How is the risk of merger clearance normally dealt with where a financial sponsor is the acquirer?
The risk of merger clearance is usually borne by both parties. While it is common also for financial sponsor purchasers to agree on covenants with regard to prompt filings, reporting and consulting, they find it even more difficult than institutional investors to agree on hell or high water clauses. Likewise, financial investors are very reluctant to accept break fees.
Usually, buyers manage the risk by setting forth merger clearance as a condition precedent to either party’s obligations in the transaction documents.
Sellers mitigate the risk through a cooperation provision obligating the sellers and buyers to use their best or reasonable efforts to obtain antitrust approval. Japanese transactions often do not include some provisions that are more commonly used in other jurisdictions by sellers to allocate the risk of merger clearance to buyers, such as “hell or high water” provisions, provisions providing for buyers’ obligations to undertake certain divestures or to litigate, and reverse break-up fee provisions.
There are no specific restrictions regarding mergers as contemplated here under Mauritius law.
The handling of merger clearance risk where a financial sponsor is the acquirer is a common negotiation point in share purchase agreements in the Norwegian market. While financial sponsors certainly prefer to include a closing condition upon which they can withdraw from the transaction without liability if the required merger clearance is not obtained on satisfactory terms, they may from time to time need to concede to more burdensome "hell or high-water" obligations, especially in controlled auction processed where there is a competitive environment. Such "hell or high-water" clauses would typically impose an obligation on the financial sponsor to divest parts of the target business and/or litigate any competition challenges if required to obtain clearance. It would on the other hand not extend to divesting any existing portfolio companies of the financial sponsor.
Sellers usually conduct their own merger control assessment with respect to the different bidders. The outcome of such assessment and its impact on the timing of the transaction and transaction certainty may be an important criteria to move forward with a specific bidder. In the current sellers' market we often see "hell or high water"-clauses included in the merger clearance closing condition.
If merger clearance is required, it is standard practice to include this as a condition precedent to the closing of the transaction in the acquisition agreement.
Depending on the parties bargaining powers, we see several practices for the allocation of the risk of merger clearance between the parties. , ranging from a hell or high water-clause to the benefit of the sellers to a walk away right for the buyer. Normally, the buyer bears the risk of any divestments, although it is not uncommon for risks to be capped in one way or another (e.g. the buyer is not obliged to offer divestments to the competent competition authorities that are disproportionate to the contemplated transaction or which would have a material adverse effect to the business of the buyer group (including target).
In the UK the anti-trust review process is a voluntary regime (i.e. a purchaser can technically close without clearance but then be subject to an investigation following closing) and therefore in this market sellers do not normally (as a matter of course) accept a condition precedent of receipt of UK anti-trust clearance.
If antitrust clearances are agreed to be condition precedent to completion, the risks of clearance are usually passed to the purchaser by the use of either a “strict hell or high water” clause for the merger clearance or a corresponding contractual penalty (whether by way of fixed amount or contractual damages) if the merger clearance cannot be obtained.
If merger clearance is required, it is standard practice to include this as a condition precedent to the closing of the transaction in the acquisition agreement. Merger clearances involving financial sponsors usually do not trigger competition issues, unless the financial sponsor has portfolio companies which overlap with the business of the target.
Depending on the parties bargaining powers, we see several practices for the allocation of the risk of merger clearance between the parties. Usually the buyer bears the risk of any required divestments, although it is not uncommon for these risks to be capped in one way or another (e.g. no obligation for the buyer to offer divestments that are disproportionate to the contemplated transaction). However, in the context of transactions organized as competitive auctions, the acquisition agreement exceptionally includes a “hell or high water” clause, whereby the buyer is obligated to take all steps to satisfy the completion authorities (including any amount of divestitures).
Polish antitrust law establishes uniform rules – i.e. regardless of the industry or type of transaction participants – in relation to the turnover thresholds determining the obligation to notify the intention of concentration as well as for the antitrust assessment of the notified concentration. Therefore, the potential risks should be considered in the context of the “specifics” of the operation of financial sponsors.
The basic risk results from the fact, that entities in the financial sponsor's portfolio will be treated as "controlled" under antitrust law, and thus they will create a "capital group" together with the sponsor.
On the one hand, this may affect the assessment of the fulfilment of the notification thresholds and the requirement to notify the transaction – due to the need to take into account the turnover of the entire capital group for calculating the thresholds.
On the other hand, this may affect the antitrust evaluation of the transaction – depending on the branches or industries in which the companies in sponsor’s portfolio as well as the entity to be acquired operate, horizontal or vertical (as well as conglomerate) effects may occur (the "concentration" of entities operating in the same market or related markets). In the case of a significant impact on the effective competition on a given relevant market(-s), there is a risk of refusal of consent by the antitrust authority or the risk of issuing a commitment decision (e.g. the obligation to sell out a part of the entities form sponsor’s portfolio to satisfy the antitrust authority). These issues arise fairly uncommonly in practice.
Under Portuguese and European law, the acquirer is generally the entity responsible for securing a merger clearance before the relevant authorities. In the transaction agreements, the risk that this merger clearance is not obtained is usually addressed by conditioning the effectiveness of the transaction to such clearances; the relevant provisions of the agreement may then be structured either as a best efforts obligation or as a “hell or high water” clause (“HOHW”).
