Identify the primary participants in M&A transactions and outline their respective roles and responsibilities.
Like snowflakes, every M&A deal is unique. Many deals can be closed with a buyer, a seller and just one lawyer. At the other extreme, consummating a large, multi-jurisdictional, public merger may involve dozens of parties, from multidisciplinary groups of parties’ own internal personnel to financial advisers, lawyers in various countries and states, environmental, regulatory, human resources (HR) and antitrust specialists, proxy solicitors, escrow agents, financing sources, insurers and even lobbyists.
With that in mind, here’s a list of key M&A deal participants along with a succinct (and, at times, oversimplified or incomplete) description of the roles they play:
Purchaser. Every M&A transaction involves at least one purchaser, or buyer, the party that will be making the acquisition. This is the person (i.e., individual or company) that signs the purchase agreement, pays the purchase price and which, after closing, directly or indirectly, owns or controls the target company or its assets. The purchaser also will work with the seller or target to establish the primary financial and strategic terms of the transaction, lead negotiations of key deal points, manage operational and financial due diligence and select and supervise transaction advisers, which includes an assortment of lawyers, investment bankers, accountants, proxy solicitors and others.
While the purchaser often is the ultimate parent company involved in the transaction, it need not be. In fact, it frequently isn’t. Instead, a company wishing to consummate an acquisition may use an existing operating subsidiary or form a new company altogether. This may be done for a variety of reasons, including for operational, tax, regulatory and risk mitigation benefits.
Seller. The seller in an M&A transaction is the person or persons selling the equity securities or assets and liabilities being purchased by the purchaser. Unlike the purchaser, every deal does not necessarily involve a seller acting as a deal participant. For example, in transactions where the target is a publicly-traded company, although public shareholders are effectively selling the company and, accordingly, may be thought of as the sellers, the Board of Directors and management of the target company itself usually take on the role that would be played by a seller in a private deal.
In private M&A transactions, where there is typically one or a small group of individuals who control the target company, these “control persons” will generally act as the seller. In that capacity, as the counterpart to the purchaser, they will sign the purchase agreement, receive the purchase price and transfer the securities or assets subject to the deal. They will also negotiate with the buyer to establish the primary financial and strategic terms of the transaction, provide information to the purchaser and its advisers conducting due diligence and select and manage its own set of transaction advisers.
Importantly, the seller in a private M&A transaction will also be responsible for post-closing indemnification obligations owed to the buyer (i.e., obligations to reimburse the buyer for certain losses it may incur as a result of violations of the purchase agreement).
As with the purchaser, a seller entity may not be an operating company with substantial assets at the top of its organizational hierarchy. Quite often, the seller entity is a holding vehicle or operating subsidiary owned or controlled by one or more other companies. In these cases, seller parent companies may be expected to guarantee post-closing obligations of the seller, including indemnification obligations.
Target. The term “target” is generally used to refer to a company, as opposed to assets, ownership or control of which will be acquired in the M&A transaction. It may refer not only to the subject of a private M&A transaction but of a public deal, as well. The term is not used in transactions involving a sale of assets and liabilities, where “Acquired Assets” and “Assumed Liabilities” are in play.
In a private deal, the target company itself may not be expected to participate actively in the negotiation and implementation of the transaction, aside from facilitating the buyer’s due diligence by providing access to information and materials. After all, a private M&A target is the subject of the deal and not usually a party to it. As mentioned above, this differs somewhat from the public M&A context, where the target company’s Board and management serve as representatives of the interests of public stockholders and the public company target is typically a party to the principal transaction agreements. In that case, the target plays the role of the seller.
Target Board of Directors. The members of the Board of Directors of a corporation owe fiduciary duties to the company’s stockholders. This means directors must act for the benefit of the stockholders, while subordinating their own interests. In public M&A transactions or private deals in which there is a diffuse stockholder base or which involve a conflict of interest impacting a controlling stockholder, these fiduciary duties may require the target Board of Directors (or a committee comprised of disinterested directors) to participate actively, or manage, the M&A transaction process on behalf of the target company. They may do so using their own independent legal and financial advisers and may rely upon target company management in discharging their duties.
In most private deals, however, target Board fiduciary duties are immaterial for several reasons. First, sales of less than all or substantially all of a target company’s assets are usually governed by the deferential business judgment rule standard of review. This permits Boards to take a more passive role in the M&A process. The more rigorous so-called Revlon standard of review only applies in connection with sales of control. Second, most non-asset private M&A transactions are structured as stock purchases, which means the buyer acquires control of the target company by dealing directly with the stockholders themselves. In that situation, because stockholders are making their own choices, target company directors aren’t being called upon to take any action on behalf of the company. In fact, the target Board need not even approve the transaction.
