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Mergers & Acquisition: Getting your "House" in order before pursuing a transaction

Posted by attorney Eric Koester

Preparing for a major transaction such as a sale of your company is like preparing to sell a house: you’ll attract more buyers and obtain a better return if you engage in some house cleaning and maintenance prior to the transaction. In particular, companies that have been engaged in excellent corporate governance throughout their existence will find this process much less tedious (and probably much less expensive). For your company, this means resolving any potential problems with corporate or financial matters, management structure, employment issues or anything else which may deter potential buyers or investors.

Potential acquirers in a sale of the company underwriters and investors will review: the company’s corporate organization, quality and experience in management, internal financial and accounting controls, growth trends and potential, the health of the company’s industry and the company’s competitive position within that industry. While some factors such as industry health are beyond the control of management, the company can be proactive in shoring up these other factors prior to the M&A process.

Either before or during the transaction, the acquiring company will perform a thorough legal and financial review of the company through the “due diligence" process. You can anticipate potential problems in due diligence by reviewing these items with the help of your legal counsel in preparation of a sale. This will allow the sale transaction to go more smoothly once underway and may provide the company a more favorable valuation by investors or potential acquirers.

What are key areas to examine before beginning the process to sell your company?

  • Corporate matters – Are the company’s organizational documents (articles/certificate of incorporation and bylaws) up to date and reflective of the current organizational structure? Are the number and type of issued shares of the company’s capital stock consistent with the authorized shares in the articles of incorporation? Have all security issuances been properly approved by the board of directors and other shareholders where appropriate? Are all stock records and minute books up to date? Is the company in good standing in all jurisdictions it conducts business? Does the company have a complex capital or organizational structure that would be difficult for an investor or potential acquirer to understand? If so, is there a compelling tax or business reason for the structure?

  • Financial matters– Are the company’s financial statements correct, up to date and properly audited? Has the company properly filed all necessary federal, state and foreign tax returns? Are there any liens, encumbrances, mortgages or other charges on the personal and real property of the company?

  • Management and operations – Are the company’s business plan and financial projections accurate and up to date? Does the company have internal controls and is the company in compliance with those internal controls? Does the company have rights in all the intellectual property it is using, either by patent, trademark, license or otherwise?

  • Employee matters – Is the company in compliance with all relevant labor and employment laws? Are all employee confidentiality, intellectual property assignment or non-competition agreements signed and current? Has the company stock option plan and each individual employee stock option grant been properly approved by the board?

  • Insurance– Are all company insurance premiums, including workers compensation and directors and officers liability insurance, current and sufficient in coverage for the company’s needs?

  • Litigation– Is there any current or pending litigation (consider breached contracts, employment disputes, etc.) that can be resolved prior to the sale of the company?

In the case of an acquisition by a public company, the company may additionally consider:

  • Board of Directors – The NYSE, Nasdaq and SEC place a number of requirements on the composition of the board of directors of public companies with respect to the number of independent directors and the composition of compensation and audit committees. Making some of these changes prior to being subject to the requirements may help ease the transition.

  • Changes in Management– If the company is lacking in board members or officers with public company experience, it is advisable to hire an executive with that experience to help guide the company through the process of an acquisition and integration with a public company. This is particularly useful for a chief financial officer given public company financial reporting requirements.

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