A best efforts clause, which is more common, will typically state that the purchaser will make its best efforts, with the occasional cooperation from the seller, to procure anti-trust clearance for the transaction. If by a pre-determined “long stop date” this anti-trust clearance is not obtained, the agreement will terminate without the buyer being held liable for such termination (unless it negligently or willfully did not endeavor the necessary efforts to obtain the clearance).
The HOHW clause, on the other hand, is included in purchase agreements when a seller or target company wishes the buyer to take on all the antitrust risk and other regulatory approvals (including assuming the risk of the relevant anti-trust authorities imposing divestiture of assets by the combined entity, or other structural or behavioral remedies). In such instances, if the buyer does not close until a long stop date it will be held liable for damages caused, irrespective of the circumstances and, especially, of the remedies anti-trust authorities may impose for the transaction to be closed. In Portugal, HOHW clauses are rare.
It is fairly common, regardless of the parties involved, that it is the buyer who will be required to assume the merger clearance risk. It is often less difficult for a financial sponsor to agree to this (if the fund does not already own businesses in the same business). However, often an industrial buyer acquires a competitor to create synergies in one aspect or another and the issue of who should bear the merger clearance risk then often becomes more complicated.
Non-Chinese parties to a share purchase agreement, to the extent they have leverage, would seek to shift the PRC antitrust risk onto the Chinese party by requiring the Chinese party to pay a termination fee if the agreement is terminated as a result of a failure to obtain PRC antitrust approval. Where the buyer agrees to pay such a termination fee (e.g. in the event of a sale from a non-Chinese seller to a Chinese buyer), the seller may request the buyer to deposit an amount equal to such termination fee in escrow at the time of signing the purchase agreement.
In Finnish sale and purchase agreements, the liability for obtaining competition authority approvals is typically allocated to the buyer whereas the seller customarily provides the buyer information required for the merger clearance process. In cases of no apparent overlaps, the buyer often bears the risk of authority requirements. If there are any overlaps (e.g. portfolio companies of the buyer operating in the same sector), the risk allocation is negotiated on case-by-case basis. Financial sponsors acquiring businesses in Finland sometimes accept hell-or-high-water clauses but seem to be less prepared to accept break fees.
In all medium or large sized transaction, the closing will be subject to the issuance of merger clearances by the relevant competition authorities. It is common for sellers to require financial sponsors to agree to a “hell or high-water obligation” pursuant to which the purchaser will carry out any action that is required by competition authorities to obtain the merger clearance.
However, given their fiduciary duties vis-à-vis their investors, financial sponsors will generally refuse any provisions pursuant to which they may be under the obligation to impose undertaking to portfolio company.
The antitrust risks are usually shifted to the buyer as most transaction documents contain either a strict hell or high water clause for the merger clearance or a corresponding contractual penalty (whether by way of fixed amount or contractual damages) if the merger clearance cannot be obtained.
During the deal negotiations stage and as a crucial step to the whole deal assessment, the financial sponsor requires a priori from the target (and the seller) all information that will enable it to determine if a merger clearance is required, as well as, to identify any issues related thereto. In parallel, clear provisions are included in the legal documentation in respect of the content of merger clearance (i.e. unqualified clearance vs clearance under conditions) which will trigger fulfilment of conditions precedent and closing of the deal.
This may be proven of paramount importance for the acquirer if any merger clearance conditions have material adverse impact on any other entities the financial sponsor already participates in. Also, the respective legal documentation customarily provides for the seller’s obligation to render any assistance to the buyer and to procure receipt by the acquirer of detailed data from the target (and any other entities participating in the merger) in order to prepare and submit the necessary filing for the purposes of merger clearance.
Reliance is placed on the substantive completion analysis; if there is no real concentration risk, buyers including PE and will take hell or high water risk but only where they have full confidence a clearance will be obtained.
Luxembourg has chosen not to put in place any merger control on a national level.
The Luxembourg competition authority does however retain the power to intervene after completion of a transaction should it consider there to be anti-competitive practices or an abuse of a dominant position as a result of the relevant acquisition.
Transactions may also of course require merger clearance from competition authorities in other jurisdictions.
Typically merger clearance is a condition precedent to completion with transactions in which merger clearance is required being structured with a split signing / completion.
As is the case with all aspects of a transaction, the ultimate allocation of risk between the parties is on a case by case basis depending on the relative bargaining power of the parties involved.
In the United States, the Hart-Scott-Rodino (HSR) antitrust review process is mandatory for most acquisitions exceeding a statutory threshold (currently $84.4 million). Inevitably, completion of the HSR review is a closing condition in any transaction to which the HSR Act applies.
If antitrust clearances are agreed to be condition precedent to completion, the risks of clearance are usually passed to the purchaser by the use of either a “strict hell or high water” clause for the merger clearance, a reasonable best efforts clause, or a corresponding contractual penalty (whether by way of fixed amount or contractual damages) if the merger clearance cannot be obtained.
It is not unusual for a financial buyer to accept a “hell or high water” provision where the risk is believed to be very low; the clause protects the seller against an undisclosed competitive overlap within the buyer’s portfolio. Where the financial buyer’s portfolio contains companies that overlap with the target, and this overlap is known or disclosed, the risk tends to be shared, with the allocation often being an important part of the deal negotiations.
Merger clearance is managed as part of the transaction, with the necessary threshold calculations being established from the outset to determine whether or not any notifications or approvals are required.