Top legal tips for the perfect M&A deal

Execution, acquisition and integration stages are the three most important steps to master in order to make a successful acquisition deal, explained legal experts at a biotech conference in London last week.

Mergers and acquisitions (M&As) reached the second-highest level in the biotech industry's history last year, according the latest Ernst & Young biotech report - Beyond Borders - and a survey published in the same report showed that 99 per cent of North American companies are planning an M&A or a strategic alliance in the next two years.

With such a high level of activity in the sector, three legal experts from a UK-based law firm gave a series of tips to biotech companies on how to get through an acquisition without 'loosing their shirt'.

Speaking at the AngloNordic Biotech Conference IV in London last Thursday, Matt Denis, partner at law firm Bird & Bird, explained that as far as the seller - or target company - is concerned, preparation and planning are crucial to spot any warning signs that can emerge from day one.

These red flag areas, said Denis, include intellectual property (IP) ownership, licensing terms, patent portfolio but also any change of control. The company about to be sold should also make sure that the buying firm complies with the competition law, as fines are common place in this area, and look out for contingent liabilities or litigation. If there are any issues it should check if there are any chances to remedy them.

"Targets companies should take legal advice from the start and make sure they know the red flag areas," said Denis.

From the buyer's point of view, the key challenges are to conduct an efficient negotiation of the share purchase agreement (SPA) - the document that details the deal structure, terms and conditions of the sale of the shares of the company; to maintain a forward looking approach; to ensure the retention of key staff; and to conduct a successful due diligence.

Denis emphasised the importance on the financial due diligence process which is aimed at ensuring the seller/target has a good title to assets. It will enable the buyer, Denis said, to find out the extent of liabilities it will have to assume.

"It is essential for the buyer to carry out its own investigation in order to obtain sufficient information and decide if the acquisition represents a sound commercial investment," said Denis.

With a proper due diligence strategy, the buyer can lead a legal, financial and business audit of the target company to assess its critical success factors, both its strengths and its weaknesses.

Sally Shorthose, another partner at Bird & Bird, took turn to explain the importance of the 'legal' due diligence.

"The reason is simple; IP is crucial and getting sufficient information of the seller's potential patent liabilities allows the buyer to be in a much better position to negotiate the acquisition," she said during the conference.

Shorthose went on to explain that the purpose of the legal due diligence is to build an inter-relationship with representations and warranties, although she stressed that it was better to know of issues in advance as enforcement can be tricky.

The process also gives a value of the target to the buyer who can then bargain with the seller.

Shorthose gave the pros and cons of conducting the due diligence early and late in the acquisition process. When it is conducted early, she said, there is a risk of confidentiality - and sellers are usually reluctant to give information - but there is time to assess the output, whereas investigating the target later on can be cheaper but gives less time to act on the results, she explained.

Shorthose also gave details on how to perform a due diligence in practical terms, citing the use of a questionnaire (customised and updated) as a tool to identify key risks, as well as the importance of a post-completion audit.

Meanwhile, in the third part of the presentation, Ulf Lundberg, head of Bird & Bird's life science sector group in Stockholm, Sweden, gave advice on the last part of the acquisition process - the integration - which he cited as a step where many acquisitions and mergers fail.

The reason for this is that there is usually little or no focus at all on integration.

"Just before closing the deal, both companies need to create a common culture and synergies must be created," said Lundberg.

As guidance on how to manage this, he cited the creation of a specific 'integration team' with the appointment of an 'integration leader', and the involvement of representatives of both companies.

"The buyer and the target need to create a list of issues and unlike the due diligence stage, they must go more into depth in the process," said Lundberg.

He added that the integration process must cover all the functions, from supply chain to marketing through to HR and IP strategy.

During the post-closing period, he said, the buying firm must analyse and implement the changes.

"The most important thing is to communicate both with management with the integration team reporting on a weekly basis to management, but also with all acquired staff," said Lundberg.

"Most importantly, do not hide risks of redundancies."

Lundberg stressed that these advices in terms of integration not only apply to outright M&A but also to joint ventures, and most business combinations.