Handling 11th-Hour Material Disclosures in M&A

By Vaughn Marshall

 

Mergers and acquisitions typically include a vigorous due diligence period. Buyers must ask probing questions in order to get a complete picture of the state of the target company. At the same time, buyers should push for appropriate representations and warranties from the seller to mitigate risk and provide an avenue for reimbursement (through indemnification) should those representations and warranties prove to be untrue. 

The due diligence process usually begins at or prior to execution of a letter of intent or term sheet, and continues until the closing date.  In an ideal process, material issues are addressed early on, well before the closing.  Sometimes, this is not the case, however, and a material disclosure is made close to the closing date that catches a buyer off guard. How should either side handle a belated disclosure of a material fact? In other words, what can both parties do to prevent these unwanted surprises, and if a later material disclosure does occur, salvage the deal? There are a few ways to move forward. 

 

For Sellers

First, sellers should act proactively and prepare an organized set of materials for the buyer in order to expedite the M&A process. Sellers should not hesitate to open up about seemingly minor details of the target company.  It’s also important for sellers to understand the buyer’s motivations for acquiring their business, and to discuss the buyer’s plans for the business following the closing. What might not seem like a significant detail to sellers could be a critical deal term for potential buyers. Addressing these terms proactively is the most effective way to prevent disclosures late in the deal process from turning into potential deal killers. Obfuscating when answering due diligence questions from buyers is not optimal.  In all events, full and transparent disclosure is always a good policy.  

 

For Buyers

The foremost concern for buyers is to conduct thorough due diligence on target companies.  Buyers should make extensive due diligence requests to determine areas of focus for more in depth due diligence efforts.  Buyers should not shy away from difficult conversations about any aspect of the seller’s business.  Similarly, buyers should always follow up on due diligence matters until full resolution.  Putting together a solid team of advisors (legal, accounting, financial, technical) prior to starting the due diligence process can pay big dividends.  

 

What Can You Do About Late Disclosures? 

If a late material disclosure does occur, the ball is usually in the buyer’s court.  Assuming the buyer has negotiated a due diligence closing condition, or the deal is structured as a simultaneous sign and close, the buyer must make a determination if the disclosure is significant enough to warrant an end to negotiations.  This can be an incredibly difficult decision to make, as buyers may be too emotionally invested in the deal to walk away.

If the buyer desires to continue with the transaction, common solutions to account for material disclosures include an adjustment to the purchase price, an increase to the post closing escrow amount, a separate escrow fund specifically to address concerns around a late disclosure, or the use of insurance tail policies. 

The potential for late disclosures and the confusion they can bring in mergers or acquisitions underscore the need for effective and proactive legal counsel in any high-stakes transaction. Your attorney can help you determine your deal breakers and the impact of certain disclosures on your ultimate goals and objectives.

 

Contact Us

Doida Crow Legal is prepared to help you navigate your next business transaction; we offer unique fee structures so you can have certainty on price and realize maximum value from our services. Please call us at 720-306-1001 or email info@doidacrow.com to learn more about our services and to inquire about a complimentary consultation. 

 

 

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