During initial discussions with clients who are seeking to undertake acquisitions, it is useful to start by asking their reason for acquiring a particular company or business.

Understanding the underlying motivation behind the clients’ decision for their acquisitions helps to achieve the following:

(a) direct focus to what matters most to the clients during the legal due diligence exercise.

For instance, if a client places importance on a particular brand name, the legal due diligence should include investigation into matters such as the ownership of that particular brand name; whether the brand name is registered as a trademark under the name of the target or the founder or not registered at all; if it is not registered, whether there is any complication in registering the brand name as a trademark.

In one transaction I have worked on, the due diligence revealed that the brand name which a client was interested in had not been registered as a trademark. Due to the rules relating to registration of companies, the parties were unable to use the brand name in the name of the new holding company that hold the target companies. Provisions relating to the brand name were included in the transaction agreements to safeguard the buyer’s interest.

(b) tailor the representations and warranties in the transaction agreements to address the clients’ concerns or gap in due diligence.

If the clients are aware of certain issues which may affect their decisions or if the speed of the deals is such that there is insufficient time to conduct customary due diligence, there should be representations and warranties in the transaction agreements to address the clients’ concerns or gap in due diligence.

(c) balance potential risks against anticipated benefits of the acquisitions to provide recommendations that best fit the clients’ requirements.

Depending on the risk appetite of the clients, an issue which is considered of paramount importance by one client may not be that important to another client.

Though not always expressly stated in transaction agreements, the reasons for acquisitions significantly shape the negotiation and drafting of the agreements.

With the “why” at the back of counsels’ mind, we can drive better processes and results for the M&A transactions.

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This post first posted on LinkedIn on 27 June 2024.