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Guide to Legal Representation in Middle Market Mergers and Acquisitions

The purpose of this guide is to save you time, money and aggravation. Mergers,

acquisitions, finance and similar transactions are not “business as usual,” they are

“extraordinary transactions.” Obtaining experienced legal representation appropriate to

the transaction can make the difference between a smashing success and an abject failure.

Herein, you will find a summary of the role of a lawyer, some basic tips on selecting the

right lawyer, and a summary description of the services that a lawyer typically performs in

representing a client who is a party to an extraordinary transaction.

Lawyers, first and foremost, represent their clients’ interests. In most transactions

involving the sale or finance of a company, there are at least two parties who have their

own legal representation. Although all lawyers practicing in the United States are licensed

by at least one state, there is a broad array of different types of law. In the context of

mergers and acquisitions, a party may require representation familiar with the legal

aspects of taxes, securities, bankruptcy, corporate formalities and shareholder rights,

antitrust, real estate, employee rights and benefits, environmental regulations, intellectual

property, commercial contracts and any number of other specific areas. Each lawyer will

conduct diligence with respect to the company in question and will then advise their client

of any risks attendant to the transaction or to their client’s business following the

transaction. Each party’s lawyer will assist their client to negotiate and arrive at the most

favorable structure and terms for the transaction and to document those terms. The

lawyers also manage the process of obtaining third-party consents and government

approvals, making required governmental filings, arranging for third-party services (like

escrow agents and title insurance) and organizing and executing the closing of the

transactions so that all of the documentation is properly executed and delivered to each

party. Depending on the transaction, a party’s lawyer may also provide a legal opinion as to

certain aspects of the transaction.

What You Need to Know

The selection of legal representation with the appropriate specialization is critical to

achieving your objectives. When selecting legal representation for the purchase or sale of a

company or significant business unit, you should consider the following factors:

1. Seek extraordinary counsel for your extraordinary transaction. You may have a

wonderful relationship with a lawyer who has served you as outside counsel and

trusted advisor for as long as you can remember. Even so, before signing them on to

represent you in an extraordinary transaction, be certain that they have the

required expertise and resources.

(a) More often than not, the lawyer who has provided excellent counsel for all

manner of general business issues, contract negotiation, litigation

management, etc., has little or no experience with anything but the smallest

of merger/acquisition transactions. No doubt, the institutional knowledge

possessed by that trusted advisor will be very useful and there is a role for

them in the transaction process. That should not, however, be in structuring

and negotiation of the transaction.

(b) Similarly, you will need legal representation with resources (man power)

appropriate to the transaction. For most middle market transactions, the

legal team should be no less than an experienced partner and a reasonably

senior associate, together with an experienced paralegal, each experienced in

corporate and commercial transactions, and the constellation of legal subject

matter experts (tax, environmental, real estate, etc).

2. Your company may not be ready. If you are selling a company, you will need to

present every aspect of the company for all would-be buyers to evaluate. There are

many technical legal matters that may or may not have made a difference to the

company’s operations that you must now address. Failure to address these items (or

at least to recognize them) ahead of time can cost you time and money and

potentially result in litigation. Even as a buyer, you need an understanding of how

your existing organization’s structure functions and how you want to fit in the new

acquisition. Moreover, if you are planning on issuing securities to the sellers as

consideration, unless you are a public company, you should expect that the sellers

would want to take a close look at your company before they will close a

transaction. The right legal representation will guide you through the right moves to

make before you go looking for your transaction partner.

3. Things that matter and things that don’t. Just like any other service-based

professionals, lawyers will pitch their own combination of expertise, price and

brand name prestige in an attempt to earn your engagement. When selecting an

attorney to represent you in the purchase or sale of a company, keep in mind the


(a) Bigger may or may not mean better. There are plenty of giant, international

law firms that will be happy to charge you top dollar to guide you through a

transaction. These firms have very specific expertise and lots of man-power

at their disposal. If you are doing a transaction with over a billion dollars of

enterprise value, your transaction involves purchase of operations in ten

different countries, you transaction will undergo scrutiny under a somewhat

esoteric set of regulatory guidelines (insurance, banking, mining, etc.), or

your transaction requires a particularly complicated structure, then paying

the big firm bill might be a good idea. For most middle market transactions,

however, representation by smaller to mid-size firms will be far less

expensive and may be of a higher quality as well.

(b) The sector in which a company does business usually has little to no impact

on the legal requirements of the transaction. Experienced merger and

acquisition counsel can adapt to the basic legal requirements of most sectors

and industries. Exceptions are industries with highly specific and complex

regulatory compliance issues, and companies with products and services so

technical as to require legal representation with a science background to

understand the nuances of the company’s product (and even that is not

usually a problem for reasonably experienced attorneys with access to

subject matter experts).

