While banks know that termination and change-in-control penalties can play a significant role in an M&A transaction, a bank’s third party contracts can impact a deal beyond just the financial impact associated with early termination.
For those banks considering a sale, one of the key questions a buyer will want answered early in the M&A process is what contracts it will want to terminate and what contracts it will acquire or assume as part of the transaction.
Having a detailed understanding of all a bank’s third party contracts can save both a buyer and a seller time and cost, prevent potential regulatory issues and streamline the M&A due diligence process.
All deals will at some point require a seller to prepare a disclosure of the bank’s contracts. This typically arises first in due diligence and later as part of a schedule to the definitive agreement.
Having a master list prepared ahead of time allows a selling bank to not only save time in a transaction but to assess for itself those third-party relationships which will have a financial impact versus an operational impact on a potential transaction.
To that end, any master list of contracts should include details such as term, termination, assignment or change-in-control provisions, potential termination penalties, notice and contact information, restrictive covenants and any other key contract details and can be organized to reflect those relationships critical to the bank and those which are ancillary services.
While a review and discussion of a bank’s contracts is just one piece of any M&A transaction, having a master contract list prepared ahead of time is one step that can benefit all parties in a transaction.