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Smart Contracts: Cementing Buyer-Seller Relationships in M&A

As digitization gathers pace, blockchain technology is rapidly gaining traction, with new use cases emerging constantly. M&A is one area where this tech holds considerable promise. Smart contracts, a key element of blockchains, enable investors to partner with confidence – even if they don’t know the other parties directly. What’s more, blockchain has the potential to transform M&A by automating many key activities.


Blockchain: The Basics


Over the past few years, this blog has looked at blockchain technology in a variety of industry-specific settings. Before we consider its deployment in the mergers-and-acquisitions space, let’s first look briefly at what blockchain is all about.


Basically, we can think of blockchain as a distributed ledger. This ledger is maintained not by a single central authority, but by a collaborative network of participants, all of whom share identical copies of it. As a result, everyone involved enjoys full real-time access and total transparency.


Blockchain takes its name from two of its key characteristics. First, the tech organizes information in groups known as blocks. Once a block has been filled, it’s chained (in other words, firmly linked) to the immediately preceding block. These links leverage cryptography, with each block containing a cryptographic hash of the preceding block, a timestamp, and transaction data.


Tamper- and Hacker-Proof Data


This approach makes it impossible to manipulate data in any block, since that would entail manipulating all the subsequent blocks. And because of blockchain’s distributed nature, any changes would immediately be visible to everyone in the network.


What’s more, since changes must be approved by all participants, no individual can alter the blockchain. When changes are made, they are visible only to those with the required permissions. Finally, blockchains offer a further layer of protection in the form of a cryptographic encryption process that safeguards against hackers.


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Three Distinctive Features of a Blockchain


· Distributed ledger technology: All network participants have access to the distributed ledger and its unchangeable transaction records.


· Unchangeable data sets: No participant can change or falsify a transaction after it has been recorded in the common ledger.


· Smart contracts: To speed up transactions, smart contracts are used. These are executed automatically when predetermined conditions are met.

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Smart Contracts: Automating Agreements, Cutting Out the Middlemen


As smart contracts are at the heart of the M&A blockchain use case, let’s consider how they work. In essence, a smart contract is just like a standard legal contract. But, unlike conventional agreements, smart contracts are self-executing and include their terms in hardcoded form. Also, these digital agreements are spread across the blockchain network.


The distributed nature of smart contracts enables various parties to enter into trusted transactions, without the need for central intermediaries – such as commercial registers, banks, and notaries. And because they’re self-executing, these contracts are triggered automatically when their hard-coded conditions are fulfilled. This makes smart contracts ideal for transactions requiring transparent, secure, automatic, and unalterable documentation.


Supporting and Streamlining M&A from A to Z


Smart contracts can be deployed throughout the M&A process. At the declaration-of-intent stage, for example, they can be used to verify the credentials of interested parties and ensure traceability. The tech also has clear advantages during the settlement phase. Here, blockchain enables financial transactions to be realized in a matter of seconds – without calling in traditional intermediaries.


At the closing stage, blockchain-based solutions allow the parties to verify contractual principles automatically. In the wake of the transaction, smart contracts not only automatically ensure that all the conditions of temporary of service agreements (TSAs) and service level agreements (SLAs) are met; they can also automate contract payments.


Greater Trust, Transparency, and Speed – Plus Tighter Security


The benefits of blockchain for M&A are clear. Since third parties are no longer required, and all participants have access to the same immutable transaction records, the question of whether information has been altered for personal gain simply doesn’t arise.


Because terms and conditions are baked into smart contracts, transactions can be completed far faster and more efficiently than was hitherto possible. What’s more, a blockchain-based approach eliminates the need to compile and exchange vast amounts of paperwork.


Last, and by no means least, leveraging blockchain for M&A creates shared transaction documentation that can be modified only with the agreement of everyone involved. And that means considerably enhanced security for all stakeholders.


Want to Know More?


If you’re interested in finding out more about these and other potential benefits of blockchain for your M&A activities, feel free to reach out to me. I’ll be happy to help you investigate how this tech can help you meet your specific requirements.


And Finally…


As another year draws to a close, I’d like to take this opportunity to wish you and your loved ones a relaxing, enjoyable, and safe holiday season. I wish you all the very best for the coming year and look forward to seeing you here again in 2022.

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