Mergers & Acquisitions – Some Legal considerations Contributed by Helen Wallace

You’re a small business that’s doing well.  You’ve got a great team, more work than you can handle and the business is making a tidy profit.  You’re ready to grow your business. How are you going to do this?  You’re thinking you could bring in another product line or extend wider into the market or hire more staff so you can take on even more work.  What about growing your business by way of merger or acquisition?

Merger vs acquisition?

Mergers and acquisitions occur when two companies come together.  However, the two are different.  A merger is when two separate companies combine to become one company to benefit both.  An acquisition is a transaction where one company purchases and gains control of another.

Any merger or acquisition will need expert advice, including accounting and legal, to help mitigate risk and to make sure the transaction goes smoothly.

Some Legal considerations

Structuring the transaction

  • Are you acquiring another business’ assets or shares? (A purchase of shares carries greater risk and more detailed due diligence)
  • Are you merging your business with another? How will shares be allocated? Will this be based on an independent valuation? Are you going from a sole trader to a limited liability company? (Control and decision making mechanisms are important to consider)

Due diligence checks

  • What exactly are you buying? Who are you merging with?
  • It’s critical to do your “DD” first!
  • Due diligence is the process of carrying out an investigation and review of the important aspects of your target business before being committed to completing the transaction.
  • Examples of matters to check include:

Financial – obtain copies of financial statements and accounts

Assets and Stock

Goodwill

Permits & compliance – does the company hold all consents and permits necessary to carry on its business and can these be transferred

Contractual obligations

Liabilities

Leases – are these assignable, what are the terms

Intellectual property rights – it may be crucial to obtain the rights to IP assets

Employment – existing employment agreements and staff obligations

Information Technology – what programmes and software are important

Tax – is everything up to date, any issues, tax implications of transaction

Insurance

Industry specific checks

Culture and values alignment

Claims against the business

Agreement for Sale and Purchase

  • A contract is necessary to document the terms and conditions of your merger or acquisition. Important terms to include:

The parties, subject matter of the sale, purchase price and settlement date

Agreed business structure and operation

Defined assets

Conditions eg, obtaining any consents and approvals, being satisfied with due diligence checks and obtaining finance

Warranties & indemnities from the vendor regarding the state of the business

Restraints of trade

Dispute resolution provisions

Employment matters

  • Existing employment agreements, key employees, obligations and liabilities
  • Effect of transaction on employment and consultation with employees
  • The Employment Relations Act 2000 gives employees certain protections if a business is sold

Regulatory requirements

  • The Companies Act 1993 governs NZ company law (eg, is the approval of the company’s shareholders required?)
  • The Commerce Act 1986 prohibits acquisition of shares or business assets that lessens competition in a market. Is Commerce Commission clearance required to avoid penalties for breach of the rules?  The Act also prohibits restrictive trade practices and includes cartel provisions such as price fixing or where competitors allocate a market between them eg, based on geographical area.
  • Industry specific regulations that need to be complied with
  • Health and Safety at Work Act 2015
  • Resource Management Act 1991

In summary, acquiring or merging with another business can bring great advantages and extend your business opportunities, but requires careful consideration of a number of matters.  Input from specialist advisors (legal and accounting are essential) and can help and mitigate the risk of taking on the next big step of growing your business.

To learn more about how Helen and Corcoran French assist their clients, visit their website: https://cflaw.co.nz/