Byron Carlson Petri & Kalb, LLC | attorneys at law

Rushing into a business merger can lead to major liability

On Behalf of | Jan 2, 2024 | Business & Commercial Law

A potential merger can be a significant opportunity for a business. The companies negotiating the merger can combine facilities and talent pools while also sharing trade secrets and other business resources. Mergers can lead to rapid growth and local market dominance for the new company formed through the transaction. In theory, a successful merger can lead to drastically improved operations. However, mergers can also fail or cause a host of operational headaches. They can cost a lot of money and put the resulting company at risk of insolvency and dissolution.

Rushing into a merger may seem necessary, as a company may want to ensure that it, not a competitor, gains access to the resources of the acquired business. Unfortunately, enthusiasm could do more harm than good in this scenario by preventing business owners or executives from performing the necessary due diligence for organizational protection.

Most liabilities persist after a merger

A merger takes two distinct organizations and creates one combined business entity. The process can take many months to complete and may involve multiple different stages. While the resulting company may technically be a different organization, it could face legal action based on the conduct or contracts of either company.

The newly-formed company created when the two organizations merge may have numerous types of liability carried over from the former businesses. For example, if either business violated worker rights by ignoring racial discrimination or failing to comply with wage laws, the newly-formed merged business may face a lawsuit brought by those workers later. Lawsuits from clients or consumers related to substandard services or defective products could also target the new company.

Business owners and executives often need to engage in a very thorough due diligence process when investigating another company. Any prospective sources of liability, including possible future lawsuits, may require special consideration. It is sometimes possible to limit liability for certain risk factors by properly addressing them in the contract when planning a merger.

Other times, liability risks may be high enough to warrant walking away from a prospective merger for the protection of one of the businesses. Realizing that the liability of both companies may transfer to the new company created after a merger may help people see the value in the due diligence process.