The most significant legal challenges in mergers and acquisitions are the issues that can change the purchase price, alter the deal structure, delay closing, or cause a party to walk away. Thorough due diligence helps buyers identify what they are acquiring and helps sellers address problems before those problems weaken their bargaining position.
An acquisition may involve purchasing equity or acquiring some or substantially all of a company’s assets. Each structure carries different consequences for liabilities, taxes, contracts, employees, and required approvals. Our mergers and acquisitions attorneys help North Carolina businesses evaluate these concerns throughout the transaction.
Does the Seller Have Authority to Complete the Transaction?
The parties must confirm that the selling entity exists, remains in good standing, and has properly authorized the deal. Corporate records should establish how many shares are outstanding, who owns the shares or membership interests and whether any other person claims an ownership interest.
Operating agreements, shareholder agreements, and prior financing documents may restrict an entity’s ability to transfer or require approval from owners, directors, or lenders. Liens on equity or business assets must also be identified and addressed before closing.
What Financial and Tax Issues Can Affect an M&A Deal?
Proper due diligence procedures can determine whether the seller’s records support its stated earnings, liabilities, and valuation. Due diligence procedures may reveal unpaid taxes, unrecorded debt, questionable revenue recognition, or large obligations that will become due after closing.
Tax considerations can also influence whether the parties choose an equity purchase or asset purchase. Tax returns, payroll obligations, sales-tax compliance, and the proposed allocation of the purchase price should be reviewed with legal and tax advisers.
Can Contracts or Missing Consents Delay Closing?
Material contracts may contain anti-assignment or change-of-control provisions. Depending on the transaction structure, consent may be required from a landlord, lender, supplier, customer, licensor, or government agency.
Buyers should examine major contracts for termination rights, unfavorable renewal provisions, pricing commitments, and dependency on a small number of customers. A valuable contract may provide little benefit if it cannot be transferred or the other party can terminate it after closing.
How Do Employee and Benefit Issues Create Risk?
Proper due diligence should also examine wages, worker classifications, restrictive covenants, benefit plans, pending complaints, and obligations to key employees. The buyer must decide which employees it will retain and whether new agreements or incentive arrangements are needed.
Layoffs or benefit changes may also trigger notice requirements or liabilities. Unpaid compensation, misclassification, and benefit-plan compliance problems can become significant post-closing costs.
Why Must Buyers Review Intellectual Property and Data Practices?
A business may rely on trademarks, software, trade secrets, customer information, or copyrighted material without clearly owning it. Buyers should confirm that employees and contractors assigned relevant intellectual property rights to the company and that important licenses remain valid after the transaction.
Cybersecurity incidents and deficient privacy practices can create regulatory exposure, litigation, and remediation costs. The review should cover reported breaches, security policies, data-use restrictions, and contractual privacy commitments.
What Other Liabilities Should Due Diligence Address?
The scope will depend on the company, but the review commonly includes:
- Pending, threatened, or settled litigation
- Licenses, permits, and industry-specific compliance
- Antitrust or other regulatory approval requirements
- Owned and leased real estate, title issues, and zoning
- Hazardous materials and potential environmental liability
These concerns can be particularly important when an asset purchase includes real property or operating facilities.
How Do Representations, Warranties, and Indemnification Allocate Risk?
The purchase agreement uses representations and warranties to document facts about the business, including its authority, finances, contracts, employees, assets, and legal compliance. Disclosure schedules identify exceptions.
Indemnification provisions determine when one party must compensate the other for losses resulting from inaccurate statements or specified liabilities. The parties may negotiate survival periods, claim thresholds, liability caps, escrows, or holdbacks.
Which M&A Red Flags Require Closer Review?
Warning signs include incomplete records, unexplained ownership changes, inconsistent financial statements, unsigned contracts, undisclosed related-party transactions, and resistance to reasonable diligence requests. No single issue necessarily ends a transaction, but repeated gaps may indicate broader weaknesses.
How Can Due Diligence Findings Change the Deal Terms?
A newly discovered risk does not always stop the sale. It may instead lead to a lower price, an asset rather than equity purchase, a closing condition, a special indemnity, or funds held in escrow. The buyer might exclude certain liabilities, while the seller may resolve a dispute or obtain consent before closing. A business law attorney can assess the significance of each finding and revise the purchase agreement so the final terms clearly allocate the identified risks.
Turn M&A Findings Into Informed Deal Terms
Legal review is most useful while the parties still have room to adjust the transaction. Patrick, Harper & Dixon, LLP advises buyers and sellers on due diligence, deal structure, negotiations, and closing documents. Contact our North Carolina business law team to discuss the risks and terms of your proposed transaction.
