M&A as a catalyst for recovery

As many jurisdictions begin to ease restrictions on commercial activities, economic uncertainty remains and the landscape of M&A activity is undoubtedly very different from early 2020 pre-COVID-19. As you begin to lead your company towards recovery, it is worth noting that in the midst of such upheaval, there are a number of promising indicators for the future of M&A activity and steps you can take to maximize your company's chances of success.

In a recent global survey of 2,900 C-suite executives released at the end of March, EY found that “despite unprecedented social and economic paralysis, many global companies continue to plan major transformation programs. More than half (56%) of executives globally are opting to transform through transactions and plan an acquisition in the next 12 months.”

Moreover, while companies across all sectors "...will continue to face disruptive factors... Executives are looking to recycle capital through divestitures and acquisitions based on the results of their strategic and portfolio reviews." Such reviews and any evaluation of potential acquisitions will invariably be initially focused on mitigating business resilience risk and potential liabilities through an increasingly rigorous due diligence process.

Enhanced Focus on Due Diligence

As due diligence is designed to comprehensively evaluate an entity and, in particular, uncover risks and liabilities, it is imperative that target companies ensure that their corporate records are complete and accurate prior to entering into due diligence with a prospective buyer. While your corporate records may be the last thing on your mind as you have successfully grown your business, they will be the very first thing scrutinized by a prospective buyer during due diligence— incomplete or disorganized corporate records will make your organization appear unprofessional at best whilst signalling that a deal with your company poses a higher degree of risk and potential liability for the buyer. Accordingly, your discipline and attention to corporate records is the one variable in your control that can impact your company's ability to secure an M&A deal.

Take Action: Five Steps Towards Success

Step 1: Review Cap Table

  • Confirm that your cap table: (i) accurately reflects the capitalization of your company on an issued and outstanding basis as well as on a fully-diluted basis and (ii) captures all other securities granted or instruments entered into by your company, including options, SAFEs, convertible debenture and notes.
  • Cross-reference your cap table, your minute book and related agreements to ensure that all securities issuances are duly authorized and documented.
  • Ensure executed and complete copies of all relevant agreements are contained in the digital data room; see steps 2 – 4 below.

Step 2: Review Corporate Records

  • Confirm that your minute book: (i) contains fully executed copies of all board and shareholder resolutions and complete meeting minutes, as applicable, since the date of incorporation, (ii) has updated copies of all ledgers and registers, and (iii) contains copies of all by-laws in effect.
  • For all share issuances: (i) ensure you have executed and complete subscription agreements, including any disclosures required by securities laws, (ii) confirm that share certificates have been prepared, executed, and where applicable, bear requisite legends and (iii) accurately identify the fair market value of any shares granted for services rendered.
  • If the company has granted options: (i) confirm that option agreements have been executed by optionees, and ensure that the strike price and vesting schedule are accurately recorded, (ii) pursuant to a stock option plan (such as an ESOP), ensure that a complete and fully compiled copy of the plan is kept with your records and (iii) keep copies of any notice of exercise delivered by the optionee and ensure that share certificates have been issued for any such duly exercised options.
  • If you have a shareholders agreement, confirm you have signatures for all shareholders and any attornment agreements or agreements to be bound.
  • Ensure your accounting records and tax filings are up-to-date and complete.

Step 3: Review of Intellectual Property Record

  • Ensure clear and absolute chain-of-title for all intellectual property developed by the Company.
  • Confirm that you have executed and complete assignments of intellectual property from each employee, officer, consultant and any other person which may have contributed to the Company's intellectual property.
  • Prepare and maintain IP Map.

Step 4: Prepare and Maintain a Digital Data Room

  • Gather copies of all agreements your Company has entered into including employment agreements, subscription agreements, option agreements, service agreements, licenses, non-disclosure agreements, assignments of intellectual property, grants, etc. The copy of each agreement should be fully compiled and executed and saved in PDF format.
  • Create a data room on a secure medium with a folder structure that allows you to neatly organize your company's records. While you may ultimately be asked to populate a new data room, organized in accordance with a prospective purchaser's due diligence request list, having your own data room will allow you to promptly prepare and provide complete disclosures.
  • Follow strict data security protocols to ensure that the data room and all documents are secured.
  • Regularly update and back-up the data room.

Step 5: Repeat Steps 1-4 Regularly!

There Will be Funds: but can you prove your value?

In a recent article, The Globe and Mail reported that "private equity fund managers are planning for a summer like no other....Sophisticated private equity investors are itching to put capital to work at what they perceive as bargain-basement prices, while equally savvy sellers are holding out for better offers."

Indeed, Deloitte has reported that “we believe M&A activities will have a strong influence in shaping the "next normal" conditions. The S&P 1200 companies have record $3.8 trillion in cash reserves and the ability to service debt in a dovish monetary environment, and the private equity sector has $2.5 trillion worth of dry powder ready to be deployed on opportunities.”

While its still too early to determine the full impact of COVID-19 on M&A, it is clear that deal activity will re-start as private investment firms begin to redeploy capital. While the prospect of continued deal activity is a hopeful sign, competition will be even more fierce than pre-COVID. Enhanced scrutiny in a period of heightened risk adversity suggests that target companies with accurate corporate records will be better able to demonstrate their value by removing a significant source of risk for potential buyers or investors.

Originally published 09 July, 2020

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