Legal Challenges in Mergers and Acquisitions

The field of law known as M&A (mergers and acquisitions) is a fascinating one and any owner of a small or large business should understand its basic principles if they have any thoughts of combining their company with another company.

A few definitions: If you want to simply combine your company with another company it’s a merger. If a much larger company wants to buy your small company, it’s an acquisition. In either scenario, having a North Carolina business attorney on your side will make the entire process easier.

Introduction to Mergers and Acquisitions

When one company merges with another company, it’s usually because both companies think they will see an increase in profits. However, it upsets the balance in both companies. Oftentimes, there are layoffs. Productivity plummets. The same is true for acquisitions. According to the Harvard Business Review, 70-90% of acquisitions fail, basically because the bigger company gobbling up the smaller company focuses only on what they are getting, not what they are giving the smaller company.

M&A also is tied to trying to predict the future. For instance, in 2011, News Corp sold MySpace at a substantial loss. At the time of purchase, MySpace was a dominant social network platform widely used by the public. However, its popularity declined sharply as users migrated to Facebook and Twitter, leaving MySpace outdated and largely abandoned.

There are several different types of M&A transactions:

  • A stock sale acquisition is where the entire business gets bought including assets, liabilities and stock.
  • An asset sale involves only purchasing one asset, like a piece of equipment. 
  • A divestiture occurs when companies sell an entire segment of their business, such as when a carmaker sells its financing division. However, it can also mean bankruptcy.
  • Mergers combine two businesses hoping for mutual benefit.

In all cases, companies view M&A as a growth strategy.

Major Types of Legal Challenges in M&A

Several diverse types of legal challenges are often encountered during mergers and acquisitions. Factors such as antitrust laws, due diligence, negotiation, and contractual agreements can lead to challenges that need to be navigated carefully.

Antitrust laws exist to ensure there are no monopolies and that M&A doesn’t eliminate healthy competition among businesses. When there was only one phone company in America, years ago, they could charge customers whatever they wanted to, but now that there any many phone carriers it’s better for consumers.

Due diligence is important because it uncovers potential problems, such as pending lawsuits filed against a company, which could potentially be very expensive. Any company looking to merge with or acquire another company should do their due diligence very carefully.

Negotiations are an important part of any merger or acquisition. If not handled correctly they can spell disaster. Contractual agreements go hand in hand with negotiations. Included in negotiations and contractual challenges are complexities of terms, conditions, indemnities, and warranties, and those can lead to disputes if not handled correctly.North Carolina business laws are complicated. You want a business attorney with experience in M&A in your corner, and our firm has the experience to help you. Call us today.