Deloitte Report Reveals Substantial Impact of Legal Entity Management on M&A Deal Terms

A company’s performance on the underappreciated task of legal entity management — managing the books and records of its subsidiaries – can have a dramatic impact on the terms of M&A deals in which it is involved, according to research from Deloitte’s Legal Business Services.

Deloitte’s report, “The Value of Entity Management, Part 1: The Impact on Mergers and Acquisitions”, finds that companies with sound legal entity management attract higher prices, among other benefits, in M&A transactions. Poor LEM can be a dealbreaker, jeopardizing critical deal terms and diminishing credibility with deal partners. “Much has been written on how to conduct legal entity management, but we wanted to highlight why it should be done, a subject that has not been seriously researched before,” said Valerie Dickerson, partner, Legal Business Services, Deloitte Tax LLP. “Knowing the stakes in any endeavor is important, and our research confirmed that LEM plays a vital role in M&A transactions.”

The report identifies six ways that substandard legal entity management (also known as subsidiary management) can have a significant impact on M&A transactions, including diminishing the credibility of the selling company and its management and driving down the deal price. Other risks the report cites are:

Delayed timelines.
The imposition of personal liability on directors and officers.
The need to use deal structures with tax disadvantages.
Grossly inflated professional fees required to remediate LEM problems.

Deloitte’s report is based on detailed interviews with leading M&A lawyers with experience at prominent law firms such as Wachtell, Lipton, Rosen & Katz; Weil Gotschal & Manges LLP; and Freshfields Bruckhaus Deringer, as well as senior in-house counsel. Interview subjects included Kim Erlanson, the vice president of corporate transactions at Dell Technologies and Philip Brandes, co-chair of the M&A practice at Mayer Brown. Combined, these professionals have advised buyers and sellers on more than $250 billion worth of transactions throughout their careers.

Several of the M&A professionals emphasized the effect that LEM failings have on a seller’s credibility, leading to closer scrutiny of other aspects of their business and coloring the entire negotiation. “It’s a credibility issue,” Sheppard Mullin partner Shon Glusky said in the report. “If I’m going to give you $100 million, I want to know that the company you were running was run properly.”

Commentators also noted that even the least of the negative impacts could be serious. “It’s expensive when you have to pay $500 to $1,200 per hour for BigLaw associates to fix ministerial issues” amid time-sensitive M&A deals, Francesca Campbell, chief M&A counsel at Carrier, notes in the report.

Deloitte’s Legal Business Services provides a wide range of LEM-related services to companies operating in jurisdictions around the world, from management of their corporate data to subsidiary-governance health checks. This report is the first in a series of studies from Deloitte on the impact of legal entity management.

“This report will deepen the business community’s understanding of a subject that can go overlooked at a company’s peril, particularly those expecting to be involved in acquisitions,” said Michael Rossen, managing director, Legal Business Services, Deloitte Tax LLP. “The positive takeaway here is that resources put toward legal entity management pay major rewards in M&A transactions.”