Corporate Transactions: Deal Structuring and Risk Management

In a stock acquisition, the buyer acquires the target company's equity interests and inherits all historical liabilities including those that are undisclosed or contingent, while in an asset purchase the buyer selects which assets and liabilities to assume, limiting exposure to legacy obligations, and mergers by acquisition counsel structuring corporate transactions should confirm whether the transaction involves publicly traded securities that require SEC disclosure and shareholder approval and whether the target has existing change of control provisions in its material agreements that are triggered by the proposed transaction structure.

Corporate transactions in the investment context include preferred equity financings, convertible note issuances, and SAFE agreements that provide growth capital to portfolio companies, and venture capital counsel advising companies on investment corporate transactions should assess whether the proposed capitalization table after closing preserves the founders' meaningful economic and voting participation and whether the preferred stock terms being demanded by the investor, including liquidation preferences, anti-dilution provisions, and protective voting rights, are within the range of market-standard terms for the company's stage.

Due diligence is the investigative process through which a buyer in a corporate transaction verifies the target's representations about its financial condition, legal compliance, contracts, intellectual property, litigation exposure, and employee matters, and business acquisition transactions counsel conducting due diligence in corporate transactions should identify at the outset which findings would constitute a material adverse effect under the acquisition agreement's definition or support a purchase price reduction.

The representations and warranties in a corporate transaction purchase agreement are the seller's factual representations about the business being sold, and a breach discovered after closing entitles the buyer to indemnification from the seller up to the caps and subject to the baskets and deductibles that the parties negotiate, and indemnification claims counsel advising on corporate transactions indemnification provisions should evaluate whether the survival periods are sufficient to allow the buyer to discover and assert the most significant categories of potential breach and whether the indemnification cap is commensurate with the magnitude of the risks identified during due diligence.

Corporate transactions that meet the jurisdictional thresholds under the Hart-Scott-Rodino Antitrust Improvements Act require both parties to file notification forms with the FTC and the Department of Justice and to observe a mandatory waiting period before closing, and Hart-Scott-Rodino filing counsel advising on corporate transactions antitrust compliance should confirm whether the transaction meets the HSR filing thresholds based on the current year's indexed figures and whether any foreign antitrust filings are required in jurisdictions where either party has significant operations.

Corporate transactions purchase agreements specify the conditions that each party must satisfy before the other is obligated to close, including accuracy of representations as of the closing date, material adverse effect standards, and regulatory approval conditions, and contract drafting counsel reviewing closing condition provisions in corporate transactions should assess whether the material adverse effect definition adequately addresses the specific risks identified during due diligence and whether the termination fee provisions, including reverse termination fees payable by the buyer for financing failure, appropriately reflect the parties' respective deal certainty obligations.

Corporate transactions term sheet and letter of intent negotiations establish the economic framework that governs the entire subsequent negotiation, and the buyer who allows aggressive seller-favorable positions to become settled issues at the letter of intent stage typically loses significant bargaining power during the definitive agreement negotiation, and private equity financing and corporate transactions counsel advising acquirors should secure at the letter of intent stage the key economic provisions, including purchase price adjustment mechanisms, earnout structures, escrow amounts and duration, and non-compete scope.

Post-closing purchase price adjustment disputes and earnout disagreements are among the most common forms of corporate transactions litigation, arising when the buyer and seller disagree about whether the target's financial condition at closing satisfied the representations made in the purchase agreement or whether the seller has met the revenue and earnings milestones that trigger contingent earnout payments, and business transfer and corporate transactions counsel managing post-closing disputes should identify at the agreement drafting stage the accounting methodology, revenue recognition standard, and dispute resolution mechanism that will govern any post-closing adjustment calculation.