Mergers and acquisitions (M&As) are important decisions in the life of a business or a company. Due diligence in mergers and acquisitions is essential to ensure that all parties benefit. This is where lawyers can help.
What is due diligence in mergers and acquisitions?
In a contract of sale, the principle of caveat emptor (“let the buyer beware”) prevails. It states that the buyer must exercise due diligence by thoroughly examining the product before purchasing it.
For example, the buyer can check the product, look for any defects, or ask for certain warranties from the seller. This will help the buyer decide whether to purchase the product or not, or to negotiate further.
The same is true for due diligence in mergers and acquisitions. When two companies agree to go into an M&A, both companies (in a merger) or the buying company (in an acquisition) will do some research. They will investigate the target business’ assets and liabilities and any other matters to help them decide whether to pursue the M&A or not.
Why is a lawyer important in mergers and acquisitions due diligence?
While the conduct of due diligence in mergers and acquisitions may be done by any officer of a business, hiring lawyers for due diligence in mergers and acquisitions will be an advantage.
Lawyers will advise companies on the due diligence aspect of mergers and acquisitions. They will also look into the merger or acquisition’s compliance with federal laws.
While the company is assured that the completion of the M&A will be favorable, they are also confident that the due diligence and the M&A itself will not violate any Canadian laws.
Businesses may consult with a lawyer in their area for more on mergers and acquisitions due diligence. Those in Calgary, for example, may contact a Lexpert top-ranked mergers and acquisition lawyer in Alberta.
Phases in Mergers and Acquisitions
There are 3 main phases in mergers and acquisitions:
- Pre-M&A preparations
- Negotiations and contract-building
- Post-M&A processes
1. Pre-M&A preparations
Before a business presents itself to the market as a target company or an acquiring company, it will have to identify some needs. The business must also strategize on how the M&A will address those needs.
Next, it will look for a company to merge with or acquire that is consistent with its M&A strategy.
Due diligence in mergers and acquisitions will start in this phase. While it will involve inquiries into the other party involved in the M&A, it may also refer to the investigation of one’s own company. This will help the company know its overall worth, which will be helpful in the negotiation stage.
A lawyer, together with the business’s officers, may begin due diligence in search of a target or buying company. They can start investigating the public records of the potential company, its financial standing, its business conduct, its operations, and products, among others.
2. Negotiations and contract-building
Negotiating between the two companies and drafting the M&A contract will follow. Signing a Letter of Intent and a Confidentiality Agreement may also be agreed upon.
Here, a full-blown due diligence is done on the other party or company. Since negotiations have already started, one of the parties may now freely request documents or financial statements from the other. The company may now assess the risks by looking at the other’s records. The company can decide whether these risks are worthy of the initial offers made by both parties.
Read more: What are the risks of mergers and acquisitions?
Lawyers for mergers and acquisitions due diligence will also review laws that both parties must comply with. For example, lawyers may inform the parties on the provisions of the Competition Act and the Notifiable Transactions Regulations. These laws may affect the validity of M&As in Canada.
Also, lawyers can verify any relevant information on the other party and identify any potential post-closing problems.
When due diligence has been completed by both parties, they may now finalize the terms of the M&A contract. Further negotiations may also happen. Ultimately, both parties can now make an informed decision on whether to proceed with the M&A or not.
3. Post-M&A processes
Lawyers may now proceed with any necessary filing for compliance and taxation after the M&A contract has been finalized. Transitions for both companies will now proceed, such as those regarding employees, corporate structure, and finances.
Learn about the different types of merger and acquisition strategies that are appropriate for your business plans and how lawyers fit into the whole process.
How is due diligence in mergers and acquisitions done?
The conduct of due diligence in mergers and acquisitions may include:
- Confirming corporate records, licenses, and permits
- Checking employment standards and tax compliance records
- Reviewing corporate contracts entered in the past
- Conducting court registry searches for any past and pending lawsuits
- Studying financial records for any liabilities (e.g., liens, encumbrances, security interests) and corporate assets
A variety of tools are used in carrying out these tasks. As early as 2017, AI has been used in conducting due diligence in mergers and acquisitions.
Who conducts due diligence in mergers and acquisitions?
It is highly encouraged for both parties to conduct due diligence in mergers and acquisitions. Aside from gathering the necessary information to make informed decisions, due diligence will also free them from any perception of bad faith against the other party.
Due diligence in mergers and acquisitions results in full disclosure, leaving no doubt in the process.
Hiring a lawyer to do some due diligence for your company? See our list of Lexpert top-ranked mergers and acquisitions lawyers in Canada.