As the unification of a company’s business endeavors by acquiring or merging with the business operations of another company, mergers and acquisitions comprise a whole range of issues, from deal origination to legal documentation, closing of the deal, and post-merger integration.
There are many legal considerations for mergers and acquisitions since it is the process of consolidating two different companies through various financial transactions. This can present significant challenges to businesses, but awareness of possible legal issues is a must for any two companies who are willing to go through the process.
Laws and Regulatory Authorities Regulating M&A
In the U.S., there are legal considerations for mergers and acquisitions at both federal and state levels. At the federal level, M&A activity is subject to the federal securities laws, principally the Securities Act of 1933 (the Securities Act) and the Securities Exchange Act of 1934 (the Exchange Act). The Securities Act governs the offer and sale of securities and therefore applies to any transaction in which securities are being purchased, sold, or exchanged, including M&A transactions. The Exchange Act regulates, among other things, ongoing reporting obligations for public companies, tender offers, proxy statements, and shareholder obligations to disclose ownership and transactions with respect to shares of public companies.
With regard to legal considerations for mergers and acquisitions, it is necessary to ensure compliance with the following regulations:
- Registration requirements of the Securities Act, requiring companies proposing to offer or sell securities to register the securities offered in the transaction, unless an exemption applies,
- Rule 13e-3 of the Exchange Act, regulating public to private transactions in which existing shareholders or affiliates of a company acquire the shares of the remaining public shareholders.
- Section 13(d) of the Exchange Act, governing disclosures following the acquisition of 5% of a class of equity in a public company.
- Regulations 14A and 14C of the Exchange Act, governing both the solicitations of shareholders in friendly statutory mergers and in proxy contests and consent solicitations for the control of a public company’s board of directors.
The Securities and Exchange Commission (SEC) is the federal agency charged with enforcing the federal securities laws including both the Securities Act and Exchange Act. The SEC usually enforces the federal securities laws and regulations, although opposing parties in a hostile takeover and shareholders can also bring an action on their behalf.
Acquisitions of US companies or non-US companies with significant US interests also need to comply with the antitrust filing and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act 1976. Federal antitrust laws are enforced by the Antitrust Division of the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC). Acquisitions by non-U.S. entities are also potentially subject to review by the Committee on Foreign Investment in the U.S. (CFIUS).Use this guide to get a detailed overview of the M&A process, key stages of M&A transactions, as well as tips for proper handling of employment tax-related issues.
M&A State Laws
State laws principally address matters such as the formation and dissolution of corporations, duties of boards of directors, mergers and other forms of business combinations, shareholder voting requirements, shareholder meetings, and amendments to organizational documents. Legal considerations for mergers and acquisitions at the state level include both the state corporation statutes enacted by state governments as well as common law arising out of judicial decisions.
Though state laws relevant to corporations have many common elements across states, there are significant differences among them. To meet proper legal considerations for mergers and acquisitions and ensure compliant M&A transactions, it is necessary to apply the general corporate law and anti-takeover laws. Mergers and acquisitions are governed by the corporate law of the state in which the target company is incorporated, which also determines the nature of a director’s fiduciary duties when entering into an agreement. Furthermore, a large number of states offer protection from corporate takeovers, including:
- Control share acquisition statutes,
- Business combination and fair price statutes,
- Constituency statutes, and
- Endorsements of defensive action.
Given that many major U.S. corporations are incorporated in Delaware, the Delaware General Corporation Law (DGCL) and the common law embodied in decisions of the Delaware courts are generally the most important and influential state corporation law. However, it is necessary to stay aware of differences among different states. Furthermore, companies in certain industries may also be covered by specific state and federal regulatory regimes.As no two companies are the same, M&A due diligence is necessary for a successful M&A process. Learn more about this demanding procedure that requires considerable skill and expertise.
Timely Preparation for Potential M&A Legal Issues
There are different laws and regulations relating to various stages of M&A. Since each of these laws can have a significant impact on a proposed transaction and each has its own proposed rules and guidelines, it is critical for companies to make timely preparations for legal considerations for mergers and acquisitions. While this is necessary, it also puts a significant burden on resources during M&A deal structuring and post-close execution. However, outsourcing this process provides a reliable, cost-effective solution that helps companies achieve the goals of an M&A deal more quickly and can free up resources. In addition to this, a team of experts provides guidance as to applicable legal requirements, assists in preparing any necessary filings, and negotiates with government authorities to resolve any issues, if necessary. Such an approach can be invaluable in not only meeting legal considerations for mergers and acquisitions, but also increasing the level of efficiency and achieving successful M&A results.