by Chris SwiecickiWhat is a Merger and Acquisition Lawyer? When Do You Need One?
Merger and acquisition lawyers help companies that are at a crossroads. They facilitate deals and advise owners who are looking to sell their business, buy another business, or combine assets and resources to create a new entity.
The merger and acquisition (M&A) branch of law brings together multiple disciplines, including accounting, tax law, real estate, government and industry regulations, and more. M&A lawyers must have a diverse skill set (or the ability to assemble a team of people with the appropriate expertise) to handle all of a transaction’s moving parts.
When Should a Business Hire a Merger and Acquisition Lawyer?
Buying or selling a company, or merging with another one, is not something that a business owner should attempt on their own. Even their corporate counsel might not be equipped to handle the transaction. An attorney with merger and acquisition expertise is necessary, and it’s a good idea to get them on board as soon in the process as possible.
The following scenarios will trigger the need for a merger and acquisition lawyer:
- Some small business owners grow their companies with the specific goal of one day striking a lucrative deal to sell it to a larger entity. They should consult with a good attorney early to ensure that their company, and their own compensation, is structured appropriately.
- Whether or not it was planned, potential buyers may start to show interest in a company. Consulting with a merger and acquisition lawyer can be helpful to assess the options, and whether or not it makes sense to entertain offers at all at that particular time. They can also advise on “poison pill” options to prevent hostile takeovers.
- Hiring a merger and acquisition lawyer is a good idea during succession planning if there is no plan to pass the company on to heirs or partners. The attorney can get the ball rolling to find potential buyers.
- When a company finds itself ready to expand and add to its portfolio by acquiring another business, a merger and acquisition lawyer can get the necessary resources lined up and begin to search for suitable candidates.
- A competitor or a company that fits well with a business may go on the market. A merger and acquisition lawyer can structure a viable offer.
Regardless of the circumstances of a sale, purchase, or absorption of a company, it is best to have an M&A lawyer at the earliest stages of the deal. Ideally, they should be the ones obtaining a valuation and crafting the agreement. These transactions are complex and have both internal and external consequences for all of the entities involved. Waiting until a deal is on the table and contracts are already drafted is too late.
M&A Attorney Responsibilities—The Basics
A merger and acquisition lawyer’s job is to advise and negotiate for their client. Throughout the course of the transaction, they will draft and file agreements that pertain to the business assets, employees, debt, and stock. The attorney will work with various accountants, real estate brokers, bankers, and opposing counsel as needed to set up the deal and see it through to completion.
First and foremost, M&A attorneys need to understand their client’s business objectives in order to craft a transaction that benefits the owners, stockholders, and employees. They will map out steps and a timeframe (which typically will take several months) and keep their client informed of the status and progress of the case.
Once the merger or acquisition is complete, the attorney will help to set up any new entities and continue to guide their client as they carry out the integration of assets, staff, and policies.
When the client is the target of a merger or acquisition, the M&A attorney will review the offer and help the company decide whether to accept it, refuse it, or negotiate further.
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Skills That Merger and Acquisition Lawyers Bring to the Table
Lawyers who specialize in mergers and acquisitions must wear many hats and understand a wide array of legal and business accounting topics. Those who routinely work in multiple disciplines can offer their clients the level of expertise necessary to reach the best outcome. Swiecicki & Muskett Attorneys at Law, for example, combine the practice areas of corporate law, taxation, and contract negotiations.
This type of multi-faceted firm can tackle the necessary parts of a corporate merger or acquisition. Whether these services are performed by the firm or outsourced, a skilled M&A lawyer is able to interpret the information and how it affects the proceedings.
Accounting and Business Valuation. Knowing what a company is worth through a business valuation is an essential part of any merger or acquisition. In addition, mergers and acquisitions require expert analysis of financial records and tax returns.
Tax Implications. Buying or selling a company can have a big impact on tax liability. It is necessary to understand the transaction’s tax implications and structure the deal accordingly.
Regulatory Obstacles. Government or industry regulations can prevent a merger or acquisition from moving forward. Antitrust, security, and investment laws are just some of the things that a merger and acquisition lawyer will need to navigate, to make sure their clients are in compliance.
Real Estate. The purchase or sale of a business can include the transfer of land, buildings, and other assets. Knowledge of real estate law and property valuations will help this part of the deal go smoothly.
Intellectual Property. Merger and acquisition contracts need to be clear about who owns or holds the rights to intellectual property. Placing a value on these items is important too.
3rd Party Contracts. Quite often, a company has contracts with lenders and other parties. An M&A attorney can obtain the necessary consent from those entities and deal with their concerns about how the business relationships will be affected by the transaction.
