What legal risks are faced in M&A financial planning?

1. Before corporate mergers and acquisitions, the acquiring party needs to understand the restrictive or prohibitive provisions of national regulatory documents on mergers and acquisitions, the policy regulations of the region where the target company is acquired, and obtain everything related to the merger and acquisition of the target company. Information to make decisions on M&A methods, which is a prerequisite to ensure the smooth progress of M&A.

(1) Subject risk

From a simple perspective, it seems that the subjects involved in the legal relationship of mergers and acquisitions are often the parties to the merger and acquisition. However, the determination of the parties to the merger and acquisition is not that simple.

Normally, equity mergers and acquisitions should be the transferor and transferee of the equity. However, in merger and acquisition practice, many equity mergers and acquisitions are signed by the actual controllers of both parties, and usually first The actual controller signs the framework agreement, and then the detailed agreement is gradually implemented, and then it will be signed by both parties to the transaction in the legal sense.

So, in this series of transaction contracts, how to arrange the legal relationships between the parties to meet both practical needs and legal validity requirements requires reasonable arrangements for different M&A cases.

In the transaction subject arrangement, there is also the issue of the contracting status of the target company. From a legal perspective alone, it seems that the target company should not be a transaction subject. However, considering the information disclosure obligations of due diligence and the failure of the merger and acquisition, Or the target company can be used as a party to the transaction contract in terms of the expansion of the subject of liability upon termination.

However, in practice, the "legal joke" that the equity merger and acquisition contract is not signed with the shareholders but only with the target company is not an exception. A court leader even told the author that this signing method is his senior court practice. Long recognized.

(2) Legal risk of information asymmetry

Legal risk of information asymmetry refers to the difference between the company’s understanding of the acquirer and the shareholders and management of the target company during the merger and acquisition process. There may be serious asymmetries, which may bring uncertainties in legal liability to mergers and acquisitions.

(3) Legal risks in M&A decision-making

In practice, the main M&A methods of Chinese enterprises are equity acquisitions and asset acquisitions. Equity acquisition refers to an acquisition that takes all or part of the equity of the shareholders of the target company as the acquisition target. After the muscle rights acquisition, the acquirer becomes the controlling shareholder of the target company, and the original debts of the target company are still borne by the target company. However, because the original debts of the target company have a huge impact on the income of the new shareholders, and may have a negative impact on the target company's potential Debt is often unpredictable during mergers and acquisitions, so equity acquisitions involve certain debt risks. Asset-based acquisition refers to the civil legal act in which the acquirer acquires all or part of the assets of the target company for a paid consideration. The target of asset acquisition is a specific asset of the target company, which generally does not include the company's liabilities. Therefore, the acquirer can basically control the acquisition risk as long as it pays attention to the creditor's rights and debts of the asset itself.

(4) Confidentiality risk

M&A transactions usually have confidentiality requirements from the beginning, and not only the transaction materials and information are confidential, but also the transaction itself and the true identity of the transaction subject. Confidentiality is required.

The confidentiality clause is not only an important component of the framework agreement, but also a necessary clause of the formal agreement.

(5) Due diligence risks

Due diligence is the most important content before mergers and acquisitions. On the one hand, due diligence cannot discover all problems, especially for merger and acquisition obstacles, contingent risks and hidden debts and liabilities. However, on the other hand, it is extremely dangerous to ignore due diligence only through the design of the claims system. It is very necessary to view due diligence rationally. Although it cannot exhaust all problems and risks, the assessment and grasp of risks are extremely important. Only on the basis of sufficient due diligence can it be possible to make correct business judgments.

Due diligence needs to be based on specific projects, requiring the target company and the counterparty to fully disclose comprehensive information about the debts, responsibilities, and risks involved in the transaction, as well as assets, finances, disputes, corporate governance, labor affairs, etc. Comprehensive information to scan for risks and design control plans within this information.

2. Legal risks in the M&A implementation stage

After the enterprise M&A method is determined, the acquiring party and the acquired party will enter the M&A implementation stage. During the implementation of the merger and acquisition, the two parties protected the security of the transaction by formulating a strict merger and acquisition agreement; and ensured the smooth progress of the merger and acquisition by reasonably arranging financing methods.

