Any corporate transaction will go through the 7 stages that I am going to discuss and hence it is pertinent to be aware of the nuances of each stage.
So, what are these stages?
Step 1: Deal structuring
This involves determining how the deal is to be done and what are the main commercials.
For example, if someone wants to invest in or buy out a company, how should they do it?
Should they purchase the shares from the promoters or should the company issue more shares? What is the percentage of shares they would be owning when the transaction is done?
Which type of shares or securities should they invest in?
How will they pay the consideration – directly or through a subsidiary company?
Instead of buying shares of a company, can all the assets be bought as a slump sale?
These are some questions that have to be answered at the stage of deal structuring. This is something the senior lawyers get to do along with bankers and senior most executives.
However, every lawyer working on a transaction needs to understand the deal structure to get their job done properly.
This structure will influence all the subsequent stages of a deal.
If you learn these steps for ALL the common deal structures, you will have a great time in a law firm.
Here are some common examples of deal structures in corporate transactions:
- Share issuance
- Share purchase
- Asset purchase/slump sale/business transfer
- Acquihire
- Joint venture
IP deals and technology deals have different structures.
IP transactions have the following deal structures, for example:
- Work for hire arrangements
- Full acquisition
- Licensing
- Joint exploitation
Step 2: Term sheet/ Letter of intent
Once the structure of the deal has been decided, a term sheet or letter of intent is issued indicating the ‘broad commercials’ of the transaction.
The parties are not bound to complete the deal just because they have signed the term sheet. This is more of an in-principle document.
Here is what a sample term sheet looks like for an early stage investment transaction.
Step 3: Commencement of legal due diligence
Legal due diligence starts once the term sheet is signed by the parties. Now is the time to run a check on behalf of the lender or the investor.
You will need to check if the company has major litigation pending or coming up, huge fines pending, important licenses and documents in order, major contracts are at place, and other issues that can impact its business.
Lenders/ investors would want to know before the transaction what they are getting into and that is where due diligence comes in.
These findings may impact the decision of the investor to invest or not. An acquirer may back out or offer a reduced valuation based on the outcome of a due diligence.
Step 4: Drafting & negotiation of transaction documents
Once it is established that the deal is worth entering into, drafting of documents will begin. There can be a long list of documents that need to be executed for carrying out a transaction.
Some transactions require one agreement, but most corporate transactions require several agreements.
For example, you have to draft and negotiate a loan agreement for a loan transaction, plus security documents if it is secured, or
- shareholders’ agreement, share subscription agreement and share purchase agreement for an investment transaction, or
- Asset purchase agreement or business transfer agreement for an acquisition where the business is transferred, etc. depending upon the nature of the transaction.
Most of the time, the base draft is prepared by the investor’s or the lender’s lawyers.
The parties then enter into negotiations to arrive at a mutually agreeable version.
Step 5: Signing/ Execution
This is the part where the parties sign the document.
You must check that there is appropriate stamp duty paid. Lawyers need to study stamp duty laws and it is not taught in law school – we teach our students that.
Sometimes, you may also need to draft a resolution from the side of the company to approve the transaction, in a format that is acceptable to the investor or the lender.
Once again, junior lawyers are engaged to do this.
Well, this cycle doesn’t come to an end with the signing or execution of the documents. There are some more steps involved. What are those?