Whether you are buying or selling a company, understanding the flow of an M&A deal, from preliminary discussions to final closing, is important. In this post we break down the typical phases of a transaction and highlight how the process varies depending on the deal structure. We also identify common decision points, events that drive the schedule, and California-specific considerations that can influence how your deal should be managed.
Starting With Strategy and Alignment
The transaction process does not begin with a term sheet. It begins with clarity. Before your company engages counsel or drafts transaction documents to acquire a company, you should understand what your company wants to accomplish through the deal. Are you aiming to acquire specific assets, the entire company, a customer list or a team of executives or technologists? What liabilities are acceptable to assume? What is your schedule and tolerance for integrating the seller’s assets into your company?
Similar questions apply to the seller. Are you planning a complete exit or do you want to retain certain assets or remain involved in the new enterprise in some capacity? Are you concerned about protecting employees, customers or other legacy relationships? Is tax minimization your top priority? Or is securing important new technologies on the top of your list?
Answering these questions early helps determine whether an asset sale, stock purchase, or merger is the best path to accomplish your company’s objectives. It also prepares your team to engage in negotiations with laser-like focus and credible positions on the most important issues. At this early stage, retaining experienced legal counsel and financial advisors is essential. Your attorney will guide you through the maze of corporate authority issues, regulatory requirements, potential structuring options and obvious pitfalls. Your CPA or financial advisor can model the tax implications of each possible transaction.
Term Sheets and Letters of Intent
Once there is alignment between buyer and seller on general terms, the parties typically enter into a non-binding term sheet or Letter of Intent (LOI). The LOI outlines the key deal terms — purchase price, form of consideration, structure, timing, exclusivity period, and major conditions to closing.
In California, LOIs often include a few binding provisions such as confidentiality and exclusivity, while the rest of the document remains non-binding. The LOI is an important step. It confirms that both sides are aligned on the major deal terms before they invest considerable time and effort conducting legal, financial and operational due diligence.
This may also be the phase where potential deal-breakers start to emerge. If the buyer insists on a structure the seller cannot accept for tax, legal or other reasons, this is the time to discover, discuss and try to resolve them. If can’t, it may be time to walk away before you commit more resources to a doomed deal.
Once the LOI is agreed to and signed, the real work begins.
Due Diligence and Document Preparation
After the LOI is completed, the buyer’s team commences due diligence by serving the seller with an initial due diligence request. This process involves legal, financial, operational, and commercial review of the target company’s business and material contracts and litigation. The scope and intensity of due diligence vary depending on the size and structure of the transaction.
In a stock purchase or merger, the buyer inherits all of the target’s liabilities, so diligence is typically broad and deep to uncover any and all latent material liabilities. In an asset acquisition, the scope may be somewhat narrower, but still thorough, focused on the specific assets and contracts being acquired and the liabilities being assumed, and on verifying the seller has clear title to transfer all the assets that are part of the deal.
A secure virtual data room is typically set up to exchange diligence materials. In parallel, once enough diligence is completed and the buyer determines it indeed wants to proceed with the transaction, the legal team begins preparing a set of definitive transaction documents. Depending on structure of the deal, this will may include an Asset Purchase Agreement (APA) or Stock Purchase Agreement (SPA) or Agreement of Merger.
These documents are quite detailed and reflect all of the terms and conditions of the agreed transaction, including pricing mechanisms, representations and warranties, closing conditions, covenants, and indemnification provisions. In California and Delaware, definitive transaction documents typically include shareholder approvals, board resolutions, attorneys’ opinion letters and compliance with a host of provisions in the California or Delaware Corporations Code. Large deals that may have antitrust implications may require the approval of federal and state government agencies.
Key Roles and Responsibilities During the Process
Successful management of an M&A transaction requires coordination among several key players:
- Legal counsel drafts and negotiates all the transaction documents, identifies compliance obligations, manages regulatory filings, and advises on risk allocation. If you’re the buyer, your corporate counsel’s job is to drive the deal to conclusion.
- Financial advisors and CPAs analyze purchase price mechanics, model tax scenarios, and help manage working capital, debts and cash to advise on purchase price adjustments before the deal closes.
- Company management provides operational and contract-related information, manages employee communications, and helps ensure the success of the post-closing transition.
