To what degree is conditionality an accepted market feature on acquisitions?
Mergers & Acquisitions (2nd edition)
Outside of the regulatory sphere, conditionality is largely accepted as commercial consideration. It is not uncommon for acquisitions of stakes in Offshore Entities (not being Offshore Listing Vehicles) to be subject to various conditions precedent, including satisfactory due diligence and the lack of any material adverse change in the target’s financial and operational position subsequent to the execution of the share purchase agreement.
While acquisitions of Offshore Listing Vehicles are still subject to various conditions precedent, certain restrictions against conditionality as provided under the Takeover Code may be applicable.
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 cannot be made conditional (except for legal conditions such as regulatory approvals).
Under the Code, a takeover bid may include conditions or pre-conditions which need to be satisfied before an offer may proceed. “Pre-conditions” are conditions that need to be satisfied or waived before the offer documentation is sent to target shareholders and these pre-conditions must be discussed with the Panel prior to being included and described in detail in the initial announcement of a firm intention to make a bid. “Conditions” apply after the offer documentation has been sent to target shareholders and are contained in the offer documentation.
Conditions and pre-conditions which are solely subjective are not usually permitted, although an element of subjectivity may be acceptable to the Panel. Except with the consent of the Panel, an offer must not be announced subject to a pre-condition unless the pre-condition relates to no reference or initiation of proceedings or referral to the CMA or the Commission, or involves another material official authorization or regulatory clearance and the offer in question is either a recommended bid or the Panel is satisfied that the authorization or clearance cannot be obtained within the prescribed bid timetable. Financing conditions or pre-conditions are not permitted except in very limited circumstances and the Panel must be consulted in advance. A “no material adverse change” condition is often included but for a bidder to rely on this condition and withdraw its offer it must demonstrate to the Panel that the material adverse change could not have been reasonably foreseen by the bidder and is of an exceptional nature.
With the exception of the condition as to the level of acceptances to be received in respect of a takeover offer (which cannot be lower than a simple majority of the target company’s shares), a bidder can only rely on a condition or pre-condition where the circumstances in question are of material significance to the bidder in the context of the offer. The Code makes it clear that following the announcement of a firm intention to make an offer, a bidder should use all reasonable efforts to ensure that any conditions or pre-conditions are satisfied.
In private M&A transactions, conditions are a matter of negotiation between the parties and will be driven by the commercial requirements of both parties. If regulatory consents are required in order for completion to be able to occur, these must be included in the acquisition documents.
Conditionality is quite common in M&A transactions, taking the form of conditions precedent, inserted in share-purchase agreements. The conditions precedent typically include obligations of both parties, to be completed prior to conclusion of the transaction, such as: (i) actions of the seller to remedy issues related to the target company discovered during the due diligence; (ii) fulfilment of mandatory requirements under Bulgarian law (e.g. corporate approvals, merger clearance, other regulatory consents, etc.) and (iii) obtainment of required contractual consents (e.g. change of control consents under facility agreements).
Conditionality is a standard market feature on acquisitions. It is common to agree on conditions precedent for the closing of the transaction, such as the obtention of mandatory regulatory approvals, the non-occurrence of a material adverse effect between signing and closing, that all representations and warranties as of the closing date are true and correct in all respects (or material respects), the delivery of certain documents and such other conditions as the nature of the deal may demand.
In the case of acquisition of publicly traded companies, the completion of the acquisition is conditioned to the obtaining of the applicable regulatory approvals if a tender offer is required.
The transfer of shares may be subject to special conditions. Thus, the parties may validly subordinate the realization of the assignment to a future and uncertain event (condition precedent) or, very rarely in practice, agree that the assignment will be retroactively resolved in the event of the occurrence - or non-occurrence, depending on the wording of the clause - of a future and uncertain event (condition subsequent or resolutory condition).
Public offers, except for certain limited conditions in case of voluntary offers, such as approval from competition authorities or minimum acceptance threshold expressed in share capital and/or voting rights (in practice 1/2 calculated on a fully diluted basis or 2/3 plus one share/vote calculated on an issued share capital or fully diluted basis), cannot be conditional upon any factor and are, in principle, irrevocable upon filing. A bidder may withdraw its offer with the AMF’s prior approval, if the target adopts measures modifying its substance during the offer period.
