As professional advisors to business clients, there is a tendency to focus upon the technical and legalistic aspects of merger and acquisition transactions. Accountants are required to analyse the financial position of the target and lawyers are required to analyse the legal position of the target. A great deal of time and effort is often expended on devising the mechanics of a transaction in order to ensure the desired commercial outcome in the most tax efficient manner. Amidst this welter of often highly technical analysis, it is easy to overlook the human factors that go into a successful merger transaction and which, if not handled properly, can lead to the failure of a transaction that might otherwise be technically sound.
There are a myriad of human factors that need to be taken into account in any transaction, but this article will focus on four fundamental elements. The first, and from a transactional point of view perhaps the most important human element, is the dynamic between the negotiating parties. Whether the transaction is an amicable one, or is perceived as hostile, will clearly colour every aspect of the negotiations and will impact substantially on the choice of mechanics to give effect to any transaction. For example, a hostile scenario automatically precludes any mechanism that requires the willing operation of the target company or its board, such as a scheme of arrangement or the acquisition of the whole or major part of the business or assets of a company. Both of these mechanisms require the willing participation of the target company and its board in that a scheme of arrangement presupposes a scheme between the company and its members and the acquisition of a business or a majority of assets requires the company to convene a meeting of its members to pass a special resolution approving the disposal.
Even in an amicable transaction, the relationship with the counterparty colours the negotiations and directly impacts the ease or difficulty with which contracts may be negotiated and implemented. Negotiating with a counterparty with whom there is no trust or rapport invariably leads to protracted discussions and more complex documentation as parties attempt to document issues which, in a more trusting environment, they would be prepared to deal with more informally than on a business basis.
Secondly, the role of labour must not be overlooked. Although the direct negotiations may be with the owners of the business, the legitimate interests of the workforce must be considered. Section 197 of the Labour Relations Act permits the automatic transfer of a labour force when a business is sold, and obviously the sale of the shares in a company automatically carries with it all the employment contracts with its employees, but a proper process of consultation is required by the Labour Relations Act and it is essential that this process be taken seriously. A disaffected and unhappy labour force can obviously be detrimental to the commercial success of any merger and, in a worst case scenario, can result in labour disputes and even strikes. It also has to be recognised that the employees of a business have a legitimate interest in knowing about a proposed merger as it may affect their very livelihoods and, subject to appropriate restrictions regarding confidentiality, they should be kept informed.
Allied to the general question of labour relations is the third important point, which pertains to key management. Unless the acquirer of a business is intending to install its own senior management, then it is essential that the transaction enjoy the support of key management. This is frequently the case in private equity transactions, and appropriate contractual provisions need to be put in place to ensure that members of key management remain locked in. Furthermore, incentivisation arrangements need to be discussed and agreed.
Finally, the question of ongoing control of the target business needs to be clearly spelled out and documented. Whilst the tenets of good corporate governance need to be properly observed, there should be no doubt, on the conclusion of a transaction, as to where ultimate control of a company will lie. This can be particularly problematic in situations where former owners remain on in management roles and possibly at board level. Practical experience indicates that the new owners may have difficulty in implementing strategic or other changes where previous owners retain a significant involvement. The parameters of authority, and an understanding of where ultimate control lies, must be established in an appropriate shareholders or similar agreement.
In a merger transaction, the numbers, the legalities and the structures are all important but, at the end of the day, it must be all about the people.
Kevin Cron, BCom, MA (Law), is the Director and Head: The Commercial Division, Deneys Reitz Inc.