- External specialists may be brought in to consult on environmental, intellectual property, labor, or industry-specific due diligence depending on the nature of the business.
In some deals, the buyer also brings in a lender or investor who conducts their own due diligence to determine whether the deal can be financed and on what terms. These financiers may require separate buyer and seller approvals and separate financing documents before they extend credit or invest. Identifying and managing the financiers’ schedules and deal requirements is often critical to closing the transaction.
Corporate and Third-Party Approvals
Every M&A deal has a different set of required approvals. In California, if a corporation is selling all or substantially all of its assets, the transaction must be approved by the company’s board and its shareholders under Corporations Code section 1001.
Stock sales may not require board approval if individual shareholders are selling their shares directly. However, shareholder agreements or voting trusts may impose additional consent requirements. In mergers, statutory procedures under Corporations Code sections 1100 through 1113 come into play, including specific notice and approval provisions.
In all types of transactions, certain contracts, particularly commercial leases, license agreements, or customer agreements, may require third-party consent before assignment. In an asset sale, these must be individually negotiated and documented. In stock purchases and mergers, many contracts will remain in place automatically, unless they include change-of-control provisions.
Failure to identify and secure required consents can derail a deal late in the process. Your legal team should identify all necessary approvals and help secure them well in advance of closing.
Closing Mechanics and Deliverables
The closing is when ownership officially changes hands. This step may occur concurrently with signing, or at a later date once all the terms and conditions in the purchase agreement have been satisfied. A sign-and-close deal is often simpler. A sign-then-close deal allows time to finalize consents, financing, or regulatory approvals.
At closing, the following events typically occur:
- Final execution of transaction documents
- Delivery of purchase price and transfer of assets or stock
- Filing any required merger or corporate documents with the appropriate Secretary of State
- Delivery of ancillary documents, including consents, officer certificates, legal opinions, escrow instructions, and transition materials
In asset deals, a bill of sale, assignment agreements, and IP transfer documents are often executed. In stock deals, updated stock ledgers, resignations, and new officer appointments may be included. For mergers, the merger agreement is filed with the Secretary of State and becomes effective either immediately or on a stated effective date.
Your company’s (and attorney’s) closing checklists should be detailed and aligned with the structure of the transaction and the governing agreements.
Timing and Workflow Differences by Structure
Each type of transaction carries different practical schedules:
- Asset purchases often take longer to close because of the need to assign contracts, transfer licenses, document each asset being acquired, and physically transferring the assets from seller to buyer. The process is more document-intensive, but offers more control over the assets purchased and liabilities assumed.
- Stock purchases can close more quickly, especially when few shareholders are involved because contracts and licenses typically remain in place and only stock certificates and consents change hands.
- Mergers follow a formal statutory process. In California, they typically require board and shareholder approval, notice filings, and post-closing documentation. They may also involve greater integration planning and public disclosures.
Sellers should be aware that California requires notice filings in some transactions involving bulk transfers of assets (often referred to as bulk sales) under Uniform Commercial Code sections 6101 et seq. These procedures are less common now, but may still apply in certain industries or asset-heavy transactions.
Integration and Transition Planning
Transition planning is often overlooked until the deal is nearly done. In reality, integrating the seller – or its assets – into the buyer’s company should be considered early in the transaction, and certainly during due diligence. The tasks typically involved in integration – including employee communications, vendor continuity, IT handoffs, and customer announcements – should be documented in side agreements shared with management of both buyer and seller.
In mergers and stock deals, much of the company’s infrastructure remains in place. In asset sales, the buyer will need to integrate the seller’s assets and employees into its management systems. The purchase agreement – or side agreements – should identify how these assets and individuals will be integrated – or eliminated – and who is responsible for making them work on Day 1.
About Finkel Law Group
Finkel Law Group, with offices in San Francisco, Oakland and Washington D.C., has 30 years of experience counseling buyers and sellers in navigating the complexities of M&A transactions. Whether you’re a buyer or a seller our M&A attorneys have decades of experience guiding clients through every phase of the transaction process. When you need intelligent, insightful, conscientious, and cost-effective legal counsel to assist you with the sale or acquisition of a company, please contact us at (415) 252-9600, (510) 344-6601, (771) 202-8801 or info@finkellawgroup.com to discuss your transaction with one of our attorneys.
