A version of this article originally appeared on the The Official ContractWorks Blog.
Mergers and acquisitions are some of the most complicated business events an organization can face. The transaction is complex and time-consuming. There are seemingly endless moving parts to consider. Executives need to integrate or restructure entire business systems, set strategic goals, and assign the right people to direct projects and programs throughout the process. Not to mention that a merger or acquisition often involves transitioning hundreds of employees, and thousands of contracts. If contracts get neglected, they can introduce dangerous risks for the business.
Your legal team will play an important role in the ensuring the success of a potential acquisition, and will be responsible for gathering all material contracts and other significant commitments held by your organization for review by the potential buyers legal team. The Contracts Checklist for M&A Due Diligence outlines specific contracts and commitments that will need to be reviewed during an inquiry, and may be used as a jumping-off point for your team to begin preparations for the review.
When preparing for these events it’s critical that your team is well versed in the risks and requirements that accompany these types of reviews, and clearly understand their responsibilities as well as the role they will play during each stage of the inquiry.
Contract Due Diligence Pre-Transaction
The legal department plays a critical role in assessing contracts during a merger or acquisition. The state of a business’ contracts holds important information about the business’ value and potential liabilities. Before finalizing a merger or acquisition, contract reviews are a form of investigation. The acquiring business needs to understand contract features that could cause challenges, such as:
Non-compete clauses and other restrictions can impose disadvantageous limits on the acquiring business. This can affect the overall value of the merger or acquisition.
Some contracts set complicated conditions over a transfer. Not providing sufficient notice, for example, could be a breach of the contract requirements. In some cases, a contract may not be transferable, and the companies will have to figure out an alternative solution.
Contracts that have already been breached or are likely to be breached soon pose immediate risks to the purchasing company. It’s also important for the legal team to consider provisions that could make it difficult to transition the accounts through the merger or acquisition process. In some cases, remedying some contract issues is essential before the agreement can proceed.
This often-underlooked area addresses how incoming contracts comply with the purchasing company’s standards for contractual relationships. The two companies may have worked under different standards for how much liability was acceptable, or what policies, language, and procedures address risks the company is particularly concerned about.
Who Handles Contract Management Procedures?
There are a few options for conducting necessary contract management procedures. Relying on in-house counsel improves the likelihood that the attorneys involved will understand the business’ contract standards, limits, and preferences. It’s also time-consuming, which can be a problem when legal counsel has additional merger-related tasks to complete. Outsourcing to a third party is a good way to find people with expertise in this particular form of review. It’s also costly, and the organization runs the risk of contracts falling into that gap between the two companies’ standards.
It’s also worth considering who will head contract management following the merger or acquisition. If jobs are in flux after the agreement is finalized, and perhaps especially if the acquired business didn’t have as strong contract management processes in place, appointing leaders in this area can save some headaches. Supervising contract integration, assigning accounts to the right employees, and performing follow-up review helps minimize risk and avoid unnecessary expenses.
Contract Due Diligence Post-Transaction
Once the merger or acquisition moves forward, it’s time to implement processes to address any issues uncovered during the pre-transaction review.
Integrate the incoming contracts into the contract management system. Even if you’ve successfully identified potential risks in contracts the business acquired, that’s only the first step. It doesn’t do the company much good to neglect, or even misplace these contracts! Hopefully, the purchasing company has a robust, well-organized system in place to make it easy to upload and track new contracts.
Send any required documents. During the pre-transaction review, legal counsel identified areas where additional notices, consent documents, or other materials are needed to transition contracts smoothly. Once the merger or acquisition agreement is settled, it’s time to follow through on any actions still remaining to do.
Keep sharp tabs on the contract review process. In a merger, it’s common for staff to need some extra attention. Managers and executives need to know who’s thriving or struggling and which jobs have become redundant. Managers working closely with their team may need to relearn dynamics of day-to-day work life as employees settle into different roles. Contracts are much the same way. Even with reviews happening throughout the process, it’s possible to miss a redundant contract or discover that new issues are arising with another account. Like learning 100 employee names in one day, no one expects to memorize thousands of contract expiration dates, either. Performing an extra review or two in the initial phases following the merger or acquisition can catch the last adjustments needed to complete a smooth contract transition.
Download your copy of The Contracts Checklist for M&A Due Diligence here.