(1) Legal risks of M&A transactions

M&A agreements are the legal manifestation of M&A transactions. Strict M&A agreement terms are an important guarantee for proactively preventing various known and unknown legal risks. . Representation and warranty clauses should be set up in the merger and acquisition agreement. The acquired party should make true and detailed statements on any information related to the merger and acquisition of the target company, and clarify the legal consequences of false statements to protect the safety of the transaction.

(2) Legal risks of M&A financing

Under normal circumstances, it is difficult for the acquiring company to completely use its own funds to complete the M&A process. M&A often requires the injection of a large amount of funds. The financing methods adopted during the financing process will lead to changes in its own financial structure, which may cause financial or operational risks. Whether the acquiring company can raise funds on time and in full through internal and external funding channels, that is, whether the company has financing capabilities, is one of the keys to the success of the company's merger and acquisition.

(3) Financial risk

A. Financial data integrity risk. Since the financial information belongs to the target company, old shareholders are often concerned about the "unfavorable" factors contained in the financial information, and often conceal or even destroy some financial information, resulting in incomplete financial information and financial files, and the target company may be punished. .

B. Risks in audit reports and notes to financial statements. The audit report is a third-party review of the company's financial matters and often discloses some risk matters. The notes to the financial statements are usually financial matters that require attention. In this information, especially the reserved opinions and emphasized matters, the financial flaws of the target company will be included. information.

C. Profit attribution is determined. If a listed company is involved in the merger and acquisition transaction, there is a problem of defining the profit attribution node. This attribution agreement is related to the performance of the listed company.

D. Risks of subsequent events. Since M&A transaction activities will last for a period of time, and it is usually impossible for the target company to terminate operations and wait for the M&A to be completed, the audit reports and evaluation reports based on the transaction by both parties are based on a tentative base date, and the results from the base date to the actual delivery date are The duration is uncertain, and it is necessary to clarify how events that occur during this period are adjusted and how operating profits and losses are borne or enjoyed.

E. Price payment risk. The payment of the transaction price needs to be reasonably arranged according to the specific transaction structure, taking into account not only the corresponding node control, but also the corresponding risk control, and the balance must be left to be paid after a certain period of time after the transaction is completed to prevent delivery and handover. Post-risk release.

(4) Equity delivery risk

Based on different target companies, the requirements for equity delivery and the competent authorities are different, and the process of handling equity delivery and the changes that need to be handled together They are also different. Some equity transfers require pre-approval (such as foreign-invested enterprises), and some require authentication procedures. Special attention must be paid to the special requirements of various special legal regulations to avoid procedural or effectiveness flaws.

(5) Company handover risk

Equity delivery is only a prerequisite for actual control of the target company, but it does not mean substantive control of the company. The handover of the company, including legal Handover (replacement of various agencies, changes in corresponding licenses, etc.) and real-time handover are the practical aspects of company control. Such handover may be implemented before, after or during the equity delivery.

In the company handover, on the one hand, we must pay attention to the smooth handover of the target company, on the other hand, we must improve various handover procedures and formulate complete handover documents to define responsibilities and preserve evidence.

Before a company is handed over, there are usually transitional arrangements to reflect the management arrangements of the company by the parties to the transaction and to avoid the risk of changes in the target company under unilateral control.

3. Legal risks in the integration stage after mergers and acquisitions

After mergers and acquisitions, it is necessary to analyze the target company’s finances, assets, business, corporate governance structure, human resources, culture, management model, Organizational structure and other aspects are integrated. The integration plan may involve strategy, financial and tax planning, creditor's rights and debt processing, supply and marketing channels, corporate governance and internal control systems, human resources, organizational structure, management model, intellectual property, corporate culture, marketing, etc. The question is whether the enterprise can be well integrated after the merger and acquisition is completed, which will directly determine the success of the merger and acquisition.

(1) Legal risks of financial integration

Corporate mergers and acquisitions are the same as any other form of business competition. Only capital is not enough, but excellent financial monitoring capabilities are also required. Financial integration is the core content and important link in corporate mergers, acquisitions, reorganizations and integrations. It is not only related to whether the strategic intentions of the mergers and acquisitions can be implemented, but also whether the acquiring party can effectively control the acquired party. Financial integration involves the connection and adjustment of financial management. The relevant financial integration content should be solved in a targeted manner based on the characteristics of mergers and acquisitions to successfully achieve the purpose of financial integration. Such as adopting unified management methods for financial personnel; unifying corporate accounting policies and accounting systems; implementing financial systems for consolidated financial statements, etc.