M&A Lawyers. The principal parties to M&A transactions each engage their own attorneys, who may be in-house attorneys but are more frequently M&A specialists practicing with outside law firms. These lawyers provide a number of services to their clients, including:
advising on transaction structure and timing
conducting or facilitating legal due diligence (i.e., the review of contracts, permits, organizational documents and other materials of the target company, or governing the subject assets, to develop an understanding of the scope, value and risks of the transaction)
rendering advice on fiduciary duties and minority stockholder rights, such as dissenters’ rights
providing tactical advice during negotiations
negotiating and drafting transaction documents
interfacing with specialist attorneys
incorporating comments to transaction documents from client personnel and specialists
interfacing with client non-legal due diligence personnel to identify and address areas of risk and client priorities
managing and driving the transaction process and getting the deal to closing, including by making regulatory filings, obtaining third party consents and coordinating with financial advisers, accountants and proxy solicitors
M&A lawyers usually serve as the hub in a hub-and-spoke system by functioning as the primary point of contact for many of the other deal participants.
Specialist Attorneys. Large or more complex M&A transactions often also require involvement by lawyers who specialize in certain areas of law. Depending on the deal, this may include, among others, lawyers who concentrate on antitrust, real estate, regulatory, securities, compensation and benefits, labor, environmental, tax, intellectual property, privacy or foreign law. These attorneys may assist with due diligence as well as negotiating and drafting transaction agreement provisions in their respective areas. At times, tax specialists play a leading role, as their guidance may impact the entire structure of the transaction. Depending on the importance of a given area, other specialists may play a more or less prominent role.
Investment Bankers. Investment banks, also called financial advisers, provide financial and strategic advice to purchasers, target companies and sellers. On sell-side engagements, they may be the first advisers contacted at the commencement of a potential transaction and will advise management and the Board as to potential buyers, prospective deal terms, timing and the process for marketing the transaction, among other things. They frequently serve as the primary points of contact for possible buyers, prepare information memos, run auctions, lead negotiations on purchase price and form of consideration, perform financial modeling and analyze competing bids. Critically, they also assist target company Boards of Directors in discharging their fiduciary duties by rendering fairness opinions, which speak to the fairness, from a financial point of view, of the transaction consideration to the target company shareholders.
Financial advisers in buy-side engagements render reciprocal services for M&A buyers, including identifying acquisition targets, preparing valuations, risk spotting, financial modeling, leading negotiations, communicating with sell-side investment bankers and rendering tactical advice. They may also assist purchasers in obtaining M&A financing and may even provide it themselves.
Others. A number of other parties may play a role in an M&A transaction. While undoubtedly important, these parties generally play tangential roles.
Banks and other sources of financing provide purchasers all or a portion of the cash they need to finance the purchase price.
Independent accountants assist with due diligence, public disclosures and preparation of pro forma financial statements.
Escrow agents are independent third parties, usually financial institutions, to which a portion of the purchase price in private M&A transactions is paid to backstop all or part of a seller’s post-closing indemnification obligations.
Proxy solicitors assist principals in public M&A deals in soliciting shareholder consent to the transaction.
Exchange / paying agents, in public deals, facilitate the payment of transaction consideration, withholding taxes, collecting shareholder payment instructions, verifying holdings and collecting tax forms.
Shareholder representatives are appointed by selling shareholders in private M&A deals with a diffuse shareholder base. They serve as the principal points of contact for buyers post-closing and coordinate compliance with ongoing covenants, including with respect to indemnification, purchase price adjustments and earnouts. They have the authority to bind selling shareholders and may be individuals (e.g., one of the larger selling shareholders) or third party service providers.
Insurance companies that provide representations and warranties insurance review and comment on seller representations and warranties and conduct independent due diligence on the target company as part of their underwriting process.
Environmental consultants may assist M&A principals with identification of environmental risk by, for example, conducting Phase I or Phase II environmental site assessments, and development and implementation of remediation plans.
HR consultants helps organizations evaluate and address the people-related costs, risks and challenges of corporate transactions, including assessing compensation and benefits programs and developing merger integration plans.
Investor relations consultants advise transaction parties in communications strategies with investors and other stakeholders.
Lobbyists may assist parties to particularly large or high profile deals being subject to increased governmental scrutiny in cultivating support and ameliorating concerns of legislators and other public officials.