Tips for a Smooth M&A Closing Part 2: Due Diligence and Filings

What this is: In Part 2 of our series on preparing for a merger and acquisition (M&A) 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.  

What this means: In addition to finalizing the agreements and financing for the closing, this article highlights items on the closing checklist that must be completed (as required conditions precedent “CPs”) 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.

As discussed in Part 1 of this series, tracking important actions on a closing checklist is critical to ensure you have what you require in advance of your closing date. Tracking due dates is critical at every phase pre-closing; however, once you are within 2 weeks of your closing date, there is no room for costly delays.  

Items on the Closing Checklist That Must Be Completed 

1. Pre-Clear Certificates of Merger 

Acquirer and target will want to ensure that the Certificates of Merger will be filed on the date of closing and not rejected for any reason.

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 restrictions are.
• Below is what is available in Delaware. (Note that pre-clearance offerings and fees in other states vary; it is prudent to check with your registered agent service provider.) 

The base fee for a pre-clearance in Delaware is $250 in addition to the below should an expedite option be required, which is likely to ensure a timely closing in many cases: 

• Two-hour expedite: $500; $750 total
• Twenty four-hour expedite, fee varies on document type, i.e.:
  • Formation $50; $300 total 
  • Amendment $100; $350 total
• Routine (5-10 business days): Only the base fee of $250  
  • Tip: Communicate and coordinate the pre-clearance as early as possible in advance of closing.
  • Benefit: Comfort of submitting a Certificate of Merger without rejection. 

2. Obtain Updated Charter  

Acquirer 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. 

3. Obtain Good Standing Certificates  

Acquirer 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 and as a belts-and-suspenders measure, getting a verbal bringdown on the date of closing. 

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 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 the 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.) 

4. 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 2 methods to determine franchise tax for Delaware corporations and you can pay the lesser amount.)
• 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 to get evidence that franchise taxes are paid. (I.e., in New York State Department of Taxation and Finance days to verify franchise taxes are paid and the request must be made from an authorized representative at the company rather than a service provider.) 

Our team provides top-notch handling and coordination of your merger and conversion filings. To learn more, visit our page on Mergers & Conversions.

5. 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 in the domestic and foreign qualified states.
• Factor in time zone differences (i.e., you will not be able to get confirmation of good standing of the target in California until 12 p.m. ET). 

6. Update ‘Complete’ Due Diligence UCC, Tax Lien and Suits and Judgment Searches 

Acquirer 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. 

7. Confirm Status and Assignment Process for Business Licenses 

Acquirer 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 Acquirer are known well in advance of your closing.
• Prior to closing, determine the 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 followup 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. 

8. File Certificates of Merger 

This critical filing occurs on the date of closing and effects the merger of the target into the Acquirer. 

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. 

9. 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 the transfer of funds from the target to the Acquirer. 

10. CELEBRATE! Your Deal Has Closed! 

Tips: 

• After the champagne toast, get some rest! There is more to do post-closing. 

Up Next: The Post-Closing Checklist 

In Part 3 of this series, we discuss in more detail important post-closing action items that should be addressed. Having a post-closing checklist is also a good idea!  

Other Reads You Might Enjoy 

Why is it important to track and coordinate timing related to obtaining Good Standing Certificates? 

As a junior attorney or paralegal, it is important to track and coordinate timing related to obtaining Good Standing Certificates, ensuring that you know what annual report due dates may be coming due between the early due diligence phase and your closing date to ensure companies do not fall out of good standing, requesting comprehensive UCC and lien searches, reviewing any business licensing requirements to assign to the buyer as early as possible in advance of closing, preparing to form your acquisition company and preparing and pre-clearing the Certificate of Merger. For all of these items, understanding the difference in timing and requirements to complete each in each state is critical and can help you avoid unwanted delays. If you’d like to learn more about this topic, check out our article, Tips for a Smooth M&A Closing Part 1: Closing Checklists. 

Why is a post-closing checklist recommended?

It is highly recommended that you develop a post-closing checklist to track the important items that need to be completed, by when and who is responsible for each. This ensures that you maintain compliance with the terms and conditions of the merger or acquisition agreement and stay in full compliance as you commence the business of your newly acquired company or integrate it into your existing business. To read more, visit our article, Tips for a Smooth M&A Closing Part 3: Post-Closing Matters.

How is a judgment different from a judgment lien? 

A judgment lien follows  a judgment and is an encumbrance on property, real and/or personal, typically against the real estate of a judgment debtor.  

Judgment liens are ordinarily created after a judgment is recorded in the local filing office (County Recorder, Recorder of Deeds, County Clerk, etc.) where the real property records are located, not in the court. It is true that a judgment can automatically become a judgment lien in some jurisdictions but in the large majority of states, a judgment lien does not occur automatically just because a judgment has been entered by the court. Some states are different from others in this regard. To read more, visit our article, Public Record Due Diligence: Judgments vs. Judgment Liens. 

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