How an Experienced Law Firm Can Help
Distressed mergers and acquisitions (M&A) transactions involve the sale or purchase of companies facing financial difficulties, such as bankruptcy, insolvency, or significant debt.
These high-stakes deals require swift action, meticulous planning, and a thorough understanding of legal and financial challenges. In such a complex and time-sensitive environment, having an experienced M&A law firm by your side is not just advisable – it’s essential.
They help clients navigate the intricacies of distressed mergers and acquisitions while protecting their interests and minimizing potential risks. From conducting comprehensive due diligence to structuring and negotiating deal terms, a skilled legal team is critical in ensuring the success of distressed M&A transactions.
In the following sections, we’ll explore how an experienced law firm can help you navigate the challenges of distressed M&A, providing the guidance needed to make informed decisions and achieve strategic objectives.
Whether acquiring a troubled company or divesting from an asset, engaging a qualified M&A attorney is crucial for maximizing value and minimizing risk in these complex transactions.
Unique Challenges in Distressed M&A
Time constraints and limited information
Distressed M&A transactions often operate under severe time constraints and have limited access to information. Buyers may have to make quick decisions based on incomplete data, as distressed sellers typically provide less detailed information than traditional M&A deals. This can lead to increased risks and potential liabilities for buyers.
The accelerated timeline of distressed M&A transactions can limit the pool of potential buyers to those with experience in fast-paced deals and the ability to adapt to significant time pressures. This can result in fewer bidders and potentially lower sale prices for distressed assets.
Increased risks compared to traditional M&A
Distressed M&A transactions carry higher risks than traditional deals. Buyers may encounter more significant due diligence issues, as distressed sellers may not have the resources to maintain proper records or invest in capital expenditures. This can lead to unexpected liabilities or operational challenges post-acquisition.
Additionally, distressed sellers may be unable to provide adequate representations and warranties or indemnification provisions, leaving buyers with limited recourse if issues arise after closing. Buyers must also be prepared for the possibility that the distressed seller may file for bankruptcy, which could result in the rejection of the purchase agreement or an auction process that favors a different bidder.
Potential for fraudulent conveyance claims
There is a risk of fraudulent conveyance claims in distressed M&A transactions [1]. These claims can arise if the transaction is deemed to have been made at an undervalue or with the intent to defraud creditors. If a court finds a transfer fraudulent, the transaction could be unwound, and the assets could be clawed back.
To mitigate this risk, buyers should pay fair consideration for the assets and document the transaction thoroughly. Obtaining a fair opinion from a reputable financial advisor can help demonstrate that the purchase price was reasonable.
Buyers should also know the applicable lookback periods for fraudulent conveyance claims [2], which can vary by jurisdiction. If the distressed seller files for bankruptcy after the transaction closes, creditors or a bankruptcy trustee can bring fraudulent conveyance claims.
Your counsel can help buyers navigate these risks and structure the transaction to minimize exposure to potential fraudulent conveyance claims.
Benefits of Engaging Experienced Legal Counsel
Navigating complex legal issues
Distressed M&A transactions often involve intricate legal matters, such as fraudulent conveyance claims, which can arise when a company transfers assets for less than fair market value, leaving creditors without sufficient recourse.
M&A attorneys possess the knowledge and expertise to guide buyers through these complex issues and ensure compliance with relevant laws and regulations, such as the U.S. Bankruptcy Code [3] and state fraudulent transfer laws.
By engaging experienced legal counsel, buyers can navigate the legal landscape effectively and minimize the risk of costly mistakes or delays.
Mitigating risks and potential liabilities
M&A lawyers are crucial in identifying and mitigating potential risks and liabilities in distressed transactions. Through comprehensive due diligence, legal counsel can uncover hidden risks, such as undisclosed environmental liabilities, pending litigation, or potential successor liability claims.
Regarding successor liability, which can impose responsibility on the buyer for the seller’s pre-existing legal obligations, M&A attorneys can advise on strategies to mitigate this risk, such as structuring the deal as an asset purchase rather than a stock acquisition.