Transaction conditionality is typically directly related to the nature of the relevant transaction. For example, in the context of a competitive sale process, vendors will typically seek to resist conditionality and require that financing and other approvals are obtained prior to the execution of a binding agreement. Alternatively, conditions are likely to be more common in complex or high value transactions (particularly those in heavily regulated industries) or where the bidder has a greater level of control in the negotiations.
New Zealand regulatory conditions are generally widely accepted to the extent application. For example, overseas investment regulation, competition or specific industry regulations.
Subject to FRA’s approval, an offeror can make a mandatory tender offer conditional upon the acquisition of at least 51% (or 75%, in case of acquisition with the ultimate purpose for merger) of the target company’s issued share capital, as evidenced by shareholders’ acceptance to sell their shares in response to the mandatory tender offer. In such case, if the mandatory tender offer does not result in the acquisition of at least 51% or 75% (as the case may be) of the target company’s issued share capital, the offeror may not complete the purchase of the offered shares, without obtaining FRA’s prior approval.
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, for example the grant of regulatory approval.
Conditions precedent are frequent in M&A transactions. They must be sufficiently precise, and their occurrence cannot depend solely on the will of a party (Art. 1355 of the Italian Civil Code).
Another common condition precedent in M&A transactions is clearance by the antitrust authority, i.e., attestation that the concentration through an acquisition fulfils compatibility requirements.
Indeed, conditions precedent are widely used in cases in which authorities’ or third parties’ consent to a transaction is required.
At times, sale and purchase transactions are conditional on the completion of a corporate reorganisation: in this case, breach does not preclude full validity of the sale and purchase agreement but rather constitutes a failure to fulfil a contractual obligation, for which the buyer is entitled to compensation for damage.
On occasion, in privately held companies, an offer to buy can be subject to financing when the buyer has not yet concluded a financing agreement with a bank at the time of negotiations and, thus, submits only a commitment letter (or, at least, a highly confident letter) from the bank to demonstrate the existence of the bank’s undertaking (or, at least, the bank’s intention) to grant financing. In these circumstances, the conclusion of the financing contract with the bank is a condition precedent to the closing.
Furthermore, material adverse change clauses enforced as conditions precedent are used in M&A transactions but are not particularly common.
In the case of a public deals, the Panel must be consulted in advance if it is proposed to include any pre-condition to an offer. Except with the consent of the Panel, a pre-condition can only be included if it relates to any regulatory clearance where the Panel is satisfied is likely to prove impossible to obtain within the Rules timetable.
Except with the consent of the Panel, or in the case of competition clearance conditions, an offer may not be made subject to any conditions the satisfaction of which depends solely on the subjective judgement of the bidder, or which is solely within its control. A bidder cannot invoke a condition to lapse an offer unless the circumstances are of material significance to the bidder in the context of the offer and the Panel, being satisfied that in the circumstances it would be reasonable to do so, consents to the condition being invoked.
In practice, it is very difficult for a bidder to invoke a condition, other than a material regulatory condition, an acceptance condition or a condition which is required in order to implement the transaction, such as bidder shareholder approval. In Ireland, no financing condition is permitted.
Private deals can be subject to whichever conditions are agreed between the parties, including a financing condition.
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 to be said, the market went on a halt after that and very few sophisticated deals went through.
As mentioned above, for schemes of arrangement and private mergers and amalgamations it is necessary to secure the approval of 50% +1 in value of each class of shareholders attending and voting at the relevant general meeting. Furthermore, it is necessary to obtain the consent of 50% +1 in value (out of the creditors present – all creditors must be notified wither in person or via a publication) of separate meetings of the creditors of each merging entity. Finally, the sanction of the competent District Court will also be required for the completion of the procedure.
Furthermore, it is common practice for acquiring parties to include a range of conditions, including receipt of any required regulatory approvals and market specific approvals prior to the completion as well as any merger control procedures that may need to be followed.
It is important to note that for public takeovers an offer may only be revoked in certain specific circumstances as provided by the Public Takeover Law and after approval by the regulatory authority.
