To what degree is conditionality an accepted market feature on acquisitions?
Mergers & Acquisitions
Conditionality exists and is usually acceptable both by the regulators and the market in general. It is common, for example, that voluntary tender offers in Brazil are conditional upon the reaching of certain thresholds. Of course one needs to examine on a case-by-case basis to ensure that the conditions are acceptable from a regulatory and legal perspectives, but they usually are. Having said that, there was a spike in sophisticated deals (and hence in sophisticated structures, including those conditional, from 2007 through 2012). Truth be told, the market went on a halt after that and very few sophisticated deals went through.
The acceptability of conditionality, e.g. with respect to certainty of funds, tends to be driven by onshore counsel rather than by the Bermuda market. Any Bermuda centric conditionality tends to be restricted to being able to obtain the regulatory permissions referred to elsewhere in this chapter and appropriate shareholder approvals as, without those, the transaction cannot close.
British Virgin Islands
Conditionality, subject to the directors of the BVI company common law fiduciary duties and complying with the terms of the Act in relation to the best interests of the company, is a generally accepted market feature on acquisitions.
Conditionality is widely accepted as a feature of acquisitions. It is common practice to include any mandatory consents and approvals which are not within the gift to give of the purchaser as a condition to completion of a transaction.
ZL: An M&A transaction usually contains the internal resolution of the buyer or the counterparty, or approval, filing or registration process from the domestic or overseas competent governmental department (e.g. Ministry of the Commerce, CSRC, NDRC, the state owned assets supervision and administration department in domestic China etc.). According to relevant laws, obtaining approval, filing or registration documents are always the effective conditions or closing conditions of a transaction. Therefore, usually in the transaction agreement, such approval, filing, or registration is usually taken as one of the effective conditions.
In addition, as to the M&A transaction itself, at the time both parties signing the agreement, according to requirements of both parties, there are always issues for the target company to be organized or regulated before closing. For example, if some material debt or asset of the target company should be split, which should be included in the SPA, and the transaction should closing according to the agreement only if the conditions are fulfilled. To our experience, it’s common for the M&A transaction to have the effective conditions.
In transactions relating to private companies, the procuring of mandatory authority approvals is a standard condition precedent for the consummation of the transaction. Other conditions depend on the deal dynamics and competitiveness of each individual transaction, but may include conditionality upon the absence of a material adverse change or material breach of warranties, procuring of waivers for change of control provisions in material agreements, or availability of financing, although such conditions can be considered quite rare in light of recent market practice.
In transactions involving a public company, the target company and the offeror often enter into a combination agreement that governs the transaction process and includes the main terms of the offer. This agreement sets cooperation obligations for the parties (e.g. filings with authorities) and addresses deal security issues, such as conditions and prerequisites under which the target company’s Board of Directors will recommend the offer, non-solicitation undertakings, and procedures to be followed in case of a competing offer (e.g. right to match). However, this agreement should not prevent the target board from fulfilling its duty to always act in the best interest of the target company and its shareholders.
Except for conditions regarding regulatory approvals only board approvals are customary conditions in private M&A transactions. In public M&A deals in general, conditions may be placed on an offer (not, however, regarding financing or a bidder’s general right to withdraw in the bidder’s discretion), as long as they are objectively detailed (such as competition clearance, crossing of minimum acceptance thresholds) and not subject to potential subjective conclusions by the bidder.
In principle, the acquisition of a target company does not rest upon mandatory conditions other than those concerning the provision of necessary administrative licences or approvals. However, in certain cases where specific matters are to be revealed or decided post-closing, and these facts play an important role in the decision of the buyer whether it will proceed to the purchase and/or make a significant impact on the price, the deal can be conditioned upon conclusion of that matter. All in all, it can be argued that conditionality is indeed an accepted and in fact rather customary market feature in Greek M&A transactions.
Conditionality is an accepted market feature on acquisitions, for example, making the transaction conditional upon, amongst other things, obtaining all necessary regulatory approvals.
Isle of Man
Conditionality is an accepted standard practice in accordance with practice in the UK.
When acquiring shares or assets in a non-listed Norwegian company, the parties are in general free to contract on whatever terms they agree and such transactions, are quite frequent being made conditional upon a set of various conditions being fulfilled.
If on the other side, the target is listed on a Norwegian regulated market, and if a shareholder acquires shares triggering the mandatory offer thresholds, such mandatory offer must be unconditional, must embrace all of the target’s issued shares, and the offered settlement needs to be in cash. In a voluntary tender offer or an exchange offer for a listed company, there is however, no general limitation under Norwegian law as to which conditions such an offer may contain. It is for example quite usual that a voluntary offer document requires a certain minimum number of acceptances etc.
It is also possible to make a merger conditional, even mergers involving listed companies.
Conditionality of an M&A transaction is an approach commonly accepted by the market.
Recent amendments to the Russian Civil Code explicitly introduced a concept of conditioned performance of an obligation, providing, inter alia, that potential conditions may be fully dependent on one of the parties to an obligation. The same conditionality may be agreed in relation to variation or termination of a contractual obligation. Thus, one of the main legal risks relating to conditionality in Russian law contracts was fully removed by amendments to relevant legislation.
Conditionality is a generally accepted feature on private acquisitions in the Kingdom and tends to include the obtaining of regulatory approvals and clearances and the resolution of material issues uncovered by the buyer's due diligence of the target company. Even within the public M&A context, offer conditions are regarded as permissible provided that they do not depend solely on the subjective judgments of the bidder or target boards. In the Almarai transaction, for instance, the conditions included shareholder approval, regulatory approvals and clearances, and completion of the transaction before a longstop date.