Human Resources. A merger and acquisition lawyer can make sure the agreements adhere to any applicable employment, compensation, and benefits laws. They will handle how various aspects are treated, such as payouts, employee stock options, retention agreements, terminations, and consolidation of offices.
Negotiations. A large part of the merger and acquisitions lawyer’s role is negotiating all aspects of the agreement between the entities. This can include the sales price, terms and payments, and any of the other items on this list.
Due Diligence. One of the most important jobs of a merger and acquisition lawyer is conducting due diligence. Private companies are not under the same scrutiny as publicly held ones, so this means conducting an in-depth investigation into the other company to ensure that things are as they claim. They will study their financial statements and other corporate documents, and assess the company’s obligations, litigation risks, and potential growth, among other things. They will look for evidence of sandbagging and ensure that everyone is holding to the implied covenant of good faith and fair dealing.
Finding the Right Merger and Acquisition Lawyer
When a company embarks on a merger or acquisition, it will need representation who can ensure that they meet the intended goals of the transaction. The terms should be clear to all entities and result in a legally binding agreement and a smooth transition for all involved.
At Swiecicki & Muskett, LLC, you will find relevant legal expertise with the breadth of knowledge necessary for a purchase, sale, or consolidation of companies. The firm’s unique combination of practice areas brings more to the negotiating table than the typical corporate counsel. In fact, Christopher Swiecicki teaches Business Acquisitions (M&A) and Corporations as an adjunct professor at Washington University School of Law.
Find out how Swiecicki & Muskett, LLC can help you navigate your merger or acquisition.
by Chris SwiecickiWhat Business Legal Fees are Tax Deductible?
As a small business owner, you know how important it is to seek legal advice and services when needed. From drafting contracts to resolving disputes, legal fees can quickly add up. However, many types of legal fees are tax-deductible, potentially saving you money come tax season. Just which legal fees are eligible for tax deductions? And are there any tax advantages of legal services worth exploring?
What Types Of Legal Fees Are Tax-Deductible?
Certain legal fees incurred by you in the operation of your business are tax deductible, such as:
Startup Costs
Legal fees incurred during this process can be deducted up to $5,000 in the business’s first year if you’re creating or buying a business. This includes fees associated with creating legal documents or paying state incorporation fees. Any remaining startup costs must be amortized over time. This is important to remember when starting a new business, as the costs of creating or buying a business can quickly increase.
Defense Costs
Legal fees for defending or protecting your business from lawsuits can be deductible. This includes fees for attorneys, court costs, and other related expenses.
For instance, if a customer sues your company for a defective product or a supplier sues you for breach of contract, the legal fees for defending yourself in court can be deducted. (That said, this significant expense can often be avoided by having proper legal documentation in place—specifically, contracts and agreements.)
Tax Advice or Preparation
Legal fees related to tax advice or tax preparation are also deductible. This includes fees for tax attorneys, accountants, and other professionals who provide tax advice or prepare tax returns. This is a critical deduction to remember, as tax preparation and advice can be essential in ensuring your business complies with tax laws and regulations.
How Much Can You Deduct?
The amount a business owner can deduct in legal fees in a year depends on the type of legal expenses incurred.
Business expenses are defined as costs incurred “while operating a necessary and ordinary business.” These expenses are typically fully deductible on a business’s tax return. Examples of business expenses include rent, salaries, supplies, and utilities. The IRS allows businesses to deduct the total cost of these expenses from their taxable income, reducing the amount of tax owed.
The 2% rule applies to miscellaneous itemized deductions, meaning you can only deduct a portion of an expense if it exceeds 2% of your adjusted gross income (AGI). However, recent changes to tax rules have impacted which expenses qualify as miscellaneous deductions.
While some fees are fully deductible, such as startup costs, others may limit the amount you can deduct. This can make navigating the deduction process complex and time-consuming, which is why many businesses turn to professionals to ensure they maximize their deductions.
For startup costs, the IRS allows a deduction of up to $5,000 in the business’s first year. Any remaining startup costs must be amortized over time. You can deduct a portion of the startup costs each year until you’ve deducted the full amount. The amortization period typically lasts for 15 years, but there are exceptions for certain types of businesses.
There’s no limit to the legal fees you can deduct for defense costs. However, it’s important to remember these fees must be directly related to defending or protecting your business from lawsuits. Legal fees related to personal matters aren’t deductible.
For tax advice or preparation, the amount of deductible legal fees vary depending on the type of service provided. For instance, legal fees for tax preparation and advice are deductible in full. However, legal fees for tax planning, such as setting up a tax shelter or tax avoidance scheme, may be subject to limitations.
It’s important to note the IRS has strict rules about what legal fees are tax deductible. So, working with a tax professional or accountant is always a good idea to ensure you’re deducting the correct amount.
Additionally, documentation of legal fees is essential for tax purposes, so keep accurate records of all legal expenses incurred throughout the year.
