Page 19 - M & A Disputes

the company, its operations, and management; financial statements; an outline of the current ownership
structure; and other pertinent company highlights.

The evaluation of the historical offering memorandum can often provide insight regarding the seller’s
perspectives on the target’s business to forensic accountants who provide M&A dispute services. Infor-
mation in the offering memorandum may also be relevant in an M&A dispute to the extent that it is a
component that formed the basis of the purchase price.

Establishment of the Data Room

Prior to initiation of the due diligence process, the seller decides upon the documents and data to be pro-
vided to prospective buyers. Customarily, a data room is established to house the pertinent information
that prospective buyers will evaluate during preliminary assessment of the proposed acquisition. Infor-
mation in the data room often includes, but is not limited to, organization charts, management presenta-
tions, operational documents, financial statements, tax returns, accounting policies and manuals, legal
documents, environmental documents, and other related documents pertinent to the transaction. The
confidentiality of such information is typically governed by the confidentiality agreement executed by
the seller and prospective buyer(s).

Due Diligence

In the lead-up to an M&A transaction, due diligence is conducted in order to assess the risks associated
with the potential transaction. Due diligence is premised on inquiries made to understand the target’s
business, its historical performance, and its future earnings potential. Legal, operational, financial, and
environmental due diligence are all common types of due diligence, which may be undertaken in evalu-
ating the deal. Typical due diligence activities include an evaluation of historical financial statements
and management projections; an assessment of target management and operations; an evaluation of sig-
nificant customers, contracts, and agreements; and an evaluation of contingencies, among other areas of
financial and legal inquiry. Based on this due diligence, prospective buyers will conclude on a value of
the target business and decide whether the acquisition aligns with their interests. Although due diligence
continues subsequent to the execution of a letter of intent, the initial financial due diligence typically
forms the basis of the initially agreed-upon purchase price memorialized in a letter of intent.

Evaluation of an inventory of the documents assessed during the due diligence process, due diligence
reports prepared by financial advisors, and internal correspondence with respect to the due diligence
process can often provide practitioners with valuable information about what was understood by the par-
ties prior to close.

Negotiations Regarding the Purchase Price and Structure of the Transaction

After prospective buyers have had the opportunity to evaluate the merits of the acquisition, the seller
will evaluate the proposals submitted. Upon evaluation of such proposals, the seller may select one par-
ticular proposal from a prospective buyer or negotiate further with select prospective buyers. At this
stage in the process, negotiations often focus on the purchase price (that is, the consideration to be paid
at closing, postclosing purchase price adjustments, and potential earnout provisions) and the transac-
tion’s structure.

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