Profitable start-up companies, especially those who have angel investors on their board of directors, will likely be acquired by another company. Angel investors invest in startups with the intention of a merger and acquisition sale or exit, buying out their initial investment. Alternatively, the start-up will grow large enough to acquire another company. Larger companies look for smaller companies for value and growth opportunities. Mergers and acquisitions (M & A) help companies fill in gaps in their strategies. Not every merger & acquisition will be successful. As an industry, merger & acquisition moves companies ahead and expands businesses. Start-up Company Counsel has the knowledge and experience to represent start-up companies in merger & acquisition negotiations and put the start-up in the most advantageous position possible in the deal.
Companies acquire other companies for various reasons. Often, a company acquires another to bridge a gap. For instance, a software development company would acquire a small “internet of things” security company to execute a strategy of product innovation. This is known as the target company. The acquiring company realizes the benefit of acquiring a profitable company and their intellectual property, resources, and talent while entering new market space as a result of of the acquisition. The acquired company can use the money to pay off debts such as loans and repay investors. Consequently, both sides benefit from the deal and realize great value.
There are also potential drawbacks to merger and acquisition. Most of the deals fall through, with almost 50% of merger & acquisition deals collapsing within 2 to 3 years. The employees of the acquired or target company, especially higher level employees, are frequently replaced after a short period of time. Deals are structured so that higher level employees of the acquired company will be employed for 24 to 36 months after the acquisition. After that, the acquiring company can extend employee’s contracts, or get rid of them at-will.
In California, state statutes govern mergers and acquisitions. The statute requires companies to follow a very specific procedure before the secretary of state will approve the merger. At the outset, the board of directors for each company must approve the merger and the agreements between the companies. The agreement must be in writing. The statute obligates the companies to state in writing the entire agreement between the parties, specifically stating all of the terms of the merger. The new company shall file amendments to its articles of incorporation including the acquisition therein, specifically including the name of the new corporation, if there is one. The agreement must also set forth the surviving company and its place of business.
Furthermore, the disposition of shares and classes of stock must be expressly memorialized in the agreement. The agreement must account for how the companies will convert shares of stock and how the parties to the agreement will ascertain the value of the stock. In addition to describing with specificity how the parties will dispose of shares of stock, the agreement must also set forth as to how other properties such as cash, real estate, intellectual property, and any other assets (such as equipment and pensions) are transferred in the deal. The parties may set out any other term they desire in the agreement. The parties should set forth the financial obligations of the acquired company, along the with payment terms as well.
After the parties execute the agreement for the merger, the acquired company no longer exists. The surviving company now has all of the rights to the acquired companies’ former property including debts and liabilities. Any causes of action against the acquired company that arise before the merger, even if not acted upon, survive the merger and become the surviving companies’ obligation.
Contact a Silicon Valley Merger & Acquisition Lawyer Today
Start-up Company Counsel has worked with many companies, negotiating and executing their mergers and acquisitions. Whether or not it is the right move for your company, through signing the final agreement, Start-up Company Counsel advises on the best options and will help you achieve your goal with a merger and acquisition. Contact them today at 855-353-5377 to speak with an experienced merger and acquisition attorney who will zealously represent you and your company.