An M&A transaction is often initially driven by the business development or strategy teams within an organisation.
Valuation, strategic rationale, synergy analysis and integration are not always matters which involve an in-house legal team at the outset. However, these matters can have significant legal implications for a transaction.
Set out below are three issues GCs should raise with their deal teams during the early stages of a transaction:
- Be cautious of synergies and valuation disclosure.
Can an organisation ever do too much synergy and valuation analysis? Probably not, but there is one key issue that most deal teams tend to forget in preparing their valuation models and synergy assumptions: disclosure.
In a public M&A transaction, and in any transaction which requires FIRB approval, the intentions of the buyer for the business and its assets and employees must be disclosed to target shareholders and to FIRB. And that doesn't even take into account the implications of such analyses for competition clearance purposes. Often, versions of the valuation model, its underlying assumptions and board or committee papers outlining the strategic rationale of the transaction are not necessarily reflective of the intentions of the bidder or the likely impact on the market, but can create an unhelpful (if unintentionally inaccurate) paper trail should they ever be revisited and are challenged as being inconsistent with the position disclosed to the public or the regulators.
Before the bankers and the deal team are let loose on the excel spreadsheets and board papers, GCs should take a step back to determine what material should be produced and how that aligns with their organisation's intentions and strategies for the deal at hand.
- Don't rush to integrate.
Some of the most successful M&A transactions we have been involved in have had a laser-like focus beyond the acquisition and towards integration.
However, GCs should be aware that recent developments relating to the ACCC's approach towards concerted practices and cartel conduct may mean that forward planning for post-M&A integration will need to be balanced against the need to comply with information sharing and 'gun-jumping' restrictions. Frequently, M&A deal teams have a very different perspective to competition lawyers and regulators on what constitutes anti-competitive conduct. For example, what may seem like a diligent effort to ensure continuity of service for existing customers in the pre-closing phase of a transaction could in fact constitute illegal cartel conduct.
Similarly, restrictions on a target's activities in a sale agreement which are designed by the deal team to protect the financial interests of a buyer could result in a breach of competition law. GCs should get involved early and brief the deal teams negotiating the transaction on acceptable parameters so these restrictions can be factored into the transaction well in advance.
- Don't ignore reputational and governance red flags.
Society is demanding that business do better. In the current environment, legal due diligence needs to take into account risks which may impact a company's reputation and, ultimately, cause financial detriment to a company.
Organisations are increasingly expanding their diligence scope to areas of reputational governance such as environmental, social and governance (ESG), modern slavery, corruption, whistleblowing, and business and human rights. In addition to this more formal type of diligence, legal counsel can often assess the quality of the organisation's corporate governance environment during the course of an M&A transaction based on the responses provided to questions and an understanding of the legal systems and processes of the target business.
Even if no specific 'red flags' are raised during legal due diligence, GCs should not ignore warning signs and should encourage both legal and deal teams to report back on any qualitative issues which expose concerns with a company's governance system.
A too-rigid approach to diligence reporting may mean that you miss out on truly understanding the underlying risks of an organisation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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