Mergers and acquisitions are often multi-million dollar transactions. Business leaders can combine their operations with another company to increase their market share. They could also acquire a competitor or a business in an adjacent industry to ensure consistent supplies or access to certain intellectual property, such as patents.
Mergers and acquisitions have the potential to be mutually beneficial, but they also come with a degree of risk. Certain forms of liability can pass to the acquiring business or the merged entity after a transaction.
What types of liability should business leaders investigate carefully as part of the due diligence process before a major transaction?
1. Successor liability
The acquisition of another business can lead to the acquiring company taking on various forms of liability. Certain forms of financial liability can pass to the acquiring business or merged company. There are limitations on successor liability, but there are also state rules that can increase the risk of successor liability in certain scenarios. For example, the improper completion of a merger could potentially increase the risk of successor liability for a business.
2. Financial obligations
In many cases, mergers or acquisitions include legal requirements to settle or at least report significant organizational debts. Financial obligations, including debts secured by business assets, typically pass to the acquiring business or merged company produced in a large business transaction. Responsibility for executory contracts and the financial obligations they impose may transfer to the new company or acquiring business. Obligations to creditors can be an important consideration when evaluating the terms of a merger or acquisition.
3. Legal liability
Many different types of legal liability stem from business operations. Employees could pursue wage and hour lawsuits by asserting that a company did not comply with the Fair Labor Standards Act (FLSA). Customers or clients could claim that products were defective or that services did not meet professional standards. In some cases, the merged business or acquiring company may ultimately be liable for the mistakes and oversights of a business before the transaction.
Performing adequate due diligence, integrating the right terms into contracts and planning major business transactions carefully can limit the risk inherent in these massive undertakings. Business leaders preparing for mergers and acquisitions need help as they investigate another company, negotiate terms and review documents, and that’s okay.