Welcome to the final article of our two-part series on fortifying M&A deals through strong corporate governance. In Part 1, we explored the consequences of weak governance and the benefits of retroactive ratification in the context of M&A transactions. In Part 2, we shift our focus to the California context and examine additional considerations in M&A control and compliance.
Whether your M&A transaction is structured as a stock sale, where the selling entity will continue as an operating entity, or an asset sale, where the business is sold from one entity to another, will provide context for which liabilities and governance failures will continue with the new owner, or be left behind with the seller. Compliance with all laws and regulations, and corporate governance requirements, is important regardless of structure, because no buyer wants unnecessary risk of claims. But compliance issues can be more important to the buyer in a stock sale because, unlike in an asset sale, the buyer is acquiring the corporate governance history of the selling entity, including the potential liabilities (whether known or not). We recommend sellers review their corporate governance history, and fix any defects, in preparation for an M&A transaction:
- Understand California Corporate Laws: California has distinct corporate laws, such as the California Corporations Code, the Business and Professions Code, and the Corporate Securities Law of 1968, that govern various aspects of corporate governance. Accordingly, it is recommended to do the following:
- Consider whether your business will likely be sold in a stock sale (change of control) or an asset sale (most sales are assets sales, but some businesses have licenses and permits that are not easily transferred in an asset sale);
- Familiarize yourself with the laws surrounding corporate governance to ensure compliance during M&A transactions and pay particular attention to the different considerations in a stock vs asset sale; and
- Pay attention to areas such as director duties, shareholder rights, and disclosure requirements specific to California. For instance, California grants shareholders the right to exercise cumulative voting. While shareholders may generally make decisions by majority vote, the election of directors necessitates unanimous agreement when acting by written consent in lieu of convening a meeting. Similarly, any director approval through written consent in lieu of a meeting must receive unanimous approval. Furthermore, directors must approve every share issuance or any other security that impacts the ownership table, such as stock options and convertible notes. Whenever an equity security is issued, filing a Form 25102 with the DFPI is required. Board approval is also required for share redemptions and material agreements outside the scope of ordinary business operations.
- If your business has a single founder from inception through today, then your corporate governance burden will be light. However, if you have partners and investors, or former partners and investors, or key employees that have been given or promised equity or profits, then you will want to take extra time to review the corporate history more closely.
- Consider Regulatory Agencies: California is known for its robust regulatory landscape, including agencies such as the Department of Business Oversight, the Department of Financial Protection and Innovation, the Employment Development Department, the Department of Tax and Fee Administration, the Franchise Tax Board, and the California Attorney General's Office, among others. These agencies oversee aspects like securities regulations, consumer protection, labor, and tax. Understand the potential impact of these agencies on your M&A deal and ensure compliance with their requirements.
- Employment Considerations: California places significant emphasis on employment regulations, necessitating a thorough assessment of obligations and potential liabilities in this area. It’s crucial to carefully evaluate compliance with employment laws, including worker protections, wage and hour regulations, and workplace safety standards. These considerations should be integrated into both due diligence and post-merger integration plans. In a stock sale the employees will continue their employment relationship through the change of control and the buyer inherits any pre-closing employment liabilities (typically subject to a seller indemnity obligation). However, in an asset sale all employees are terminated at the closing by the selling entity and the buyer extends fresh employment offers to those employees desired by the buying entity. Managing this transition, as well as accrued vacation pay, health plans, and other benefits is an important pre-closing consideration for both parties.
- Privacy and Data Protection: California has its own comprehensive privacy law called the California Consumer Privacy Act (CCPA) and its successor, the California Privacy Rights Act (CPRA). When engaging in M&A deals involving consumer data, understand the implications of these laws and ensure compliance with data protection requirements, including data privacy disclosures and consumer rights.
- Ensure Compliance with California’s Blue Sky Laws: California’s securities laws, particularly in relation to startups, are fairly unique. While in many states, securities exemptions are “self-executing,” meaning founders are not required to take extensive measures to avoid running afoul of state securities laws, California operates differently. In California, Section 25102 mandates that the issuing company regularly file a notice through the California Department of Financial Protection and Innovation (DFPI).
- Stay Abreast of Legal Developments: California's legal landscape is continuously evolving. Monitor updates and changes in legislation, case law, and regulatory guidelines that may impact corporate governance in the state. Engage with legal professionals who specialize in California corporate law to stay informed about recent developments and their potential implications for M&A transactions.
Why Your Choice of M&A Law Firm is Crucial
As this article illustrates, corporate governance is an indispensable component of any M&A transaction, and businesses operating in California face unique considerations due to the state's specific legal and regulatory framework. Given the intricate nature of M&A deals and the importance of balancing control and compliance, it is crucial to partner with an experienced corporate law firm specializing in mergers and acquisitions. Adams Corporate Law specializes in mergers and acquisitions in California, and we have a proven track record of assisting clients in navigating the complex landscape of corporate governance.
Schedule a consultation with us today at (714) 619-9360. Our team is ready to provide the guidance and expertise you need to update your corporate governance responsibilities and achieve a seamless and compliant M&A transaction.