Support for M&A transactions: planning from A to Z

Our country is undergoing a considerable number of political and economic changes, each of which has a broader impact on partnerships, investment and business. Over the past few years, the abbreviation ‘M&A’ – referring to mergers and acquisitions and the related support services – has been appearing with increasing frequency in the news and on law firms’ websites under the ‘services’ section.

We are seeing a steady rise in M&A activity, particularly in the sectors of information technology, energy, finance and agribusiness. M&A transactions are complex and strategic operations that help to strengthen companies’ market positions and foster business development in the country. In this article, we will explain in more detail the concept of M&A, its forms and the planning (structuring) of M&A transactions.

The concept of M&A and its forms

M&A (Mergers and Acquisitions) refers to the set of processes involved in the consolidation of businesses (capital), as a result of which larger companies emerge on the market in place of several smaller ones. It is the most popular method of business expansion in the economies of the US, the UK and the EU. Expansion resulting from M&A is considered inorganic, as it is achieved either through the acquisition (purchase) of one company by another or through the merger and/or amalgamation of such companies, in contrast to traditional business expansion, which occurs through the proportional growth of the business itself (revenue, profit, etc.).

From the definition itself, it is clear that there are two forms of M&A — mergers and takeovers. Here is a slightly more detailed look at each:

Merger

This form is structured through the reorganisation of legal entities, which may take the form of:

• a merger, where two legal entities merge to form a third, new legal entity, and neither of them continues to exist. This type is usually referred to as a horizontal merger;

• an absorption, where one legal entity is absorbed into another and ceases to exist. This type is usually referred to as a vertical merger.

The form of a merger and its types of reorganisation are quite complex and require significant resources for further business development; consequently, they are used less frequently, both in Ukraine and abroad. However, they offer the advantage of deferring the point at which a taxable event arises.

Takeover

The form of a takeover is more straightforward and natural for entrepreneurs in Ukraine and abroad, as it involves the direct purchase of a business. Such a business purchase can be carried out in two ways:

• an asset purchase agreement — in this case, individual business assets (intellectual property, fixed assets and other non-current assets, etc.) are acquired without purchasing shares in the legal entity that owns them. Consequently, it is possible to separate oneself from the liabilities of the acquired legal entity. However, sometimes, due to creditors’ demands (after all, it is in no one’s interest for their debtor to become insolvent, and agreements most often provide for a mechanism to grant consent to the sale of individual assets), the parties agree that the purchaser shall also assume the liabilities, which is achieved through a change of debtor;

• an agreement for the purchase of corporate rights — in this case, the acquiring company directly purchases corporate rights in the legal entity that holds the assets and through which the business is conducted, or in a group of legal entities. This approach is usually implemented through a contract for the sale and purchase of corporate rights.

Planning M&A transactions

Planning or structuring M&A transactions is the process by which the form and terms of a merger or acquisition are determined. This involves developing the optimal legal, financial and organisational structure to ensure maximum benefit for all parties to the transaction.

The classic practical process of M&A planning will focus specifically on takeovers as the most common form, although most of the provisions are directly applicable to mergers:

Stage 1 — Preparation

At the first stage, the two parties hold an introductory meeting and outline their initial positions before entering into full-scale negotiations. If the parties decide to proceed, it is recommended that they sign an NDA to maintain confidentiality not only regarding the fact that negotiations are taking place, but also regarding the information that will be exchanged in the future.

Stage 2 — Discussing the terms and drawing up a Term Sheet

A Term Sheet is a document that is not mandatory to draw up, but which helps to outline all the key initial terms agreed upon by the parties (duration of the process, duration of the due diligence / whether it is required, price range, form of payment, subject of the acquisition). The purpose of this document is not to provide a legal framework for the transaction, but merely to record the initial agreements; therefore, it is often drawn up in a free-form style and takes the form of a list. It is also worth noting that a Term Sheet is drawn up once the parties have agreed on the main terms and are ready to move forward with negotiations; if not, this document may be signed following several further consultations and meetings.

Stage 3 — Memorandum of Understanding 

The conclusion at this stage of a Memorandum of Understanding or other similar document may have a different legal nature depending on the approach taken by the lawyers. The main purpose of this document is to provide a comprehensive description of the structure of the transaction, provisions regarding the price and its adjustment, the payment procedure, the parties’ obligations following the completion of the transaction, and the representations and warranties provided by the parties, amongst other things. Usually, this document serves as a detailed action plan for the implementation of the transaction, so it must cover all key points. At this stage, it is essential to take a responsible approach to describing precisely those contentious issues that may arise, without avoiding them, as the process of terminating the agreement will subsequently be considerably more costly and economically damaging. Particular attention should be paid to: 1) establishing the procedure for conducting an audit; 2) obligations to refrain from offering or selling the business to third parties for a specified period; 3) penalties for breach of obligations. These clauses are usually mandatory and need to be discussed at the outset of the relationship.

Stage 4 — Conducting due diligence

At this stage, a comprehensive due diligence process is carried out, which includes a review of the financial and legal documentation of the business to be acquired (or merged), a valuation of assets and liabilities, and an analysis of risks and opportunities. The main aim of this stage is to identify potential risks that may arise following the completion of the transaction. Due diligence is usually carried out in the following areas: legal matters, accounting matters, tax matters, and economic valuation of the business (less commonly, but also observed: compliance with environmental legislation, customs legislation, etc.).

Stage 5 — Obtaining consents and permits

The process of obtaining consents and permits takes place at this stage, as the buyer gains a complete picture of the situation following the due diligence review. However, if the parties clearly understand the need to obtain certain consents and permits at an earlier stage, then work on these may commence in advance. It is generally preferable for the need to obtain specific consents and permits to be identified at an earlier stage, as this process can take a considerable amount of time, thereby extending the duration of the transaction.

Stage 6 — Preparation of the final contracts

This is the stage of fully formalising the transaction, which involves setting out all prior agreements in the relevant contracts specified in the action plan (sales contracts, corporate agreements, escrow agreements, etc.), as well as supplementary agreements (service agreements, employment contracts, non-competition agreements, agreements on the assignment of claims or the change of debtor, etc.). It is also necessary at this stage to obtain all necessary permits and consents.

Stage 7 — Post-transaction obligations  

This stage depends entirely on the parties involved, which is why there is no single standard approach.

Consequently, M&A transactions, like any other arrangement establishing new business relationships, require high-quality legal support at every stage of their implementation in order to assess all risks in a timely manner, prevent any unjustified deviation from fundamental positions, and act strictly within the bounds of the law.

Author – Natalia Ivanova Read the article on the ‘Yurydychna Gazeta’ website: here.