Both sellers and buyers must handle a torrent of details during an M&A deal closing, such as getting permissions from a host of parties and transferring various operating permits. If you’re in a transaction’s early stages, you might not realize how much paperwork and communication will be necessary to achieve an ownership transfer. The earlier that the parties prepare for this time-consuming task, the better.
It’s not unusual for a closing to be delayed, sometimes substantially, because one deal participant hasn’t completed a particular agreement or gotten permission from a third party. So, at the latest, you should start preparing for closing when deal negotiations begin.
This is where having a good working relationship — and good communication — with your buyer or seller is essential. If one party fails to follow through on its share of the workload, it could put a major strain on the deal, delay closing and even sour postmerger relations.
A number of filings are required for an M&A transaction closing — particularly if the deal involves a larger or publicly traded company. Paperwork related to the Hart-Scott-Rodino Act is one such responsibility. Designed to prevent antitrust violations, the act requires certain parties to a merger to notify the Federal Trade Commission and Department of Justice. Generally, if your deal volume is larger than $75.9 million or one of the parties has more than $151.7 million in total assets or annual net sales, you must file for government approval and wait a period of 30 days before you close.
Public companies also must notify the Securities and Exchange Commission. Paperwork includes standard registration Form S-4 and Schedule 14-D9, which should be filed when either the buyer or seller solicits its public shareholders with respect to a tender offer.
Getting Stakeholder Permission
One of the more time-consuming preclosing chores is obtaining consent from various stakeholders. Depending on the selling company’s circumstances, it may be necessary to gain the permission of employees as well as any customers with contractual relationships. (See the sidebar “Informed consent” for information on informing other concerned parties.)
If any of the seller’s contracts, such as those with customers or vendors, include a prohibition against being reassigned to a new owner, the buyer must obtain consent from the contract’s other party to revoke the clause. Unfortunately, third parties aren’t always cooperative with such requests. Most buyers prefer to acquire their seller’s essential strategic partnerships, but business partners may be reluctant to work with a new owner — particularly in cases where the buyer is one of the partner’s direct competitors.
You’ll have to tie up a lot of loose ends before closing your deal. For example, you must ensure that all agent and legal fees (including filing fees) have been paid. Buyers, in particular, need to attend to such miscellaneous issues as:
Affiliate agreements. If your seller has affiliate agreements with other companies, these should be confirmed or canceled.
License transfers. If the seller has any type of license with a governmental entity (for example, a restaurant chain might hold a liquor license), it must be transferred to new ownership. Buyers may have to renegotiate such licenses.
Employee matters. Employee benefits can cause some of the biggest preclosing headaches. Buyers should work with sellers to transfer or replace such benefits as 401(k) plans, health insurance packages and unemployment compensation arrangements.
Share the Work
The amount of paperwork you’ll encounter in the days and weeks before closing can be overwhelming. So that you don’t get buried, share some of the responsibility with trusted managers. And be sure to work with an experienced M&A advisor who knows what you need to file, whom you need to notify and when everything needs to get done.
Sidebar: Informed Consent
Who needs to know — and, more important, consent to your plans — when an M&A is in the works? The answer may surprise you. Any party that has a relationship with the selling company may need to give its consent before the deal closes.
M&A agreements often specify which party will be responsible for obtaining consents regarding change in ownership. Your agreement may also discuss what happens if a stakeholder refuses consent and derails the deal. For example, the seller may have to pay early termination fees.
To prevent such snafus, sellers might want to sever relationships with difficult stakeholders before the merger process gets rolling. Also, sellers should provide their buyers with a complete list of all contractual relationships, including those with:
- Vendors such as food service providers, transportation outfits, investment advisors and raw materials suppliers,
- Third-party outsourcers including IT, maintenance, HR and payroll,
- Business partners such as former employees who may own trademarks or other critical intellectual property that must be licensed, and
- Regulatory or government bodies that provide limited licenses, accreditations or charters to perform certain business practices.