M&A lawyers job is demanding and rightly so. Currently the legal role/workstream in a deal unquestionably requires deep understanding of the relevant non-legal aspects and elements of the deal and the deal’s business rationale.
Analysing the capital structure of the target and the various capital components, is an integral part of the legal due diligence. It is important in multiple aspects: valuation, planning post-closing governance and integration, optimising the cost of the capital and ROI, etc.
Our recent transactions (both sell- and buy-side) related to high-growth businesses. The three most typical models for financing of the growth were:
- fundraising including capital increases;
- utilisation of the net sales income/free cash flow; and/or
- debt.
We specifically look into the financing model and in particular:
– debt including bonds and shareholder/intragroup loans
– equity, common or preferred stock
– hybrid instruments such as convertible debt
– retained earnings and profit distribution/dividends.
The legal due diligence report must factor in those items and propose workable solutions for the deal negotiations and the transaction documents. For an optimal outcome, it tremendously helps to consistently work closely and regularly compare notes with the client’s financial and M&A advisers. On all those matters the client must be updated swiftly, ideally in real time, briefly but in a sufficient and actionable detail.