This article has been written by Tanya Gupta, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Since a long time ago, there has been discussion and debates going on among the legal fraternity about the use of the latest technologies in the future of the legal industry. Technologies like smart contracts, blockchain, artificial intelligence have a great impact on the legal industry and become instrumental in changing the shape of society. Now it is time to acknowledge the power of these technologies to solve more dissipates and new types of disputes. But the adoption of these technologies may seize the role of the lawyer. And nowadays clients are demanding more transparency, simplicity, and accessibility to dispute resolutions with lesser expenses.
Nature of M&A transactions
Big companies are forced to buy new ideas because they are not able to maintain them with smaller but more focussed teams. So due to this fact, M&A transactions are rising in number and value and it is also rising in number and value & and it is also assumed that in the future also M&A transactions will rise both in number & value. M&A transactions are generally risky in nature such as finding the right target, the process itself is also costly as well as a lot of parties are involved to ensure all quality measures. M&A transaction process is very long and costs are also higher than expected and accordingly M&A transaction has a lot of resources to compete with.
Before we discuss the potential impact of Blockchain technology on M&A transactions let us understand what is blockchain technology. Blockchain is a database that is not handled only by a single actor, for example, a central authority or a bank although it is collectively handled by a group of participants who have identical copies of the database. Database prepared with a new record is interconnected to the previous record by a complex cryptographic mathematical function whose solution requires a certain amount of computing processing power. Each new record is time-stamped as well. The individual database entries are grouped into blocks and linked in chronological order conses system based on cryptography verify the individual entries. No intermedial instances such as banks or states are necessary anymore as blockchain is stored decentralized at all network participants.
In the last decade, the major innovation in blockchain technology. The technology has proved that it will play a significant role in the future yet there was a lot of criticism about the practical applications. Mostly in the financial industry, there are many cases for blockchain technology. Due to advantages & business opportunities that outweigh its costs & risk, blockchain forced its way into a broader technology space. In simple words, digital information which is shared by society is a blockchain. New blocks are added due to the information being regulated. Due to this, no one needs to trust anyone else regarding the information when it is already available with all the participants within society. Blockchain consists of a network of nodes. Copy of the blockchain is stored locally in every node. Participants need at least half of the approval of all nodes if they want to add transactions to the network. Memorial of the nodes contains all the transactions which are not confirmed. Mines fill the block which they want to add to the network by picking transactions out of the memorial. Meses add the block to the network by a mathematical process which is called hashing. In Blockchain technology first, there was just the possibility of tracking transactions. Smart contracts are now significant because they enhance the usage of blockchain technology.
The potential impact of blockchain technology on m& a transaction
One potential impact of blockchain in M&A transactions is that during the due diligence process parties are allowed to transaction to possess and verify records. Of the information that is disclosed by the seller to a buyer. Once the deal has been finalized, the information which is disclosed in the virtual Room on a DVD on a flash drive the virtual data provides is usually asked to provide a copy of the information to both the buyer and seller. In case of the post-merger integration process or post-transaction disputes parties have a record of all such information disclosed during due diligence. Blockchain technology can enhance the seller’s and buyer’s confidence by creating permanent, undesirable, and real-time information which is disclosed during due diligence.
The second important potential application is a smart contract which enables automatic completion of transactions once the conditions to closing have been satisfied which are said due in the sale and purchase agreement. The smart contract automatically checks the condition to closing once verified by both buyer and seller and ensures that agreed consideration is paid to the seller and legal ownership is transferred to the buyer. Smart contracts improve quality, deal certainty, and reduce costs, efforts. Smart contracts do the following activities.
- While ensuring traceability certifies interested parties.
- While ensuring mutual trust automates the payment and asset share transfer.
- If certain oblations and conditions are met it automates transactions.
- With a higher level of comfort and risk, it enables the dealmaker to enter into agreements.
In the due diligence process, there is a general problem which is a lack of diligence by the seller. Companies on themselves. Generally, without requisite authority contracts are unsigned or signed by persons. So to verify the validity and performance of the contract additional steps are also required which increase the expense of due diligence recent development in blockchain legal innovations space avoids this problem. Every contract with various subcontractors’ signatures & performance stages is verified by data room providers during due diligence. We get a permanent, real-time, immutable record of information that is disclosed during due diligence after shifting due diligence processes to the blockchain. Blockchain verifies and executes merger agreements which enable major cost savings for buyers & sellers within a short period of time.
Intellectual property assets
Blockchain technology also enables the recording of intellectual property assets. In a due diligence process all inventions, designs, and proofs of use can be quickly verified to prove ownership, integrity, and transfers of the IP assets due to which digital trails of records of IP assets are being created. It simplified the due diligence exercise necessary for IP transactions by enabling the recording of Intellectual Property Assets. It also provides security and peer-to-peer transactions. There are few examples where firms actively implement blockchain technology in their financial affairs.
- According to a 2020 research analysis report by Block’s John Dantoni Coinbase, Binance and Kraken are the most active firms in acquisition.
- A blockchain-based Payments Company; Netcents Technology has recently engaged Boustead securities to screen and negotiate acquisitions and identify institutional investments for NetCents.
During the M&A Process if we want to do the transactions more effectively with fewer expenses and less amount of risk then we should adopt blockchain technology. Blockchain Technology will open with many opportunities and great challenges in the legal industry. Due to blockchain technology, very few parties are involved and it reduces intermediates. The reductions in intermediates will result from M&A transactions cheaper. If the price cheaper which means the investor has more capital to implements other deals which results in an increase in overall deals of the company. More investors are competing for the same target due to low prices because investors with a low amount of capital enter the market. Due to the increased amount of competition, the price could be redone. The risk of investor for making low decisions are reduced through smart contracts because trust can be built beforehand. Due to benefit of automatic execution, the transaction itself becomes much more manageable and secure. If we look at what blockchain really is we can see that its application in M&A transactions or any other sphere of financial services could do a lot of increase in data connectivity between the financial services industry and regulators.
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