Controversy Over De-Merger Clauses

Source: Partner Insights

Advice from consultant August Aquila on mergers and de-mergers:

If two firms decide to uncouple after a merger, they may discover that the following questions should have been asked before the merger was consummated.:

• Who takes the clients that were developed by both sides together?
• Who keeps the lease?

It wouldn’t be difficult to prepare a long list of issues like these.

The firm being acquired may have more reasons than the acquirer to want the de-merger clause.

Problems with de-merger clauses:

• A de-merger clause can militate against the success of the merger. The two firms are less likely to feel like one firm, especially in the beginning.
• Cross-selling will be inhibited.
• Maybe those jointly developed clients referred to above will never be brought in.
• Management decisions are not made for the good of the “firm,” but for the individual parts.

If you do write a de-merger clause:

• Include non-compete agreements.
• Consider how capital accounts will be repaid.
• Determine how you will handle such things as:
  • Receivables and WIP.
  • Liability insurance.
  • Leases.
  • Etc.

Being more deliberative about entering the merger is perhaps more important than a de-merger clause. The better you know each other, and the more compatible your vision of the new firm, the better your chances for success. If you have doubts, call off the merger.

For the complete article, click here and select the article Should You Have A “Merger Out Clause?”

From Partner Insights, Aquila Global Advisors, LLC, October 23, 2007, www.aquilaadvisors.com.