A vigorous merger and acquisition transaction may be stranded due to a broken capital chain, or may change due to a sudden change in the market environment. However, the most regrettable transaction is often not because the business logic is not established, but because the legal compliance problem is wrong! A contract, a regulatory clause, or even a key disclosure obligation may become the last straw that breaks the camel's back.
In the chess game of the capital market, mergers and acquisitions are not just a game of capital, but also a contest of laws. Both parties to the transaction not only need to settle the profits on the books, but also cross the "minefield" of laws and regulations to ensure that the transaction meets various compliance requirements. Goheal has studied merger and acquisition cases in depth for many years and found that legal compliance issues have become the number one invisible killer affecting the success or failure of transactions.
Today, let's talk about the legal compliance requirements in mergers and acquisitions and see how to avoid a good deal from failing due to negligence in legal details.
Although the contract is small, it is a matter of life and death: the compliance pitfalls in M&A transactions
Legal compliance issues are not abstract. They may be hidden in any M&A link, and the most prone to problems are often the design of contract terms. Many companies thought everything was ready when signing the contract, but they turned out to be "overturned" due to the details of the contract. Here are a few typical cases:
1. The contract terms are "full of loopholes", and the transaction collapsed
The contract is the "reassurance" of M&A transactions, but if the terms are vague and the division of responsibilities is unclear, it is likely to cause disputes and even lead to the failure of the transaction. Goheal's research found that many failed M&A transactions originated from legal loopholes in the contract.
Case: SoftBank canceled the acquisition of WeWork
SoftBank originally planned to acquire shares of shared office company WeWork for US$3 billion, but because WeWork failed to meet the strict financial requirements in the contract, including new criminal and civil investigations and the impact of the new crown epidemic, SoftBank finally decided to cancel the transaction. This decision led to a significant drop in WeWork's valuation and triggered lawsuits from shareholders.
Enlightenment:
Contract terms must be clear and avoid "ambiguous" wording.
Set clear liability for breach of contract to ensure that the parties to the transaction cannot easily go back on their word.
2. Regulatory compliance issues, transactions that are "cut off"
In cross-border M&A transactions, regulatory approval is often the key to determining the success or failure of a transaction. If a company ignores legal compliance requirements, it may be "stopped" by regulators at the last minute.
Case: Qualcomm's acquisition of NXP failed
Qualcomm originally planned to acquire Dutch chipmaker NXP Semiconductors (NXP) for US$44 billion to expand its market share in the automotive chip field. However, the transaction ultimately failed due to failure to pass the review of China's antitrust regulators
Enlightenment:
Cross-border M&A should assess regulatory risks in advance to avoid stranded transactions due to approval obstacles.
Compliance teams and legal advisors must intervene in advance to ensure that the transaction design meets the legal requirements of different jurisdictions.
How to avoid transaction failures due to compliance issues?
Legal compliance issues in M&A transactions may seem complicated, but in fact, the following three strategies can be used to effectively avoid risks:
1. Conduct legal due diligence in advance to identify "minefields"
Legal due diligence is an indispensable part of M&A transactions. Goheal* recommends that companies conduct the following legal review work before M&A:
Is the target company involved in undisclosed litigation or debts?
Is there any ownership dispute over the target company's intellectual property and patents?
Does the target company comply with antitrust regulations and industry regulatory requirements?
Case: Disney's acquisition of 21st Century Fox
Before acquiring Fox, Disney conducted rigorous legal due diligence to ensure that the transaction would not be rejected by US regulators due to antitrust issues. In the end, the transaction was successfully completed.
2. Ensure complete information disclosure and don't be dragged down by "misleading statements"
One of the reasons why many M&A transactions fail is that the information provided by the seller is incomplete or misleading, causing the buyer to discover the "pitfall" after the transaction is completed.
Case: Enron Financial Fraud
Before being acquired, Enron used complex accounting techniques and false statements to cover up huge debts and losses, causing serious deception to investors and regulators. In the end, the company declared bankruptcy in December 2001, and investors suffered heavy losses.
How to avoid it?
All financial information, contractual agreements, and intellectual property ownership must be disclosed transparently.
The buyer should require the seller to provide "Representations & Warranties" to ensure the authenticity of all disclosed information.
3. Establish a "transaction protection mechanism" to reduce legal risks
In M&A contracts, companies can reduce legal risks through transaction protection mechanisms, such as:
Incorporate a "break-up fee" clause to avoid losses caused by sudden cancellation of the transaction.
Introduce a "Material Adverse Change" (MAC) clause to ensure that the buyer can terminate the transaction if there is a significant change in the financial or operating conditions of the target company.
Conclusion: Are you really ready for your transaction?
In the M&A game of the capital market, a contract may determine the life and death of a transaction. Goheal reminds all M&A participants that legal compliance issues must not be ignored, otherwise even the most perfect business plan may be shattered by legal issues.
So, here comes the question:
1. Do you think the legal compliance requirements in M&A transactions are strict enough?
2. With the increasing number of cross-border M&A, how should companies improve their legal compliance capabilities?
3. In terms of information disclosure, how should companies balance business confidentiality and compliance requirements?
Welcome to leave a message in the comment area for discussion, your opinion may be the key to the next successful transaction!
[About Goheal] American Goheal M&A Group is a leading investment holding company focusing on global M&A holdings. It has been deeply involved in the three core business areas of listed company control acquisition, listed company M&A and capital operation. With its deep professional strength and rich experience, it provides companies with full life cycle services from M&A to reorganization to capital operation, aiming to maximize corporate value and achieve long-term benefit growth.