Financing out clauses and material adverse change clauses are accepted elements of acquisitions in the Japanese market. Whether these conditions end up in the transaction documents depends on the deal. Buyers also often make deals conditional on there being no breach of representations and warranties or covenants.
Apart from conditions relating to the absence of a breach of warranty or material adverse change, the most-frequently encountered condition is for shareholders approval of the acquirer.
In a public tender offer conditions which may be imposed which would enable the acquirer to withdraw are very limited.
In private M&A transactions, conditions precedent are very common, in particular if the Federal Competition Authority needs to approve the transaction. Common conditions precedent are the clearance by the Federal Competition Authority or other authorities (e.g., the Financial Market Authority), material adverse change clauses, bring-down certificates regarding representations and warranties and the execution of ancillary agreements.
For public M&A transactions, pursuant to the Takeover Act an offer may only be conditional if it is objectively justified. Mandatory offers pursuant to the Takeover Act must not be made conditional (except for legal conditions like regulatory approvals).
Conditionality is an accepted feature. In fact, the Listing Rules refer to conditionality as one of the elements that ought to be disclosed in the offering document. The nature or level of the conditionality acceptable is not stipulated. Conditionality is a fairly common occurrence, with conditions to a bid tending to range from matters relating to the internal restructuring of the target company/group, to the attainment of project finance by the buyer, to the attainment of regulatory clearances. The non-fulfilment of a condition attached to a bid is one of the limited circumstances when a bid may be withdrawn or declared void.
There is no general prohibition on conditioning an acquisition on the occurrence or non-occurrence of certain events. Most acquisitions of public companies contain some degree of conditionality. Typical conditions include the absence of a material adverse effect prior to closing, no breach by either party of the representations, warranties or covenants contained in the merger agreement, the absence of an injunction or other legal restraint and receipt of the necessary regulatory approvals. Financing or similar conditions are permitted and while not common are not unheard of. Where the transaction is structured to include a tender offer, the offer cannot be conditioned on events that are not objective or that are entirely within the buyer’s control or else it may be deemed an “illusory” offer. In certain circumstances where closing conditions are not satisfied, such as the buyer’s failure to secure the necessary regulatory approvals or obtain financing, the buyer may be required to pay a reverse termination fee to the target.
Historically, Vietnamese domestic vendors have been resistant to conditionality. Nowadays, however, conditionality is commonplace and increasingly accepted.
Conditionality is an accepted feature on acquisitions but in relation to listed GBCs and Reporting Issuers, the provisions of the Securities (Takeover) Rules 2010 must be adhered to. Where the merger or acquisition is going to need to approval of the Competition Commission or the FSC, this should be sought and received before the offer becomes unconditional. This would usually be achieved by making the offer conditional upon, amongst other things, obtaining all necessary regulatory approvals. The offer document must specify the last date when the offeror can declare the offer unconditional.
Conditionality is an accepted standard practice and would usually include any requisite shareholder or regulatory approvals. Where the Takeover Code applies, the offer must include a condition that the offer will lapse unless the bidder acquires (or agrees to acquire) more than 50% of the voting rights of the target. A typical condition though is that a bidder acquires at least 75% of the target shares (so that a bidder has a sufficient majority to pass any required shareholder approvals or effect a scheme of arrangement) or at least 90% of the target shares so that it may compulsorily acquire the remaining shares by notice to the relevant shareholders.
Conditionality of an M&A transaction is an approach accepted by Romanian law and by the market and often encountered in Romanian M&A transactions.
MAC conditions are relatively common, more so where the purchaser is a PE fund. They are especially common where there is a long pre settlement period (which is often necessitated by regulatory requirements – especially OIO consent).
Financing conditions are included on a minority of transactions, but are still relatively common. For an auction process, most bidders will (from a competitive standpoint) endeavour to have financing arranged prior to signing, and some vendors may require this as a condition of bidding.
For transactions with overseas purchasers, OIO approval is a common condition.
On a public merger conducted by way of open offer, the minimum permissible acceptance condition is set by the Code at 50% of voting rights in the target. In practice, most offers are announced with an acceptance condition set at 90% (with the bidder having the ability to waive that condition down to some lower level).
For schemes of arrangement, it will be necessary to secure the approval of 75%, in value, of each class of shareholders attending and voting at the relevant general meeting.
Other than these approval-related conditions, the only other mandatory condition which the Code stipulates must be applicable to all bids is that the bid must lapse if there has been a referral to Phase II merger control investigation by the European Commission or the CMA.
While it is common for bidders to include a range of other conditions, including receipt of required approvals from other competent regulatory authorities and market specific provisions such as MACs, these may not be framed in a manner that is subjective and the threshold for invoking any of these conditions and thereby abandoning a bid is set at an extremely high level. In practice, the Panel will only permit a non-mandatory condition to be invoked under circumstances where the events giving rise to the right to invoke the condition are of material significance to the bidder in the context of the offer.
It is also worth noting that it is not permissible to include any conditions relating to the availability of financing for the bid.
In practice, this means that the level of tolerance in the UK market for conditionality on public mergers is very low. As a result, for transactions involving complex regulatory affairs or the need to undertake detailed merger control reviews, it may sometimes be appropriate to announce the offer on a conditional basis. This approach is only available following consultation with the Panel, where they have been convinced that it is unlikely that the required approvals can be obtained within the timeframes prescribed in the Code. Such conditional offers are made on the understanding that they will only be formally tabled to shareholders following satisfaction of certain specified conditions.
In the private M&A markets, there are no such restrictions and it is open to the parties to agree an appropriate level of conditionality.
Conditions precedent are generally accepted and usual, especially in case of required third-party approvals. On the contrary, conditions subsequent are not so common.