Webinar Series: Preparing Emerging Companies for Mergers and Acquisitions – Video Recording

Emerging companies seeking an exit must ensure that they have their house in order before entering into M&A transactions. In a recent webinar, Williams Mullen attorneys David Lay and Cathy Zhang highlighted several key diligence areas emerging companies should review.

One crucial area is capitalization documentation. Companies need to have a clear and organized record of their capital structure, including details on ownership stakes, equity distribution, and any outstanding obligations. This information is essential for potential buyers or investors to assess the company’s financial health and potential liabilities.

Incentive equity is another important consideration. Emerging companies often use equity compensation to attract and retain key employees. However, it is essential to ensure that these incentive plans are clearly documented, compliant with relevant regulations, and structured in a way that aligns with the company’s goals and objectives.

The ownership of intellectual property (IP) is a critical diligence issue that emerging companies must address. Companies need to have a comprehensive understanding of the IP assets they own, including patents, trademarks, copyrights, and trade secrets. Ensuring that the company has clear ownership rights to these assets and that they are adequately protected is crucial for maintaining value and avoiding disputes during the M&A process.

Employee and independent contractor status is another area that emerging companies need to review. Misclassification of workers can lead to legal and financial consequences, so it is essential to ensure that employees and contractors are correctly classified under applicable labor laws. Clear documentation of these relationships and compliance with relevant regulations are essential for mitigating risks during an M&A transaction.

Sales and use tax compliance is another consideration that emerging companies must address. Companies need to ensure that they are collecting and remitting sales tax in jurisdictions where they operate and that they are complying with relevant tax laws. Failure to adequately address these issues can lead to financial penalties and liabilities that may impact the company’s valuation and attractiveness to potential buyers.

Securities filings are a crucial aspect of M&A diligence for emerging companies. Companies need to ensure that they are compliant with all relevant securities laws and regulations, including any required disclosures and filings. Failure to comply with these requirements can delay or derail an M&A transaction, so it is essential to address any compliance issues proactively.

Lastly, drag-along covenants are an important consideration for emerging companies pursuing an exit. These provisions allow majority shareholders to force minority shareholders to participate in a sale or merger. Ensuring that these provisions are clearly defined and understood by all shareholders is essential for avoiding disputes and ensuring a smooth M&A transaction process.

In conclusion, emerging companies must address several key diligence areas before pursuing an exit through an M&A transaction. By reviewing and addressing issues related to capitalization documentation, incentive equity, IP ownership, employee classification, tax compliance, securities filings, and drag-along covenants, companies can increase their chances of a successful and smooth exit process.