The Illinois CPA Society held its 2009 Mergers & Acquisitions Conference on September 14, 2009. One of the benefits of the M&A Conference is the opportunity to hear the latest developments from fellow legal and financial advisors that assist mid-market business in mergers and acquisitions. Jennifer Watson, Vice Chair of Masuda Funai’s Business Group, served as the moderator of the panel discussion on "International M&A Landscape: Inbound Investment," and was a panelist for "Avoiding Post M&A Disputes with Legal and Accounting Due Diligence.”
Some of the “takeaways” from the panel sessions included:
- International M&A:
- The focus of the discussion was on in-bound investments from China and characteristics of Chinese investors. Generally, in-bound investment from China is continuing under China’s major policy change that encourages Chinese investors to “go global,” but at what appears to be a slower pace than last year.
- The panelists highlighted the importance of sellers conducting due diligence on potential Chinese purchasers/investors to ascertain if the purchaser can or is able to complete the purchase due to factors such as the requirement of various approvals by Chinese governmental entities and the ability to convert funds into U.S. dollars.
- Cancellation of Debt (“COD”) Income:
- Businesses that have or are considering debt forgiveness or debt modifications should understand that forgiveness or modification of debt can lead to COD income. In addition, acquisition of debt by a person related to the debtor can also result in COD income to the debtor.
- There is a new COD income deferral rule that defers the impact of COD income and that may provide debtors some relief. As a result, debtors are recommended to carefully review their debt, potential exclusions from COD income, and the potential deferral rules with their advisors.
- Avoiding Post M&A Disputes with Legal and Accounting Due Diligence:
- The panel discussed the importance of drafting clear and unambiguous acquisition agreements to avoid post acquisition disputes. This includes involving both legal and financial advisors in reviewing the terms of the agreements to ensure clarity and to ensure that the agreements comply with the intent of the parties. The use of schedules showing examples of calculations for clarifying calculations, such as working capital adjustments or other purchase price adjustments and earn outs, were also recommended.
- As buyers in today’s economy are generally more risk averse, a potential seller may want to consider pre-sale due diligence to find and resolve any potential issues that could reduce its value in the eyes of potential buyers.
- Buyers should conduct full legal, accounting and financial due diligence on a potential target, including ascertaining any undisclosed liabilities, underfunded pension or employee benefit obligations, thoroughly examining accounts receivables and reserves, analyzing inventory and inventory trends, and the ability of the target to maintain sales and produce positive cash flows.
- Buying, Selling or Holding Distressed Companies:
- The panel discussed various options for acquiring distressed business, including: (i) sales of business under Section 363 of the Bankruptcy Code (the general benefit is that such sales will generally be free and clear of all liens and encumbrances); and (ii) assignments for the benefit of creditors.
- It was noted that one difficulty in purchasing distressed business in bankruptcy is the retention of key employees. Generally, incentive payments to key employees are permitted, but court approval is required for retention payments, making it difficult to retain key employees.