M&A Structuring During World Financial Crisis
- By A.S. Yermolenko
- Sep. 29 2009 00:00
Head of FBK
Legal corporate practice
The financial crisis has moved through the M&A market like a glacier and as usual it has been painful for the market. The main feature of the time that is usually called “period during crisis” is a material decrease of activity and a lull in the field of M&A. At the same time this lull does not mean the complete stoppage of activity, simply a decrease in volume of transactions.
It is no secret that performing M&A transactions requires much labor and effort. When forming the legal matrix for the purchase or sale of business, in addition to legal aspects, one always has to consider a whole set of factors, beginning with the company’s financial condition and the financial condition of its owners, up to and including the psychological peculiarities of the owners. The current economic situation has an important place among these factors.
We always consider three blocks of issues in regard to M&A transactions: the method for transfer of assets and the procedure for conduct of actions and the security ensuring the performance of obligations. The current economic situation makes the participants of the transaction review their behavior in relation to each block.
In regard to the first issue, the possible legal mechanisms for the transfer of control over assets or businesses from the seller to the buyer is considered. Basically, we are talking about the choice between the purchase of assets used for keeping of business and the shares/participatory interests in the charter capitals of companies, through which business is conducted. Various combined variants are also possible and are indeed frequently used.
The crisis brings up complications that are rare at the growing market. The first one of them, rather obvious and located at the surface, is the lack of money stock along with growing complexities related with engagement of crediting. This all leads to the fact that large companies whose shares are circulating at the open market frequently prefer to pay with their own liquid securities (or securities of other companies), while previously they would pay with borrowed or even their own assets. The second problem is that the sale of assets does not allow full-fledged keeping of business in the field of production, as the transfer of personnel is also needed. In the current conditions, any large-scale manipulation with personnel brings the phantom of mass dismissals into life, as well as breach of employees’ rights. This is, naturally an issue that causes a negative reaction from local and regional authorities. Although there is no bad faith, investors usually shy away from companies with such potential problems, taking their money elsewhere.
The next issue is the procedure of activities within the transaction. When working out the step-by-step plan of transaction, one should always consider which activities that are compulsory under the law. When the market has a lot of enterprises in difficult financial situations, those who made a decision to invest into such companies usually prefer to make such investments in several steps. The drawback of this method is obvious: the transaction is prolonged, which raises the risk that it won’t be completed. This can happen for various reasons: stoppage of financing, change of political relations between the seller and the buyer; revelation of seller’s bad faith or hidden defects. However, in hard times many buyers prefer to act in a conservative way: It is better to lose some part of funds than to pay the price at once and to find out that the purchased business is completely worthless and that all the money is lost.
The last, but perhaps the most important clause during structuring of a transaction, is the development and agreement of the mechanism which guaranties the interests of both parties, though, primarily those of the purchaser, as the purchaser bears risks related with purchased assets. Considering the economic problems and increased risks, this part of purchase and sale agreements raises the temperature of negotiations to the maximum and frequently becomes the stumbling rock: The parties refuse the transaction as they are not able to agree on the guarantees; at this junction patience and skills are needed.
We’d rather be optimistic. In spite of difficulties and high investment risks, it is possible to state that the M&A market is gradually reviving and this allows us to hope that the prosperity epoch and everything related with it will come back.