Mechanisms for closing corporate operations

Corporate or M&A transactions, such as mergers and acquisitions, are a common business strategy for business growth and expansion. These transactions are not only a source of growth and diversification for companies, but also have the potential to create shareholder value and improve efficiency and profitability. However, for these operations to be successful, it is important to have proper closing mechanisms in place that ensure the successful completion of the deal and minimize risk to all parties involved.

In this article, we explore the different mechanisms for closing corporate or m&a operations, focusing on the implication of the legal aspects applicable to these transactions, which affect the signing and closing negotiations. .

Closing mechanisms, or closure of corporate operations, are the tools used to finalize and close business agreements between companies. These mechanisms may vary depending on the type of transaction and the specific conditions of each agreement. Below, we detail some of the most common closing mechanisms used in corporate operations:

Cash payment:

This is one of the simplest and most common mechanisms in corporate transactions. In this case, the purchasing entity pays the seller a specified amount of money in exchange for the assets or interest in the company being acquired. This mechanism is particularly for the seller since he gets immediate liquidity. However, it is rare that a transaction is closed with a single payment coinciding with the date of the sale. In most cases, cash payments are made following a negotiable payment schedule, which includes an initial payment and a deferred payment. The retention of deferred payments usually responds as a guarantee measure for the buyer, since they allow covering the risks derived from contingencies (legal, fiscal, labor or of another nature) that the company subject to sale carries. For this reason, there is sometimes a direct relationship between the prescription dates of these contingencies and the established payment schedule.

Actions:

This closing mechanism is a popular option in m&a transactions related to consulting or auditing businesses. Even the integration of law firms opts relatively frequently for this solution. The acquisition occurs without using cash. In this case, the buying company issues new shares or uses existing shares to acquire the selling company’s share. Shareholders of the selling company receive shares of the buying company as payment for their participation in the company. This mechanism is especially useful when the companies involved want to combine their operations and resources.

Earn-out agreement:

This mechanism is a buy-sell agreement in which part of the purchase price is based on the future performance of the company being acquired. In this case, the acquiring company pays an initial amount in cash and then makes additional payments based on the future financial performance of the acquired company. This mechanism is particularly useful when the acquiring company is concerned about the risk that the acquired company will not meet financial expectations. And it is especially interesting for the buying company, to the extent that it keeps the seller involved in the future development of the company. It is commonly said that in this way the seller maintains “skin in the game”, or in other words, the seller will participate in the achievement of objectives since the result will have a direct impact on the collection of a higher sale price.

Guarantee mechanisms:

Guarantee mechanisms are tools designed to protect purchasing companies from the risks associated with corporate transactions. These mechanisms include guarantees and insurance that protect the purchasing company from possible contingencies or liabilities that may arise after the closing of the operation. Previously we mentioned the retention of part of the price as the most common guarantee. In this sense, the result of the audit carried out by the buyer, which we call “due diligence”, will have special relevance, in which they will be able to contemplate the volume of liabilities in the company and the risk of future third-party claims against the company. saleswoman. Both by private entities (customers, suppliers, etc.) and public entities (Tax Agency, Social Security, etc.).

Choosing an appropriate closing mechanism can have a great impact on business management. For example, paying in cash can be a useful option for companies seeking immediate liquidity, but it can also leave the acquiring company with less cash available for other investments and opportunities. On the other hand, the use of shares may allow the acquiring company to retain its cash, but it may also dilute the value of the acquiring company’s existing shares. We analyze these issues in the following specific article “Impact of closing mechanisms on business management”.

The application of MAC clauses (English acronym for “Material Adverse Change”) is common when a signing date and a closing date have been agreed, with an interim period for compliance with the milestones and obligations. These clauses are based on allowing modifications to the agreement in the event of supervening circumstances in said interim period, which adversely and significantly affect the company being acquired. More information on this can be found in our article “MAC clauses in company purchase and sale contracts”

Likewise, obviously, the rest of the conditions agreed to this effect in the rest of the content of the SPA (Shares Purchase Agreement) will also be relevant.

Conclusion

The inorganic growth that corresponds to this type of corporate operations is a common business strategy for the growth and expansion of companies.

The most common formulas combine alternatives such as those exposed: cash payments, delivery of shares, earn-out agreements and different guarantee measures (such as withholding part of the price).

Proper negotiation of closing mechanisms is essential to ensure successful completion of the deal and minimize risk to all parties involved. Undoubtedly, all operations of this nature have important legal implications that must be properly considered and addressed. Due diligence, regulatory compliance and legal and financial advice are critical aspects that must be taken into account throughout the process.

José Luis Casajuana Ortiz
Socio de J. L. Casajuana y responsable del área internacional

12/04/2023