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Which Legal Fees Are Not Tax Deductible?
It’s important to note legal fees related to personal matters, such as divorce or estate planning, can’t be deducted. Additionally, legal fees that aren’t directly related to your business aren’t deductible. This includes legal fees for personal lawsuits or disputes unrelated to your business.
For example, if a former employee is suing you, but the lawsuit has nothing to do with your business, you can’t deduct the legal fees for defending yourself against this suit.
However, these fees are deductible if the suit relates to a business dispute (such as an employee suing for unpaid wages).
The IRS also does not allow you to deduct legal fees for the following:
- Personal lawsuits or other legal disputes unrelated to your business.
- Legal fees for divorces, child custody issues, and similar matters.
- Legal expenses related to criminal activities.
Final Thought
Keeping track of your legal fees throughout the year is essential, as working with a tax professional or accountant to determine the tax advantage of legal services for your business. Deducting legal fees is a small but important way to keep your business financially healthy. For more on the intersection of legal help and tax law, contact us.
by Chris SwiecickiMergers and Acquisitions: The Perils of Breaking a Stock Purchase Agreement
At Swiecicki & Muskett, LLC, we often litigate interesting cases that illustrate just how important it is to follow the terms of a contract. One recent case involved our appeal of findings in favor of the seller of a business. We aimed to prove that the company breached its Stock Purchase Agreement (SPA) with the buyer, despite the original court ruling in the seller’s favor.
by Chris SwiecickiThe Importance of Due Diligence
The Court, Seller, and Buyer all agree that the $10 million of cash in the dda accounts that Seller failed to sweep belonged to Seller; Yet the Buyer was awarded the funds.
In an unpublished Opinion, on March 29, 2021 Vice Chancellor Morgan T. Zurn authored a correct, yet tough opinion.
The action arose from a stock transfer whereby plaintiff Deluxe Entertainment Services, Inc. (“Seller”) sold all the outstanding shares of its wholly owned subsidiary, Deluxe Media Inc. (“Target”), to defendant DLX Acquisition Corporation (“Buyer”).
At closing, approximately $10 million in cash remained in Target’s bank accounts. Seller alleged it failed to sweep those funds from Target before closing and Buyer does not dispute Seller had the right to sweep those funds before closing.
Seller brought three counts. Count I – Breach of SPA; Count II – Breach of the Implied Covenant of Good Faith and Fair Dealing; and Count III – Reformation of the SPA.
Count I
Under the SPA, Seller agreed to sell to Buyer, and for Buyer to purchase and pay for all of Target’s shares in exchange for a cash payment. It is a general principle of corporate law that all assets and liabilities are transferred in the sale of a company effected by a sale of stock. When Seller agreed to sell Buyer all the Target Shares, it agreed to sell all the Target’s assets. Thus, by default, Target’s pre-closing assets and liabilities transferred with its shares.
Thus, the SPA presumed all Seller’s assets were included unless specifically excluded. Seller made no argument that cash was in any way excluded or subject to being clawed back. Seller does not contend that any of the express provisions of the SPA were breached. Seller Lost on Count I
Count II
In Count II, Seller argued that the implied covenant of good faith and fair dealing required Buyer to return the cash.
The implied covenant of good faith and fair dealing inheres in every contract and requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain.
The implied covenant cannot be used to circumvent the parties’ bargain, or to create a free-floating duty unattached to the underlying legal documents.
An essential predicate for the application of the implied covenant is the existence of a “gap” in the relevant agreement. There is no gap in which the implied covenant can operate where the subject at issue is expressly covered by the contract, or where the contract is intentionally silent as to that subject. Seller Lost on Count II
Count III
Reformation is not an equitable license for a court to write a new contract at the invitation of a party who is unsatisfied with his or her side of the bargain; rather, it permits a court to reform a written contract that was intended to memorialize, but fails to comport with, the parties’ prior agreement. A party seeking reformation admits that had they read the document more carefully, they would have noticed and corrected the mistake. Seller proffered no evidence that there was scrivener’s error in the SPA.
Rather, the “mistake” at issue was Seller’s failure to sweep the cash from Target’s bank account, separate and apart from the terms of the Purchase Agreement. Seller’s failure to sweep Target’s cash is an operations or accounting mistake, which is crucially distinguishable from a scrivener’s error in the underlying agreement itself that can be remedied by reformation. Seller’s mistake in its own preparation to perform the parties’ agreement cannot justify reforming that agreement. Seller bears the risk of that mistake. The court would not change the terms of the parties’ bargain to accommodate Seller’s error in preparing to perform under the agreement that reflects that bargain.
Seller Lost on Count III
Practice Pointer: Check and Double Check Your Preclosing Checklists