M&A deals can be transformative for businesses. However, overlooking seemingly insignificant contractual details can derail meticulously crafted transactions. Understanding which contract clauses can become deal breakers is essential for any company considering a merger or acquisition.
Hidden Deal Killers in Your Contracts
Several types of contractual provisions can create unexpected obstacles during M&A transactions. These "hidden deal killers" often go unnoticed until the transaction is well underway, creating costly delays or even terminating negotiations entirely.
Change of Control Clauses
Change of control clauses permit counterparties to terminate agreements following an acquisition. These provisions can affect critical business relationships, from key supplier contracts to customer agreements. When a significant portion of your revenue depends on contracts containing such clauses, the acquiring company may reconsider the transaction or demand price adjustments.
Exclusivity Restrictions
Exclusive dealing arrangements can limit a company's flexibility post-acquisition. If your business is locked into exclusive relationships that conflict with the acquirer's existing partnerships, this creates immediate operational challenges that must be resolved before closing.
Material Adverse Effect Provisions
MAE provisions create ambiguity around termination triggers. Different parties may interpret what constitutes a "material adverse effect" differently, leading to disputes during the transaction process. Clear, specific language is essential to prevent such clauses from becoming negotiation sticking points.
Right of First Refusal and Match Clauses
These provisions constrain negotiating flexibility by requiring you to offer opportunities to existing partners before pursuing new relationships. During M&A transactions, such restrictions can complicate integration planning and limit the combined entity's strategic options.
Strategic Due Diligence Approach
Comprehensive contract review during due diligence helps identify potential deal breakers before they become transaction obstacles. Legal professionals should focus on several key areas:
- Financial Liabilities: Uncover hidden financial obligations, penalty clauses, and contingent liabilities that could affect valuation
- Termination Risks: Assess which contracts are vulnerable to termination following the transaction
- Contract Transferability: Determine which agreements require consent for assignment to the acquiring entity
- Regulatory Compliance: Identify contracts that may trigger regulatory review or require government approvals
Post-Merger Contract Preparation
Once problematic clauses are identified, proactive management can minimize their impact on the transaction and post-merger operations.
Renegotiation Strategy
Key contracts containing deal-breaking provisions should be renegotiated before closing. Approach critical vendors, customers, and partners early to obtain necessary consents or modify problematic terms. This prevents surprise terminations after the acquisition announces.
Contract Consolidation
Post-merger, consolidate overlapping agreements to eliminate redundancies and conflicts. This streamlines operations and reduces the risk of inadvertently violating exclusive dealing or non-compete provisions.
Communication Protocol
Establish clear communication protocols for informing counterparties about ownership changes. Proactive, transparent communication often prevents counterparties from exercising termination rights, even when contractually permitted.
Transition Provisions
Negotiate grace periods and transition clauses that provide breathing room during integration. These provisions allow time to restructure relationships or find alternative arrangements without disrupting business operations.
Carve-Out Exceptions
For critical services or relationships, negotiate carve-out exceptions that allow continuity despite ownership changes. This is particularly important for contracts essential to ongoing operations that cannot be easily replaced.
Ensuring Business Continuity
The ultimate goal of contract review in M&A transactions is ensuring business continuity. Every identified issue should be evaluated not just for legal compliance, but for its practical impact on operations post-closing.
Strategic contract review ensures smooth integration and business continuity throughout the acquisition process. By identifying and addressing potential deal breakers early, companies can structure transactions that preserve value and minimize disruption.
Working with experienced M&A counsel who understand both the legal complexities and business implications of contract provisions is essential for successful transactions. The investment in thorough contract due diligence and strategic renegotiation pays dividends by preventing deal failures and protecting transaction value.