Practical Tips to Ensure a Smooth M&A Closing; Part 2: Due Diligence and Filings

In Part II of our series on preparing for a mergers and acquisitions transaction, we will review practical tips to consider when you are conducting your public records due diligence and coordinating your state filings. Not all state requirements are the same when it comes time to prepare for your closing.

As discussed in Part 1 of this series, tracking important actions to be taken and documents to be retrieved and filed on your closing checklist is critical to ensure you have what you require in advance of your closing. Tracking due dates is critical at every phase pre-closing; however, once you are within two weeks of your closing date, there is no room for costly delays.

In addition to finalizing the agreements and financing for the closing, below are items on the closing checklist that must get completed (as required “conditions precedent”) before the merger and acquisitions deal funds and closes. By preparing in advance and being aware of the difference in timing, you can keep calm and ensure that you have a smooth closing.

• Pre-Clear Certificates of Merger
  • Buyer and target will want to ensure that the Certificates of Merger will be filed on the date of closing and not rejected for any
  • Tips:
    • Determine if the states in which your Certificates of Merger are being filed offer a pre-clearance review and what the timing, fees and restriction are, for example:
      • The Delaware Secretary of State’s office will pre-clear a draft Certificate of Merger for a $250 fee, plus an expedite fee of $350 for a 24-hour turnaround time or $500 for a 2-hour turnaround time. A detailed letter describing what is missing from the certificate will be issued.
      • The New York Department of State will accept a draft Certificate of Merger for review for no fee; however, there is no expedited service. The certificate is reviewed on a routine basis and there is no guaranty as to when you can expect a response.
    • Coordinate the pre-clearance as early as possible in advance of closing.

• Obtain Updated Charter
  • Buyer wants to confirm that there have been no amendments to the Certificate of Formation of the target company that would adversely affect the M&A deal.
  • Tips:
    • Consider obtaining a long form Good Standing Certificate to determine if any amendments were filed since the certification date of the last charter.
    • If no amendments have been filed, you may be able to rely on the charter obtained earlier, use the long form Good Standing to support the requirement below and save fees on ordering another copy of the charter.

• Obtain Good Standing Certificates
  • Buyer wants to ensure that the target is “duly existing, in good standing and has paid its franchise taxes” through the date of the closing.
  • The purchase or merger agreement typically provides the number of days prior to closing that the Good Standing Certificates should be dated; the goal is to get this as close to closing as possible.
  • Tips:
    • Always track the following (at all phases pre-closing)
      • Due dates for annual reports and/or tax payments due between the date of the last Certificate of Good Standing and your closing date.
        • Due dates vary greatly - some are due on the anniversary date of formation, some due on April 1^st of odd numbered years, some on odd numbered years based on the last digit of the organization ID of the company. Tracking these complex due dates will prevent unpleasant surprises prior to closing.
      • Factor in time it will take to obtain the Good Standing Certificate from the state (turnaround time in most states will be within 24 hours; however, some states, like California, may take up to 72 hours).

• Verify Payment of Franchise Taxes
  • Representations in the merger or purchase agreement will include that the target company has paid all franchise taxes to date.
  • Tips:
    • Identify any franchise tax payments due in the early due diligence phase and ensure those payments are made well in advance of the closing date and ensure that you are paying the correct amount (i.e., there are two methods to determine franchise tax for Delaware corporations and you can pay the lesser amount; for more information see Delaware Corporation Annual Report and Franchise Tax Time: Tips to Make the Process Easier).
    • Determine which states include the representation that all franchise taxes have been paid on the Good Standing Certificate (i.e., Delaware).
    • For states that do not include this representation, coordinate well in advance of your closing (i.e., in New York it currently takes 5 – 10 business days).

• Obtain “Bring-Down” Good Standing
  • Obtained on the day of closing before the wire transfer is authorized; ensures that no event or due date has caused the target company to fall out of good standing.
  • Tips:
    • Coordinate in advance with your service provider to verify good standing as early as possible on the date of closing.
    • Factor in time zone differences (i.e., you will not be able to get confirmation of good standing of the target in California until noon New York time).

• Update “Complete” Due Diligence UCC, Tax Lien and Suits and Judgment Searches
  • Buyer will want to confirm that there are no material pending liens or suits and judgments filed since these searches were completed in the early due diligence phase.
  • Tips:
    • Coordinate a “bring down” for these searches based on the last through date of the previous searches conducted.
    • Keep in mind that a “complete” search may not be complete enough!
      • Consider if there are any additional searches required related to intellectual property searches with the U.S. Patent and Trademark or Copyright offices to verify ownership of important intellectual property.

• Confirm Status and Assignment Process for Business Licenses
  • Buyer will want to ensure that the assignment of Business Licenses will be effective as of the date of closing or soon thereafter.
  • Tips:
    • Ensure documentation, procedure and timing to coordinate the assignment of business licenses from the target to the buyer are in known well in advance of your closing.
    • Prior to closing, determine timing of submission of any documents or applications to the appropriate licensing agency.
    • Track the steps and timing on your closing checklist; some of these assignments will move to the post-closing follow up if they cannot be completed on your date of closing.
  • Note that Part 3 of this series will cover the important considerations for business licenses in greater detail

• File Certificates of Merger
  • This critical filing occurs on the date of closing and effects the merger of the target in to the buyer.
  • Tips:
    • Know the expedite options to file and return evidence of the merger in advance of your closing date.
    • Coordinate closely with your service company representative to submit the Certificates of Merger with clear instructions on timing of submission and requirement to receive evidence of filing back as quickly as possible.
    • Ensure that someone is available and in close contact with the states if there is any issue so that coordination of a resolution can be addressed ASAP.

• Confirm Wire Transfer Instructions
  • Ensure that wire transfer instructions are confirmed. While this is an administrative item, it is important to avoid any delay in transfer of the funds from the target to the buyer.

• CELEBRATE! Your deal has closed!
  • Tips:
    • After the champagne toast, get some rest! There is more to do post-closing.

In Part 3 of this series, wediscuss in more detail how properly addressing business licensing issues prior to closing an M&A deal can help you avoid unexpected penalties and delays in the acquirer’s ability to carry on business.

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.