M&A deals: What tech firms need to know

Identify: Indemnity

The acquiring company should clearly understand what the target company has agreed to indemnify, and these limitations of liability can be very complex and should be heavily negotiated prior to closing an M&A deal. These are often the most negotiated provisions and typically have cross-references which makes them especially difficult to fully comprehend. Careful review of the indemnification provisions of each contract is needed to ensure that these provisions align with the combined entity’s indemnification standards and practices.

Limit: Unlimited liability

When startups are motivated to close a new deal, especially with big, recognisable brands, they will often accept potentially unacceptable provisions. This is commonly seen with limitation of liabilities. Accepting unlimited liability does not necessarily pose a large risk to a startup, because they have much less to lose. However, it can pose a significant risk to an established organisation with much higher exposure if they accept that unlimited liability.

It becomes very important that the acquiring company quickly identifies the contracts containing unlimited liability and look to renegotiate amend or possibly terminate the contract. We worked with a software giant which bought a startup and discovered it had inherited numerous unlimited liability provisions – a small problem for the $1.5 million startup, but a much bigger problem for the $1 billion company.

The silver lining

As M&A activity increases, especially within the startup world, knowing what’s in contracts is more important than ever, and having easy access to and visibility into contracts data is essential. Due to the time sensitivity on many M&A deals and the manual labour often required to analyse contracts, most companies resort to sampling just a small portion of the target company’s contracts with the assumption that if the sample passes the test, the rest will as well. But, countless cases prove that this approach exposes the acquiring company with risk they had not anticipated.

Luckily, current contract technology offers machine learning and natural language processing solutions so that organisations going through the M&A process can streamline the due diligence process to consolidate contracts, pinpoint and understand risk, and uncover vendor consolidation opportunities.

Contract intelligence solutions can also help to alleviate some of the M&A concerns companies have when it comes to Brexit. By gaining full insight into the terms impacted by the separation from the EU, such as governing law, currencies, and other commercial terms, companies may find that the merger, acquisition, spin-off, etc. will actually give them a competitive advantage or provide for growth.

By extracting metadata and clauses through a sophisticated search and analytics, businesses can quickly understand the risk and opportunities in those contracts and determine if there is still value to the deal. This will help facilitate closures with the added security of fully knowing what is being acquired. So no need for extra water or paracetamol, because understanding contract terms will prevent the post-deal hangover that so many rushed deals result in.

Christina Wojcik is vice president of legal services at Seal Software

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