a 100 percent owner of the seller entity.
Third-party consents are those that a selling party must obtain before it can assign or transfer a contract to a buyer. Contracts are generally freely assignable, unless the contract itself, a statute, or public policy dictate otherwise.
Many contracts, ranging from leases to manufacturing agreements to license agreements, have anti-assignment provisions that prohibit a party from assigning the contract to a third party without first obtaining the consent of the counterparty to that contract. Some contracts also contain provisions that prohibit a "change in control" of a company absent the consent of the counterparty. These provisions can create barriers to closing.
A buyer and seller should have identified all contracts with anti-assignment provisions in the diligence stage, which will allow them to efficiently seek third-party consents. The parties should coordinate communications with the relevant third parties as these sorts of conversations can be sensitive and will involve disclosing the pending transaction to an outside party, which poses some risks to the parties' relationship.
The parties may need approval from a regulatory agency or government body before closing the transaction. Certain industries are subject to unique regulatory oversight that necessitates government approval for fundamental transactions such as a merger.
In addition, transactions in which the acquiring party will hold voting securities, non-corporate interests, or assets valued at or above $92 million may require pre-merger notification to the Department of Justice and Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and its rules and regulations (HSR Act), if the "size of parties" test is also satisfied and no statutory exemptions under the HSR Act are applicable.
Those agencies then have 30 days—during which the parties may not close the transaction—to review the transaction. At the conclusion of those 30 days, the agencies must either permit the transaction to proceed or request more information from the parties.
To be clear, a transaction is not immune from the antitrust review by the agencies simply because it does not meet the $92 million "size of transaction" threshold. The parties simply do not have an affirmative duty to report the transaction if it is below that monetary threshold. For a more in-depth review of HSR filings, please read our recent advisory.
In addition to delivering the required approvals and consents, parties will need to deliver a suite of documents that would have been negotiated in connection with negotiation of the definitive agreement. Those documents can include customary certificates relating to the business, releases and joinders from the selling parties, resignations from directors and officers, restrictive covenant and IP ownership and assignment agreements, and other documents.
While lawyers will prepare and organize these closing documents, the business parties will often be responsible for gathering signatures. Parties should prepare well in advance of the actual closing date to gather the necessary signatures and hold occasionally delicate conversations.
The combination of two businesses and their workforces into one can present unique challenges. Business combinations sometimes result in employees choosing to leave the organization rather than work for the buyer or the combined entity. A buyer may also choose not to retain certain employees because their roles have become redundant or are otherwise unneeded.
Before the transaction becomes widely known to employees, the parties should develop a strategy for communicating with their workforce. The buyer and seller may need to coordinate to identify which employees will be let go as a result of the merger and which employees may need to be incented to remain working post-closing. The parties should also have identified in the diligence stage whether any employment contracts will be affected by the merger and how they plan to address those impacted contracts.
The definitive agreement will likely address how the parties will handle employee benefits and benefit plans. Given the complexities associated with benefit plans, transferring or terminating the plans will require early coordination between the parties, their counsel, subject matter experts, and plan administrators.
Deal fatigue is real. The last thing anyone wants is for an M&A transaction to collapse after making it to the closing stage. Consulting a lawyer and preparing in advance can significantly reduce the chances of that happening.