At The Jayson Law Group one of our practice areas in New Jersey business law is mergers & acquisitions. Here is a scenario to help explain the difference between an acquisition and a merger:

Company A makes pharmaceuticals, specifically topical creams and ointments to help with rashes and burns.  It is an established business, has a strong customer base, and a trusted name.  Company B makes sun block.  It is a newer business, and has slowly built up a customer base.  People are starting to know the company, but are not too familiar with it yet.  What the public does know is that Company B makes a quality sun block. 

The management of Company A decides that they want to begin making sun block.  It seems like a logical step in their business, and they are noticing that the sun block market is steadily rising.  After reviewing the cost involved to start researching, developing, and manufacturing sun block, Company A decides that it is going to purchase another business that makes sun block.  Company A sees that Company B is a fast rising company with a quality product, and decide that Company B’s sun block is the perfect product to fit Company A’s sun block production need.  Company A approaches the Board of Directors of Company B to inquire about owning the sun block.

Using the above scenario, we will now look at two ways Company A and Company B can do business together regarding the sun block.

In an acquisition, Company A purchases or acquires Company B and establishes new ownership and legally controls Company B. In a merger, Company A and Company B would join together to form a new single company. The new Company may have the name of either Company A or Company B for public recognition, but the two companies are one.

Mergers and acquisitions are aspects of strategic management and corporate finance management that can help an enterprise grow and progress rapidly without creating a subsidiary or joint venture. While they are fundamentally two different types of purchases of a business, the steps and documentation involved are similar. So for the remainder of this post we will use the words interchangeably when discussing the steps and documents involved. 

Corporate M&A transactions often begin with a letter of intent. The letter does not bind the parties to commit to the transaction, but generally does bind the parties to confidentiality and exclusivity so that nothing can interrupt the process before both parties have had time to consider and do the due diligence with attorneys, accountants, tax advisors, and other business professionals.  During this time a non-disclosure agreement may also be negotiated.  A non-disclosure agreement allows for the parties to learn more about each other without fear of that information being leaked to the public.

After due diligence is completed, a merger agreement may be drawn up—also known as a share purchase agreement, or asset purchase agreement, depending on the type transaction being executed. Such contracts usually focus on five key terms:

•  Conditions which must be satisfied before the transaction. Conditions typically include regulatory approvals and protection for the funder (acquirer). 

• Representations and warranties by the seller about the company being purchased must be shown to be accurate. If the representations and warranties prove to be false, the funder may claim a partial refund.

• Covenants govern the conduct of both parties before and after the closing. These can include terms regarding future income, tax filings, tax liability, and post-closing restrictions. 

• Termination rights come into use if there should be a breach of contract or a failure to satisfy a condition. Termination rights could include instructions about fees and damages payable. 

• Provisions are the catch-all of the contract. Provisions could include requirements about shareholder approvals, SEC filings, and terms related to the legalities of the closing.

These are some of the basics regarding merger and acquisition transaction contracts.