The M&A, or Mergers and Acquisitions, process consists of a series of complex contractual stages that affect various areas of the companies involved, such as corporate, intellectual property, labor, and regulatory areas. Therefore, M&A is a process with a significant impact on the acquiring company and the target company.
M&A operations also have effects that extend beyond the corporate environment, directly impacting the social aspect. In this article, we will explore the main phases of M&A, understand their implications, and how startups can benefit.
Content:
- What is M&A (Mergers and Acquisitions)?
- Types of M&A: incorporation, merger, spin-off, and acquisition of companies
- Stages of the M&A process: Due Diligence and contracts
- M&A for Startups: strategies and challenges
What is M&A (Mergers and Acquisitions)?
The term “M&A,” or Mergers and Acquisitions, refers to the entire process of corporate reorganization that involves the purchase, sale, merger, or incorporation of companies. M&A even encompasses significant investments involving shares, through a financial and contractual chain.
Companies initiate M&A negotiations for various reasons. Among them are: new technologies, innovation, asset acquisition, collaboration, reduction of operating costs, increased competitiveness, market expansion or consolidation, and tax structures.
As it is a highly complex transaction, the legal aspects require close attention from all parties involved. There is a need to address legal issues related to the Civil Code, the Corporation Law (LSA), and regulatory norms that may be applicable depending on the market segment in which the companies involved in the M&A operate.
Types of M&A: incorporation, merger, spin-off, and acquisition of companies
There are different types of M&A operations, each with its own characteristics and implications. Let’s explore the main ones:
Incorporation
In an incorporation operation, one or more companies are absorbed by another. At the end of the deal, resulting in the extinction of the seller(s)’ CNPJ(s) (National Registry of Legal Entities), only the buyer’s CNPJ will remain.
For an incorporation to be configured, the incorporated company, which is encompassed by the incorporating company, must be extinguished. Consequently, the incorporating company will have its share capital increased by the transfer of assets. This type of operation can occur between companies in different segments or within the same economic group as an internal reorganization strategy.
The approval of the partners or shareholders of the incorporated company is necessary, requiring a qualified quorum of ¾ of the share capital in limited liability companies, or half of the votes in corporations, unless the bylaws require a higher quorum. In addition, the appointment of experts for the valuation of the net worth of the company to be incorporated is necessary. The dissenting partner will have the right to withdraw from the company within thirty days following the meeting that approved the operation.
According to the LSA, it is necessary to observe the existence of an incorporation protocol, containing elements such as the number, type, and class of shares attributed in substitution of the rights of partners that will be extinguished, criteria for valuing the net worth, valuation date, solution to be adopted regarding the shares or quotas of the capital, and all other conditions to which the operation is subject.
The minutes deliberating on the incorporation, with the consequent extinction of the incorporated company and increase in the share capital of the incorporating company, must be registered with the competent commercial registry.
Share Incorporation
This transaction consists of the incorporation of all the shares of a company’s share capital by another, transforming it into a wholly-owned subsidiary. This operation must be authorized by the general shareholders’ meeting, requiring the appointment of experts. Furthermore, it results in an increase in the share capital of the company making the incorporation move.
Merger
In this operation, companies unite to form a new company, which assumes the rights and obligations of the previous ones. This operation should be carried out when the companies involved wish to join forces through a new structure. In this way, the original companies will be extinguished, and a new CNPJ will be opened.
Spin-off
A spin-off occurs when a company transfers part of its assets to one or more companies, which may already exist or be created for this purpose. In this way, a spin-off operation can be partial or total.
Partial Spin-offs
In a partial spin-off, the spun-off portion is transferred to an existing company or to a new company specifically created for this purpose. In this way, the spun-off company will not be extinguished.
Total Spin-offs
In a total spin-off, all of the assets are transferred to one or more companies. As a result, the spun-off company will be extinguished. This operation can be carried out with existing companies or new companies created to receive the assets of the spun-off company.
Acquisition
The most common operation in the M&A market, the acquisition can be done via Cash Out or Cash In. In this modality, the acquiring company purchases quotas or shares of the selling company, without the latter’s CNPJ being extinguished.
Cash Out
Cash Out is the operation of buying existing quotas/shares held by the current partners or shareholders. The company remains in existence, but with a modification in its partner/shareholder structure.
Cash In
Cash In occurs through the issuance, subscription, and payment of new quotas/shares, through an increase in the capital of the target company. The target company retains the previous partners/shareholders and includes the new partners/shareholders who joined via capital increase.
Stages of the M&A process: Due Diligence and contracts
An M&A operation, whatever the chosen type, takes several months to be completed. This is a process that requires detail and attention at each stage until its conclusion. Check out the main stages of the M&A process:
Approach Negotiations
In this phase, some event, usually related to market interests in expanding the business, acquiring assets, promoting innovation or new technologies, sparks the interest of the parties in each other. Preliminary contact begins to identify synergy for the business. The discussions are initial and do not delve into confidential or sensitive issues.
Confidentiality Agreement – NDA
From the moment the parties identify synergy for the operation, the conversations require a greater level of depth and exchange of information. To enable more in-depth conversations based on concrete information, the parties enter into a confidentiality agreement, establishing that everything discussed and all shared information and data must remain confidential.
Letter of Intent or Memorandum of Understanding – LOI, Term Sheet, and MoU
After sharing the necessary information, the parties seek to enter into a firm letter of intent or memorandum of understanding. This document outlines the economic aspects of the offer and the business, as well as the most important conditions, determining that these will be further detailed in the respective definitive documents.
Due Diligence
After the initial commitment is made, the parties proceed to the audit stage. A checklist is prepared with items of corporate, fiscal, contractual, intellectual property, real estate, accounting, and tax matters that need to be provided to verify the company’s health. This stage is crucial for finding a risk score for the operation.
Definitive Contracts
Once the audit is completed and the parties decide to “go” with the operation, the negotiation and execution of the definitive contracts proceed. The legal nature of these contracts may vary depending on the type of operation being conducted.
Closing Acts
As the final phase, the closing acts are carried out, which encompass all the necessary steps to reflect the agreed reality in the definitive instruments. These acts may vary depending on the type of operation, but usually include amendments to the company’s articles of association or the holding of shareholders’ meetings.
M&A for Startups: strategies and challenges
M&A operations are a strategy frequently adopted by startups due to their potential to drive growth and competitiveness for these innovative companies. The development stage and profile of startups directly influence the characteristics of these operations, which offer advantages such as access to new technologies, market expansion, and operational improvements. Through mergers and acquisitions, startups can raise capital to invest in expansion, product development, and entry into new markets. Furthermore, these operations allow for the integration of advanced technological solutions, strengthen market presence, and generate synergies that increase efficiency and reduce costs, becoming an essential tool for reaching new levels of success.
Specific Challenges
Startups face significant challenges during M&A operations, which can directly impact the success of these transactions. One of the main obstacles is the accurate valuation of the company, a complex task due to the dynamic and often uncertain nature of these organizations. Another critical point is cultural integration, as aligning distinct corporate cultures can be particularly difficult, especially when the startup has a very strong cultural identity. In addition, preserving the capacity for innovation and agility, fundamental characteristics for a startup’s business model, is essential to ensure that the operation does not compromise its growth potential and adaptation to the market.
Business Structuring
For startups, M&A operations can involve full or partial acquisitions, as well as mergers. It is common for startups to retain a significant portion of their founders and technical team after the acquisition to ensure the continuity of innovation and business vision.
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