[Startup Must-Know Laws] The Concept and Process of M&A as a Strategic Management Tool

A Comprehensive Guide to M&A
Understanding Key Methods and Processes for Startups

Heecheol Ahn, Attorney at Law, DLG Law Firm

M&A (mergers and acquisitions) is a strategic activity that goes beyond asset purchases or investments, exerting a significant impact on a company's overall structure, including changes in governance, organizational integration, and business expansion. Methods of M&A include mergers, stock acquisitions (acquisition of existing shares and subscription to new shares), asset transfers, and business transfers.

A merger is a structure in which two or more legal entities are integrated into one, and it can take the form of a surviving merger or a new establishment merger. In the stock acquisition method, acquisition of existing shares involves purchasing shares from current shareholders, while subscription to new shares refers to investors acquiring newly issued shares by the company. Asset transfers involve acquiring specific assets individually, whereas business transfers refer to the comprehensive transfer of an organization's entire business operations.

The M&A process requires careful review and execution, depending on the strategic nature and complexity of the transaction. The acquirer first searches for target companies that align with its business strategy and evaluates them from various perspectives, including their position in the industry, growth potential, technological capabilities, governance structure, and regulatory environment. Preliminary valuation then takes place, assessing investment suitability and corporate value based on the target's financial statements and market position.

As the formal M&A process begins, both parties typically enter into detailed negotiations and, to protect information, sign a non-disclosure agreement (NDA). To negotiate the specific terms of the M&A, a term sheet is drafted and executed, outlining key conditions such as the purchase price, closing conditions, representations and warranties, and option clauses. The most crucial stage that determines the success of the transaction is due diligence. Through legal, accounting, tax, and management due diligence, the target company's risks are analyzed from multiple angles. Depending on the transaction structure, necessary permits and reporting procedures may proceed in parallel.

Subsequently, depending on the transaction method, agreements such as the share purchase agreement (SPA), share subscription agreement (SSA), asset transfer agreement, merger agreement, and shareholders' agreement (SHA) are executed, and the final terms derived through due diligence and negotiations are reflected in the contracts. Once all precedent conditions are fulfilled, the transaction is closed. At this stage, the payment is made, shares are transferred, registration changes and disclosures are carried out, and post-closing filings or reports required by applicable laws must also be completed.

M&A is a complex management activity that requires the sophisticated integration of legal, financial, and strategic elements. Because it is a process of redesigning a company's structure, rather than a simple transaction, precise legal review and contract risk management at each stage are essential.