4. Your lawyer is probably not your investment banker. Although some lawyers may

use their connections to help you find a transaction partner, most do not have their

pulse on the current market conditions and pricing. Moreover, lawyers are almost

never set up to conduct an auction process or a green field search for the right

acquisition target. Middle market companies will almost always find an investment

banker to be a value added part of their team.

5. Don’t hire the “C” team if they pitched you the “A” team. This is a particular problem

for the middle market business. Most of the larger law firms are built with a

pyramid structure involving few partners at the top and lots of junior associates at

the bottom. The bigger the firm, the bigger the fees generated by the transaction

need to be in order to keep the attention of that top partner that you spoke to in the

pitch meeting. Although the junior to mid-level associate who may lead your deal is

very “smart,” there is no substitute for experience. Your transaction may not go as

smoothly as you hoped, and your fees may ultimately be significantly higher.

Process, Responsibilities, Deliverables

The legal services required for most transactions run a varied path from initial structure

through post-closing matters. Typically, your counsel will perform the following services;

in more or less the following order:

1. Preparation for a transaction. For a sell side transaction, or a buy side transaction

in which securities will be included in the purchase consideration, a little attention

at the start of the process can prevent big (and costly) problems later. The

target/issuer should be clean for diligence and optimized for tax purposes. Counsel

should verify that the company has taken reasonable actions to minimize potential

issues relating to (i) the company’s governing documents and records; (ii) litigation;

(iii) assignment of material contracts; (iv) labor and employment issues that may

arise in the context of a transaction; (v) ownership of intellectual property; (vi) real

property, including environmental matters; and (vi) any other matters material to

the company’s operations, assets and liabilities.

2. The Letter of Intent (Memorandum of Understanding).

A letter of intent (“LOI”), also called a memorandum of understanding, is usually (unless it

is solely to start discussion) an agreement between the parties. An LOI usually does not

bind the parties other than with respect to certain specified terms. Terms common to most

LOIs in the merger and acquisition context include:

(a) Structure of the transaction: which may involve a merger (purchase of all of

the target company’s outstanding equity), an acquisition (purchase of some

or all of the target’s assets/liabilities) or one of several combinations of the

two. Creating a transaction structure also includes the choice of the most

appropriate forms of organization (e.g. corporation, limited liability

company, partnership, etc.). Transaction structure can be very complex and

will depend in part on (i) desired tax effect; (ii) level of difficulty in

transferring material contracts, and governmental authorizations; (iii)

requirement and amount of difficulty of obtaining shareholder consents; (iv)

buyer’s strategy for integrating the target into its organizational structure;

and (v) many other factors that may be unique to the transaction in question.

(b) Consideration for the transaction: which is the compensation that the buyer

provides to the seller, may include: (i) cash; (ii) equity of the buyer (including

preferred equity, warrants and debt convertible to equity); (iii) license(s) to

use intellectual property; and (iv) debt, which may be secured.

(c) Procedure and timing of payment: which may include: (i) an earn out; (ii)

payment in installments, which may be conditional; (iii) and a hold back in

escrow to satisfy the seller’s post transaction indemnity obligations.

(d) Diligence procedures according to which one or both of the parties may

conduct diligence to ascertain if they actually want to complete the

transaction described in the LOI.

(e) Contingencies to closing the transaction, which may include: (i) buyer’s

ability to obtain financing; (ii) either or both parties’ ability to obtain

required authorization from shareholders and/or a board of directors; (iii)

obtaining necessary government approvals; (iv) completion and satisfaction

with due diligence investigations; (v) agreement by seller’s key personnel to

not compete with, and/or continue working with the buyer for some time

period following the closing of the transaction; (vi) completion of other

transactions (which may be with third parties); (v) other terms a party

desires to include to avoid surprising the other party during the agreement

negotiation process; and (vi) other standard contingencies to be “negotiated

in good faith by the parties.”

(f) Expected representations and warranties of the parties often left to be

“negotiated in good faith by the parties.”

(g) Terms of indemnification, which may include: (i) the specifics of which

parties must indemnify which other parties (ii) the conditions required to

trigger indemnification obligations; (iii) whether an indemnifying party may

control the defense from a third-party claim; (iv) the amount of any holdback

of consideration; (v) the conditions required to trigger payment of the

held-back consideration to a party (often a time schedule for payment to

seller) and (vi) the amounts of any threshold or cap to the amount of funds

subject to indemnification.

