B-law B-law B-law: Ethics for Business Lawyers Conflicts of Interest in M&a Transactions

• Publication year: 2022
• Author: Written by Neil J Wertlieb

B-LAW B-LAW B-LAW: ETHICS FOR BUSINESS LAWYERS CONFLICTS OF INTEREST IN M&A TRANSACTIONS

Written by Neil J Wertlieb

This edition of B-Law B-Law B-Law addresses unique conflict of interest issues that arise in connection with the sale of a business. Continue to watch this column for guidance on ethical issues of particular interest to business lawyers in the State of California.

THE STRUCTURE OF A SALE TRANSACTION

As a business lawyer, you are likely aware that a sale of a business is typically structured in one of three ways: (1) the entity that owns the business sells its assets to a buyer; (2) the equity owners of that entity sell their equity interests to a buyer; or (3) the entity is merged with the buyer (or more typically a subsidiary of the buyer). If you are the lawyer for a corporation working on the sell-side of such a transaction, it is not always clear whose interests you are engaged to protect when it is your client that is being sold.

In an asset sale, the corporation that owns such assets is clearly the party to the transaction, selling its assets to the buyer. As corporate counsel, your role in the transaction is clear—you are working to protect the interests of your client, the seller of the assets. While the corporation's shareholders might be required to approve the corporation's sale of substantially all its assets, since they are not selling anything they typically are not parties to the sale transaction.

In a sale by merger, the corporation is also a party to the transaction, agreeing to merge with the buyer (or its subsidiary). Again, as corporate counsel, your role in the transaction is clear—you are acting as counsel to the corporation in its capacity as a party to the transaction. And while the corporation's shareholders are required to approve the merger, and their shares in the corporation will be converted into the right to receive the merger consideration, they typically are not parties to the merger transaction.

But in a stock sale, it is the corporation's shareholders who are selling the business directly by selling their shares in the corporation to the buyer, and the corporation itself typically would not even be a party to the transaction. I n this instance, your role as corporate counsel is not at all clear, especially if your client is not even a party to the transaction.

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CONFLICTS OF INTEREST IN CONNECTION WITH THE SALE TRANSACTION

When working on the sell-side of such a sale transaction, corporate counsel should have a clear understanding of who their client is, and who their client is not, and where appropriate should communicate such distinction to non-client participants who might reasonably believe...