Mergers & Acquisitions: The 5 stages of an M&A transaction

Whenever there is more than one potential purchaser involved, this second phase is usually preceded by the due diligence exercise which is outlined below. However, if there is only one potential purchaser in the fray, before or simultaneously with the commencement of the due diligence exercise, it is common for the parties to start considering certain matters which should precede the contractual phase of the sale. Such matters, include the following:

• competition/antitrust law implications, and whether such transaction necessitates pre-clearance from the Office for Competition;

• employment law considerations;

• licensing matters; and 

• fiscal implications, amongst others.

It is also common for the potential purchaser and vendor to outline the proposed terms and conditions underlying such acquisition in a letter of intent, which in most cases is (or for the most part is) not legally binding.

It is common practice at this stage, for a due diligence exercise on the target company or target business to be carried out. In most cases where there is one potential purchaser, the due diligence exercise is carried out by advisors engaged by the said purchaser, in which case it would be referred to as a buyer due diligence. 

A vendor may also decide to carry out a due diligence exercise itself for a number of reasons. Principally, a vendor due diligence may facilitate a sale (in which case the potential purchaser may decide to rely on such due diligence and secure its position by warranties and indemnities) or  spot any potential issues which might hinder the sale, effect the price/ negotiations or have an impact on the warranties that it can provide to the purchaser. 

A due diligence may cover legal, fiscal as well as financial areas and the main aim of such exercise is to identify the key risks that may arise from the potential transaction, determine fair pricing and increase bargaining power. From a legal standpoint, the due diligence exercise itself may span over a number of issues in order to thoroughly examine the target or its business, such as: corporate matters, contractual and commercial obligations, employment, data protection, intellectual property, insurance, regulatory and compliance matters.

Once the due diligence exercise is finalised, the prospective purchaser will typically go over and consider the findings and their materiality to the transaction together with its advisors. Should the purchaser be still interested in proceeding with the acquisition, the parties would typically engage in negotiating the details of their transaction, and all terms and conditions thereto. This may also involve negotiating the final price or agreeing on a mechanism that would determine the sale price and the details of the warranties, the indemnities and any limitations which will then be included in Share Purchase Agreement (SPA) or an Assets Purchase Agreement (APA), depending on whether the transaction will involve the acquisition of shares or of the business.

It is common for the SPA/ APA to include clauses that come into effect post-closing, such as further obligations that are to be undertaken by the parties, finalising the transfer of additional assets; obtaining consents, issuing notifications, affecting a price adjustment mechanism or entering into other ancillary contracts. 

Besides implementing such post-closing matters, the parties may consider undergoing a post-closing integration exercise in order to bring the two companies or businesses together with the aim of maximising synergies to ensure the success of the deal.