Word on the street is that merger and acquisition activity in the financial services industry is booming. Why the sudden boom? Experts believe that the boom, which started in 2013 and is expected to continue in 2014, has been spurred on by favorable valuations, a healthier economy, and a strong financing market. The biggest instigator, however, has been compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Volcker rule, which is prompting banks to sell off those assets that render them non-compliant. This news is especially timely given our promise last week to examine some of the most important merger and acquisition legal issues. As we noted last week, the term merger and acquisition (“M&A”) refers to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one of company by another in which no new company is formed. Mergers and acquisitions are very common in the business world, and they involve many detailed steps and legal issues.
Whether you are a buyer/acquirer or a seller/target, the merger and acquisition process requires a significant amount of time and paperwork. In a proposed M&A, there are three main documents: (1) an indication of interest (IOI) or memorandum of interest; (2) a letter of intent (LOI); and, (3) a purchase agreement. The IOI is generally a non-binding agreement that includes identification of the parties; the structure of a proposed deal, including the method (see post dated February 7, 2013, Mergers and Acquisitions: Structure of a Deal) and form of payment, and the terms of any seller financing; the business interest to be purchased; and, the purchase price or valuation of the interest to be purchased. An IOI can also include a timetable for the deal, including the timeframe for due diligence as well as a target closing date. An LOI is similar to an IOI in content, but it is a more serious signal of interest by the proposed acquirer/buyer. Once an LOI is signed by the parties, it becomes binding and exclusive, meaning that the seller/target may not meet with other potential suitors, and generally triggers the due diligence period. Lastly, a purchase agreement is the definitive document outlining the terms of the sale, including all legal obligations, warranties, employee preservation requirements, and other issues that may arise during due diligence.
Selling or buying a company can be a long and complex process, taking up to twelve months or more. If you are thinking about selling your business or buying another business, it is important to be prepared and seek legal advice from the beginning. And even though the mountain of paperwork can seem daunting, an experienced business attorney can guide you and your company — acquirer or target — through the process. If you need assistance with any merger and acquisition issues from reviewing and drafting the necessary documents, to structuring the deal and consummating the transaction, contact an experienced attorney at the DeCardenas Law Group to discuss your options and questions.