Typically perceived as a mundane corporate function, legal entity management (“LEM”) often has a significant impact on price, structure, and timing of acquisitions, and can even be a dealbreaker
A company’s performance on the underappreciated task of legal entity management — managing the books and records of its subsidiaries – can have a dramatic impact on the terms of M&A deals in which it is involved, according to research released today by Deloitte is Legal Business Services.
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Deloitte’s report, “The Value of Entity Management, Part 1: The Impact on Mergers and Acquisitions”, finds that companies with sound legal entity management attract higher prices, among other benefits, in M&A transactions. Poor LEM can be a dealbreaker, jeopardizing critical deal terms and diminishing credibility with deal partners. “Much has been written on how to conduct legal entity management, but we wanted to highlight why it should be done, a subject that has not been seriously researched before,” said Valerie Dickerson, partner, Legal Business Services, Deloitte Tax LLP. “Knowing the stakes in any endeavor is important, and our research confirmed that LEM plays a vital role in M&A transactions.”
The report identifies six ways that substandard legal entity management (also known as subsidiary management) can have a significant impact on M&A transactions, including diminishing the credibility of the selling company and its management and driving down the deal price. Other risks the report cites are:
- Delayed timelines.
- The imposition of personal liability on directors and officers.
- The need to use deal structures with tax disadvantages.
- Grossly inflated professional fees required to remediate LEM problems.
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Deloitte is report is based on detailed interviews with leading M&A lawyers with experience at prominent law firms such as Wachtell, Lipton, Rosen & Katz; Weil Gotschal & Manges LLP; and Freshfields Bruckhaus Deringer, as well as senior in-house counsel. Interview subjects included Kim Erlanson, the vice president of corporate transactions at Dell Technologies and Philip Brandes, co-chair of the M&A practice at Mayer Brown. Combined, these professionals have advised buyers and sellers on more than $250 billion worth of transactions throughout their careers.
Several of the M&A professionals emphasized the effect that LEM failings have on a seller’s credibility, leading to closer scrutiny of other aspects of their business and coloring the entire negotiation. “It’s a credibility issue,” Sheppard Mullin partner Shon Glusky said in the report. “If I’m going to give you $100 million, I want to know that the company you were running was run properly.”
