General Counsel’s Role in Mergers and Acquisitions: Ensuring Legal Due Diligence
If a merger and/or acquisition (M&A) is in your company’s future, you no doubt know that there’s a lot of due diligence to be done. Presumably, you and your General Counsel have already made a decision that the merger or acquisition is a good strategic fit for you in terms of lines of business and management strategy. Unfortunately, the hard part comes next.
Here are the top six areas that you, your General Counsel, and your M&A team will need to look at closely before closing a deal:
Financial Matters
A review of financial matters should be at the top of your list. The M&A team should review all pertinent bank accounts, accounts receivable, accounting records, current and contingent liabilities, recent financial audits, and other financial documents.
Sales and Customers
It’s important to carefully evaluate the other company’s sales approach, as well as the way they deal with their customers. Among other things, you should have a good understanding of their customer retention and satisfaction, as well as any product claims or alleged defects.
Material Contracts
This can be an extremely time-consuming aspect of M&A due diligence, but it’s a significant one. All material contracts must be reviewed to determine if there are any provisions that might adversely affect your business if you decide to terminate the contract. For example, you may have a requirements contract for a particular raw material, and the business you’re looking to merge with might have a requirements contract for the same raw material. What will happen if you prematurely terminate one of these contracts? Often, these types of agreements impose heavy penalties for early contract termination.
Litigation
It’s imperative that you understand the status of litigation of the other company. There could be lawsuits for defective products, employee litigation relating to alleged sexual harassment or discrimination, personal injury lawsuits for slip and falls that occurred on the premises, and any number of other outstanding litigation. Thus, you’ll need to evaluate what is the legal and monetary exposure of the outstanding lawsuits.
Insurance
A review must be conducted of all insurance policies held by the other business. This includes property liability, errors and omissions insurance, key man insurance, workers’ compensation, and other types of insurance.
Environmental Issues
Many businesses will have some environmental compliance issues to deal with. For example, a retail business, depending on its size, must often comply with regulations concerning the disposal of hazardous waste, such as paint cans or pesticides. On the other hand, a manufacturing company will have to deal with environmental issues that can be enormous in scope, including the Clean Air Act, the Clean Water Act, and various solid and hazardous waste regulations.
Accordingly, it’s important that an audit be conducted of the other business to ensure that it has been meeting its environmental compliance obligations. This is an area fraught with complexity and high penalties for noncompliance.
Contact One Oak Legal For Your General Counsel Needs
We’ve only briefly touched upon the due diligence that must be conducted before a business merger or acquisition takes place. Taxes, employee matters, compliance with state and local real estate codes, and many other items must also be reviewed to ensure that the merger or acquisition makes sense and will not result in any unexpected liabilities.
A General Counsel typically takes the lead in reviewing pertinent documents and evaluating legal compliance and risk in a merger or acquisition. At One Oak Legal, we are Harrisburg business lawyers and can act as your General Counsel to provide all the legal guidance you need. Contact us, and we will work proactively with you as you grow your business.