top ten legal considerations when investing in consumer products & services
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When Investing in Consumer Products and Services
1. Be mindful of the impact of the transaction on the investor’s portfolio—Consider the rest of the investor’s portfolio to assess the impact of a particular acquisition on the investor’s exposure to particular industry segments and geographic regions.
2. Align incentives through deal structure—Consider how to structure the acquisition to align investors’ goals with those of the sellers, through the use of earnouts, rollovers, and employment and consulting arrangements.
3. Be mindful of legacy relationships—Bidders should evaluate legacy rela-tionships of consumer products companies with the supply and distribution chain. Contracts with vendors, distributors and customers may not have standard termina-tion or assignment provisions. Distributorships may be legally protected from termination.
4. Consider who the sellers are—Is the seller a family-owned producer or distributor that may have considerations in addition to deal pricing that drive the transaction? Is the seller a fund with distribution requirements that impact when it must receive and distribute deal proceeds? These considerations can impact deal struc-ture, including escrows, earnouts and holdbacks, and can enhance the competitive position of a bidder’s proposal during an auction process.
5. Be actively involved in assuring compliance post-closing—Make sure all post-closing notices are delivered, an active compliance program is in place and that there is a mechanism for the purchaser to monitor ongoing regulatory activities.
6. Use a prenup to reduce the pain of divorce—Developing a brand is a labor of love requiring passion and patience. Partners acquiring a brand should work out in advance their agreement concerning future exits through transfer restrictions, buy/sell provisions, tag alongs, drag alongs, deadlock provisions, etc. Exit rules can avoid or reduce separation issues.
7. Protect those trademarks—Rights to a brand can be lost when the brand promoter does not seek affirmative federal trademark protection early on. Parties that delay may find that someone else scooped up the mark. Advance planning can avoid the cost and lost time that arises when a party needs to change a brand.
legalConsiderations
Top 10
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8. Specialized, in-depth due diligence is critical—Review whether the target company complies with applicable laws, especially laws governing food, alcoholic beverages, labeling and deceptive trade practices. Be alert to hidden legal land mines.
9. When on the buy side, get comfort on labeling matters—Labeling laws apply to many consumer products. Comprehensive reps and warranties and due diligence are helpful. Just because a label is truthful does not mean it is not misleading—witness the costly lesson learned by Coca-Cola with Vitaminwater’s label. Similarly, greenwashing issues can be dealt with by repre-sentation, warranties and due diligence.
10. Focus on the risk in licensing agreements—Outside of bank-ruptcy, the law varies as to the assignability without licensor consent of copy-right, patent, trademark and software licenses. Section 365 of the Bankruptcy Code is murky. These valuable assets require analysis before proceeding.
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Consumer Products
As consumer product makers face new regulations, international pressures and class actions, we bring in-depth knowledge of government and industry regulations and practices, resolving compliance and other regulatory and liability concerns.
We defend your product and brand to limit the likelihood of agency actions and private lawsuits. With extensive trial experience and focused, cost-effective services, we force the prompt disposition of lawsuits. We regularly help clients deal with agencies like the Consumer Product Safety Commission (CPSC).
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At Nixon Peabody, we see 21st century law as a tool to help shape our clients’ futures. We are constantly thinking about what is important to our clients now and next so we can foresee obstacles and opportunities in their space and smooth the way. We work together to handle complex challenges in litigation, real estate, corporate law, intellectual property and finance anywhere in the world.
For more information, Please contact:Richard F. Langan, Jr., partner Private Equity & Investment Funds [email protected] 212-940-3140
Daniel McAvoy, partner Private Equity & Investment Funds [email protected] 212-940-3112
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