Key Considerations for Structuring a Deal for a Successful Merger/Acquisition

Posted by Adam Martin on September 26th, 2018

Opting for the right deal structure is the most critical part of the job when it comes to making a successful business merger or acquisition. It’s a big and complex business transaction and to make the most of a business deal, it must be made on an even keel. Deal structure sometimes may favor one party or the other if it’s not planned and executed in an appropriate manner. For the reason, both parties engaged in a business deal, specifically of merger or acquisition, must consider different aspects all from legal to taxations. This is to ensure a mutually agreed transaction structure that is beneficial for both parties. Deal structuring service can be of great matter in the course of such baronial business transactions.

A number of issues are to be discussed and addressed up when negotiating a merger and acquisition (M&A) deal at the time of execution of a letter of intent (LoI) or soon after LoI has been executed. The post, in an effort to develop an understanding of a successful merger and acquisition, explains the key concerns that both target and acquiring company need to be attentive to. 

Structuring a Deal

There are three principal undertakings that exist when structuring a business deal or merger/acquisition transaction - (i) stock purchase, (ii) asset sale and (iii) merger. Both the acquiring and target company have several business and legal interests withing of the three undertakings. Therefore, it is necessary to recognize and surmount material concerns when negotiating a merger or acquisition. We have spotted 4 primary considerations that both parties should be concerned about. They are-

(i)                 Transferability of liability

(ii)               Third party contractual consent requirements

(iii)             Stockholder approval

(iv)             Tax consequences

You may perhaps be unaware of what all the above 4 key considerations are comprised of if this is the first time you are into a business merger or acquisition. No worries. We have explained all the four considerations in detail so that you can have an understanding of what these considerations are all about.

(i)     Transferability of Liabilities 

After consummation of a stock sale in the acquisition, the target company’s liabilities are transferred to the acquirer by the effect of law if aren’t negotiated mutually. The case of companies’ merger is no different when it comes to transferring the liabilities. However, in the case of the asset sale, only those liabilities are transferred to the acquiring company that is assigned an acquirer.

(ii)   Third Party Consents

It is crucial to obtain a preclosing consent to an assignment if the target’s existing contracts have a prohibition against assignment. Though no such consent is required for a stock purchase or a merger, there may be a requirement of third-party consent if a contract contains specific prohibitions against an assignment.

(iii) Stockholder Approval

The board of directors of a target company has enough authority to grant approval on an asset sale without seeking the approval of individual stockholders. But, it is required for all stockholders to grant approval pursuant to a stock sale. In case of achievability of unanimity in stock sale context, the merger can be brought as an alternative where the target and acquire negotiate mutually agreed stockholder approval terms to complete the deal.

(iv)Tax Consequences

Considering tax consequences are not meant to be dropped off the radar when structuring a deal. You are required to be concerned about tax consequences as much as you are about the valuation of a company in emerging markets before you step ahead with merger or acquisition. The target company would be accountable for the corporate tax for an asset sale and its shareholders also have to ensure tax payment on any subsequent dividends.

There might be many other considerations that business owners may have to keep in their mind when steering the course of business mergers or acquisitions, but the mentioned four considerations are the key to the successful business deal.