(h) A “no shop” provision that specifies a time period during which the seller

may only negotiate with the buyer for the sale of the target company or


(i) A confidentiality provision, which may be unilateral or mutual, that obligates

the parties to prevent the disclosure or improper use of each other’s

“Confidential Information.”

Often the terms of an LOI are non-binding (exceptions being the “no shop” and

confidentiality provisions). IT IS A GIANT MISTAKE, however, to delay engaging competent

legal counsel until after execution of the LOI. The LOI is the blueprint for the transaction.

Once signed, a party rightfully expects that the terms of the transaction will reflect the

terms of the LOI. Counsel engaged after execution of the LOI may find that the terms of the

LOI will: (i) increase transaction costs; (ii) create unexpected losses; (iii) result in missed

opportunities; or that the terms in the LOI would result in an illegal or commercially

impossible result. In these situations, counsel (and their client) will have to now push for

renegotiation of established major terms. That renegotiation will invariably cost more time

and money and may seriously reduce negotiation leverage. It also may kill the deal.

3. Diligence. Upon execution of the LOI, counsel for the Buyer will send counsel for the

Seller a diligence request letter. These letters can be very long and are often overly

broad. Each of Buyer’s and Seller’s counsel will review all of the available material

information about the target’s assets, liabilities, historical operations and near-term

prospects. Buyer will use the information from the review to determine whether to

pursue, renegotiate or abandon the transaction. Each counsel will rely on the

information to negotiate the final terms of the transaction; and will also advise their

client of any possible unintended consequences that may result from the

transaction. Complete disclosure of all material information is the surest way to

avoid post-transaction litigation between the parties.

4. The Purchase Agreement. A completed purchase agreement will include: (i) a

description of the target’s equity or assets being purchased and the purchase

consideration; (ii) mechanics for the exchange of consideration; (iii)

representations, warranties and covenants; (iv) obligations of the parties’ during

the period between agreement execution and closing; (v) documents or conditions

required prior to the closing; (v) post closing obligations of the parties; and (vi) tax

elections, dispute resolution, and standard “boiler plate” items.

5. Drafting and negotiation. Using the LOI, the parties’ respective counsels negotiate

and draft the purchase agreement and other required documents. As part of the

process, counsels address material matters discovered through the diligence

process. Counsel will review the key documents with their client to obtain

information and discuss the legal effect of the language in the documents. Counsel

will also provide guidance as to sticking points in the negotiation, including matters

discovered through the diligence process, and provide potential solutions.

6. Execution and closing. Upon conclusion of the drafting process, the parties execute

and become bound by the purchase agreement. Counsel now works with their client

to satisfy any conditions precedent to the closing. Depending on the transaction, the

parties may each need to: (i) take required organizational actions including

obtaining approval from their equity holders and governing bodies; and (ii) obtain

third-party and governmental consents and approvals; (iii) negotiate the terms of

any ancillary agreements (e.g. shareholder agreements, employment/consulting

agreements, license agreements, etc.); and (iv) draft and review any number of

ancillary closing documents (officer certificates, legal opinions, government filings,

etc.). Additionally, if required, Buyer’s counsel will also negotiate and draft

documents required accomplishing Buyer’s finance of the purchase consideration.

When all parties (buyer, seller, financiers and other third-parties) have approved

the form of all of the documents applicable to them and all other conditions to the

closing are completed or waived, the parties’ counsels run the closing, overseeing

the complete execution and delivery of documents in the correct sequence, the

exchange of the company/assets for the purchase consideration.

7. Post closing matters. Following closing, one of the parties’ counsels will organize,

bind and distribute full sets of executed closing documents. Counsel will also make

any required government filings and assist in the drafting of any press release. After

the immediate post closing matters are complete, counsel will continue to advise

their client with respect to long term matters (e.g. release of held-back purchase

consideration, calculation and payment of earn-outs, etc.) and application of the deal

documents to real world circumstances (litigation avoidance).

As a final note, nothing (outside of litigation) is worse than spending hundreds of

thousands of dollars on a deal that should never have been attempted. Sometimes, the

biggest value add from the timely engagement of the right lawyer is identification of deal

killing issues before a client becomes committed to an ill fated transaction. A good lawyer

will be very clear about whether an issue will not be able to be resolved. Your lawyer

should be a problem solver, but not a “yes man.” With the right team, a lawyer can keep the

transaction process moving through the various stages described above. Don’t forget to

invite them to the closing dinner.

BY: Josh Lawler, Zuber Lawler & Del Duca