Mergers and acquisitions have many moving parts. Whether you’re the buyer, seller, or counsel on either side, it can be a challenge to differentiate necessary deal complexities from unnecessary inconveniences and unreasonable requests. To help tackle this, Caravel’s team of seasoned M&A lawyers have shared their M&A deal red flags! Here are 8 points one should be looking out for in all future deals:
1. Corporate Chaos: You don’t want to inherit chaos. An incomplete minute book, general lack of maintenance of corporate records, no written employment agreements, overly complicated capitalization structures, reliance on inconsistent or incomplete financial records or statements including those with irregularities and unrealistic assumptions; these things say something about a company’s operations and organization.
2. Leadership Jumping Ship: A recently departed CEO or CFO who has not been satisfied, or high management turnover rate in general, should raise questions.
3. Misreading the Room: Ask yourself – do the expectations set out by reps, warranties, indemnities, etc… make sense within the context of the transaction? If they do not, is it because of a misunderstanding, unrealistic expectations, or a failure to appropriately assess and respond to the details of the situation? Are other aspects of the deal limiting or unrealistic?
For example, covenants regarding the operation of a business while working towards closing can be restrictive for a seller, these requests should be read carefully. The same should apply to the responsibility of the seller. One of our lawyers recalled a previous instance in which a buyer wanted the seller to be fully responsible for any issues with the backend of technology used by the company. Most people don’t know what’s behind Microsoft word, for example, and how this makes it impossible to meet that standard of responsibility. Watered down language, using terms like “to the knowledge of…” should be included to meet more reasonable standards of responsibility.
4. All Eyes on You: Certain sectors are more likely to attract scrutiny from the government (i.e., tech, strategic resources, defense, etc…). The possibility of a National Security Review for deals with foreign buyers should be carefully considered and prepared for accordingly by both parties.
[Read our blog post: What you need to consider before buying or selling a company]
5. Failing the Compatibility Test: While we may neglect its importance, ensuring a culture fit is imperative. If the buyer and seller are entirely misaligned when it comes to matters of operations and corporate culture standards, it will be difficult to achieve a successful outcome in the end. Even if the deal is sealed, the aftermath may bring new challenges impacting the success of the business.
6. Rogue Requests: One of our lawyers recalled an instance in which they were representing a client on one side of an M&A matter when the business people on the other side reached out to request the lawyer represent them too, at the same time! Ignoring conflicts and other standards of Western legal practice should always raise red flags.
7. Crossing That Bridge When We Get There: As touched upon in other points, preparedness and organization are essential to keeping a deal going. Parties should not be leaving key details as an afterthought. In M&A deals, both sides need to determine what contractual consents they might need from third parties to proceed with the deal. For example, if the seller is leasing office space, and wants to transfer the lease to the buyer, the seller will need to obtain the landlord’s consent to the lease transfer. Consents may also be required from regulatory authorities such as the Competition Bureau. Proactively addressing these issues is a standard that should always be met.
8. Money Tie-Ups: The monetary aspect of a deal should always be approached with careful consideration. Details including outstanding liens, fair market value of underlying assets, etc., should be put under a magnifying glass. Contingent tax or environmental liabilities and the target corporation being at or near insolvency with unpaid secured/unsecured claims against the business should raise red flags.
Looking for M&A support? We can help. Caravel has a team of 85 qualified and experienced lawyers, including those who specialize in M&A transactions. Get in touch with our team today to find out more.