Structuring the transaction to achieve optimal outcomes
M&A attorneys help buyers structure distressed transactions to achieve optimal outcomes by crafting creative solutions and negotiating favorable terms.
For instance, in a 363 sale under the U.S. Bankruptcy Code [4], experienced legal counsel can advise on the pros and cons of acting as a stalking horse bidder, which can provide advantages such as setting the baseline price and negotiating favorable bid protections.
Additionally, M&A lawyers can help buyers navigate the challenges of credit bidding, a powerful tool in distressed acquisitions that requires careful planning and execution.
Key Considerations in Distressed M&A
Assessing the level of distress and its impact on the transaction
When approaching a distressed M&A transaction, assessing the level of distress and its potential impact on the deal is crucial. M&A attorneys can help buyers evaluate the target company’s financial situation, liquidity position, debt obligations, and cash flow projections.
For example, if the target company faces imminent bankruptcy, the buyer may need to move quickly to secure the assets before they are subject to court-supervised auction processes.
By understanding the level of distress, buyers can make informed decisions about the timing and structure of the transaction.
Choosing the appropriate transaction structure
Selecting the appropriate transaction structure is critical in distressed M&A. M&A lawyers can advise buyers on the benefits and drawbacks of various structures, such as pre-packaged bankruptcy plans or out-of-court transactions.
For instance, in a pre-packaged bankruptcy, the debtor negotiates the restructuring terms with key creditors before filing for Chapter 11 protection, which can help expedite the process and minimize disruptions to the business.
Conducting thorough due diligence despite time constraints
Due diligence in distressed M&A transactions is often challenging due to time constraints and limited access to information. However, thorough due diligence remains essential to identify and assess potential risks.
M&A attorneys can help buyers prioritize key focus areas, such as identifying unencumbered assets, evaluating the enforceability of critical contracts, and assessing potential succession liabilities.
For example, buyers must consider the potential impact on future cash flows and liabilities if the target company has substantial unfunded pension obligations.
Negotiating favorable terms and protections
Experienced M&A counsel can help buyers negotiate favorable terms and protections in distressed transactions. This may include negotiating asset purchase agreements that clearly define the assets and liabilities acquired and securing appropriate representations and warranties from the seller.
M&A attorneys can also advise using escrow arrangements or holdbacks to provide additional security for potential post-closing liabilities.
B&T Legal: Your Trusted Partner in Distressed M&A
B&T Legal is a trusted partner for businesses navigating the complexities of distressed M&A transactions. Our experienced attorneys take the time to understand each client’s unique needs and objectives, providing tailored legal solutions to help them achieve their goals.
We offer transparent pricing models, including subscription-based and fixed flat-rate fees, ensuring predictability and cost-effectiveness for our clients. This approach sets us apart in the legal industry and demonstrates our commitment to putting our clients’ interests first.
At B&T Legal, we foster long-term partnerships with our clients, supporting their growth and success at every stage. Our attorneys are dedicated advisors who offer legal expertise and strategic guidance to help clients make informed decisions.
With a team of skilled attorneys based in Denver, Colorado, and a nationwide reach, B&T Legal delivers comprehensive legal services across various fields. Whether you’re an entrepreneur, a startup, a small business, or a large corporation, we have the knowledge and experience to guide you through the distressed M&A process.
For personalized, expert legal guidance in navigating the risks and opportunities of distressed M&A transactions, contact B&T Legal today. Our committed attorneys are ready to help you achieve your objectives and protect your interests every step of the way.
Sources
- https://www.americanbar.org/groups/business_law/resources/business-law-today/2023-april/business-planning-triggers-fraudulent-transfer-law/
- https://news.bloomberglaw.com/bankruptcy-law/expanding-the-fraudulent-conveyance-look-back-period
- https://www.law.cornell.edu/uscode/text/11
- https://corporatefinanceinstitute.com/resources/valuation/363-sale