(2) Legal risks of asset integration

After corporate mergers and acquisitions, through asset integration, non-core businesses can be divested, non-performing assets can be dealt with, good assets can be reorganized, and the operational quality and quality of assets can be improved. Efficiency makes the enterprise's organizational structure more complete, its capital more abundant, its debt ratio more reasonable, its finances more sound, and its production costs lower. The integration of corporate assets includes the integration of tangible assets and the integration of intangible assets. The integration of corporate tangible assets includes the use of good assets and the cleanup and disposal of non-performing assets. The cleanup and disposal of non-performing debts and non-performing investments are an important supplement to improving the efficiency of asset operations and an important means for enterprises to avoid risks and nip problems in the bud after mergers, acquisitions and reorganizations. The integration of corporate intangible assets is also an issue that cannot be ignored in corporate mergers and acquisitions. Full attention should be paid to the integration of intangible assets to avoid legal risks arising from the loss and improper use of intangible assets.

(3) Legal risks of business integration

After corporate mergers and acquisitions, the target company should abandon, merge, and increase some business activities according to actual needs. In business integration, legal risks generally involve customer relationship maintenance, marketing development, diversified development, etc. After mergers and acquisitions, it is necessary to pay attention to the maintenance of original customer relationships, take active customer maintenance measures, pay attention to marketing integration including marketing methods, strategies, marketing plans and tasks, etc., to prevent the reduction of the company's original market share or advantages; connect well In production, marketing, marketing and other related links, we attach great importance to existing customer relationships and supply chain maintenance issues to effectively reduce the legal risks of diversified development.

4. Legal risks of special mergers and acquisitions projects

In addition to the previous risk analysis based on general mergers and acquisitions projects, special mergers and acquisitions projects have special legal risks due to special legal regulations. , and the risk control of these special M&A projects may have its own system and needs to be studied separately.

These special projects mainly include:

(1) Foreign mergers and acquisitions

my country’s legal regulations on foreign mergers and acquisitions are constantly being adjusted along with my country’s foreign investment policies. Here we should not only pay attention to the specific procedures and special requirements stipulated in Order No. 10, but also pay attention to other relevant regulations, such as foreign investment access policies, foreign investment approval policies, control of indirect foreign mergers and acquisitions, special regulations on foreign mergers and acquisitions of real estate, and security reviews of foreign mergers and acquisitions. systems, foreign exchange and foreign debt management, and regulations on special entities deemed to be foreign capital (foreign-invested venture capital enterprises, Sino-foreign partnerships focusing on investment business), etc.

(2) Real estate enterprise mergers and acquisitions

Due to factors such as a large investment base, cumbersome transfer approval procedures, and many entities involved, real estate projects are usually carried out in the form of equity transfers, and the target company If the transaction is not a simple project company, related restructuring arrangements such as company split will be carried out first.

In the mergers and acquisitions of real estate project companies, the most important ones are tax risks, contract risks of third parties involved in the project, contingent risks, project ownership and procedural risks, etc. Among them, tax risks alone are very complex. In the process of M&A transactions, they not only include tax risks related to equity transfers and personal tax risks of individual shareholders, but also include risks deemed to be taxable on land transfers; after the M&A is completed, land value appreciation is involved. tax and corporate income tax risks, because the costs related to equity transactions cannot enter the target company's own costs, which means that for the receiver, the transaction price cannot enter not only the land development costs, but also the operating costs of the project company, but only It is the investment cost of the new shareholders of the target company.

(3) M&A transactions involving state-owned assets

M&A transactions involving state-owned assets must not only pay attention to the country’s laws, regulations and policies on state-owned asset management, but also pay attention to the region where the target company is located Sexual state-owned assets management policy.

It is not only restructuring mergers and acquisitions that require attention, but also equity mergers and acquisitions.

(4) Listed company mergers and acquisitions

Due to their extensive public nature, my country’s current legislation and policy regulations on listed company mergers and acquisitions, although not separate legislation, have already formed their own system. , the most important of which is the particularity of the process and the particularity of information disclosure. Not only the acquisitions carried out by listed companies need to perform special procedures and meet special requirements, but this is especially true for the acquisitions carried out by listed companies.