Other Corporate Issues: Securities, Contracts, Workforce

A sell-side mandate is not just about price discovery; it is about identifying every claim against the seller's business that could change at the change of control. The banker's diligence covers debt securities, equity securities, contracts, and workforce, in addition to the headline price and structure.

Debt Securities and Contracts

A change of control can trigger covenants in existing debt, force the company to repurchase bonds, accelerate maturity, or require lender consent. Each one affects the cash needed at closing.

Items the banker assesses on the debt side:

• Debt covenants: Does existing senior or subordinated debt restrict M&A activity, require lender consent, or trigger acceleration at change of control?
• Change-of-control put rights on bonds: Public bonds often give holders the right to put their bonds back to the issuer at 101% of par on a change of control; a $1 billion bond issue can require $1.01 billion in cash at closing if 100% of holders put
• Lender and counterparty consents: Credit facilities and material contracts often require consent for assignment or change of control; obtaining consent can be a multi-month workstream
• Conversion features: Convertible securities may automatically convert at closing, changing the post-deal capital structure
• Earnouts and contingent value rights: Pre-existing contingent payment obligations to a prior seller of an acquired business

Exam Tip: Gotchas

• Change-of-control puts are typically at 101% of par, not 100%. The 1% premium is the bond market's compensation for the unexpected put event. A seller's banker that ignores the 1% can understate cash needed at closing by tens of millions of dollars.
• "Change of control" is defined in each instrument. A merger that does not constitute a change of control under the debt indenture may not trigger the put even if the seller's shareholders cash out completely.

Equity Securities

The seller's equity structure can divert deal proceeds away from common shareholders or accelerate cash payments on closing.

Items the banker assesses on the equity side:

• Preferred stock: Liquidation preferences (the preferred holder's claim on proceeds before common) and anti-dilution protections (adjustments triggered by deal terms)
• Warrants: Vesting on change of control; converted-to-cash at closing or rolled over into acquirer warrants
• Options: Vesting on change of control; common single-trigger (vests on the deal) or double-trigger (vests on deal plus termination) provisions
• Restricted stock units (RSUs): Same change-of-control vesting analysis as options

For an early-stage company with multiple rounds of venture financing, the equity waterfall can be intricate: Series D investors get paid before Series C, which gets paid before Series B, which gets paid before Series A, which gets paid before common. The banker's job is to model the waterfall and show shareholders what they will actually receive at each transaction price.

Exam Tip: Gotchas

• A preferred stock "liquidation preference" pays the preferred holder BEFORE common shareholders on a change of control. A $500 million deal where preferred holders are owed $300 million leaves only $200 million for the common. The banker has to know the waterfall before quoting per-share economics to common shareholders.
• Outstanding options and warrants dilute the deal. A target with 100 million common shares and 10 million options outstanding will see 110 million shares in the post-vesting count if the deal accelerates vesting. Per-share economics are calculated on the higher number.

Workforce Issues

A deal that involves site consolidation or headcount reduction can trigger workforce statutes and labor agreements that the banker must surface pre-deal.

Items the banker assesses on the workforce side:

• The Worker Adjustment and Retraining Notification Act (WARN Act): Requires 60 days advance notice of plant closings and mass layoffs (typically 50 or more affected workers at a single site); the obligation runs with the seller pre-closing and the buyer post-closing, depending on deal structure and timing of the workforce action
• Union and collective bargaining issues: Labor contracts may have change-of-control provisions, successor-liability obligations, or specific notice requirements
• Plant closings: Explicitly called out in the FINRA outline; a deal involving site consolidation needs a WARN compliance plan baked into the timeline
• Shareholder objectives: Different classes of shareholders (founders, venture capitalists, employees with options) may have different preferences for cash vs stock, liquidity timing, and tax outcomes
• Corporate culture: Soft but real; cultural mismatch is a top cause of post-merger failure and is now diligenced explicitly

Exam Tip: Gotchas

• The WARN Act notice requirement is 60 days, not 30 or 90. A "60-day" mass-layoff notice is the standard answer.
• Shareholder objectives can drive structure. A founder-led company where the CEO holds 50% of equity may demand a stock deal for tax deferral, while financial-sponsor shareholders may insist on cash. The banker has to reconcile these preferences during the structure-and-bid phase.
• Corporate culture is now an explicit diligence area. Sophisticated sell-side bankers help the seller surface cultural fit data (employee surveys, leadership-style assessments) during the marketing phase to demonstrate that integration risk is manageable.