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.
Myanmar does not have any takeover regulations and there are no laws dealing with tender offers on the YSX. Conditions are not prohibited with respect to business transfers, such as for satisfactory due diligence, and schemes of arrangement could in principle be conditional subject to the court’s supervision.
Shares are transferred pursuant to the general Civil Code provisions on tangible moveable objects. As such, their transfer and acquisition can be made subject to certain conditions; in that case, their destruction or deterioration prior to the fulfilment of the conditions is at the transferor’s risk. By contrast, public takeover bids for listed companies cannot be made conditional upon any type of prerequisites other than those which are included in the information document and relate to regulatory licensing / approval or to the issuing of new shares that will be provided as consideration.
a) Public M&A Transactions
A voluntary tender offer, as opposed to a mandatory offer, may be subject to certain conditions. Customary conditions for a voluntary tender offer are, for instance, a minimum acceptance threshold, absence of competing offers and merger control, and other regulatory clearances. The bidder may also consider including a “material adverse change” condition allowing the bidder to walk away from the offer if the financial situation of the target deteriorates during the offer procedure. However, such a MAC condition is accepted by BaFin only under strict conditions. These conditions (except for merger control clearance and other mandatory regulatory approvals) can typically be waived by the bidder during the offer period and are an important tactical instrument used to improve offer acceptance. In contrast, a mandatory tender offer may only be conditional on merger control and other mandatory regulatory approvals.
b) Private M&A Transactions
Private M&A transactions are often made subject to anti-trust clearance (always), AWG clearance (if required), financing, board approval (both infrequent at final offer stage; rather frequent at indicative offer stage) or a MAC (infrequent).
In private M&A, parties are free to include conditionality in a deal, subject, however, to some limits.
The inclusion of conditionality is more restricted and regulated in public M&A transactions.
A mandatory bid must be launched once all legal requirements hereto are fulfilled (see below - question 25). As a consequence, the bid cannot include conditionality other than the conditionality allowed by law (such as a condition precedent relating to certain approval by the competition authorities if clearance is required).
A voluntary bid can be subject to other conditions (such as the offer reaching a certain level of acceptance), but these must allow the bidder to achieve the intended result. The conditions must be communicated to and approved by the FSMA.
11.1 In the context of target companies being public companies, as a general proposition there is a low degree of tolerance in Vietnam for conditionality, except in relation to mandatory pre-completion requirements such as trading band waivers, competition law clearances, or resolutions of the General Meeting of Shareholders to approve MPO waivers.
11.2 In the context of public companies, the general perception and expectation of target companies and their shareholders is that purchasers ought to acquire shares in the target company on an “as is” basis and in reliance upon publicly available information (as opposed to the conduct of due diligence investigations).
11.3 In the context of target companies being private companies, conditionality is nowadays a widely accepted and fairly commonplace feature of M&A transactions in Vietnam. This represents a significant change in the M&A landscape in Vietnam, as compared with, for example, 20 years ago or even 10 years ago, when conditionality was generally far less acceptable to many proposed vendors.
11.4 Even in private company scenarios, there does remain a significant degree of resistance to lengthy lists of conditions precedent, particularly onerous conditions precedent, and the inclusion of conditions precedent the satisfaction of which is not wholly and clearly within the reasonable control of the vendor(s) and/or the target company. As is the case in many jurisdictions worldwide, in Vietnam it is highly desirable for lists of conditions precedent to be kept as short and user-friendly as possible, and for the responsibility for the fulfilment of each condition precedent to be clearly and specifically allocated to one or more specified parties.
11.5 It is very common in Vietnam for vendors to insist upon the payment by purchasers of up-front deposits, with 10% of the total purchase price being the typical bottom-line demand. Vendors often expect such deposits to be paid direct to them (as opposed to placed into escrow) and to be subject to forfeit if the transaction does not complete in any circumstances aside from unilateral termination by the vendor. Negotiation of arrangements being acceptable to foreign purchasers (such as escrow arrangement or narrowly-defined forfeiture scenarios) is often painstaking and difficult. There is, however, nowadays an increasing degree of acceptance in relation to the use of escrow accounts, subject to reasonable, balanced, and carefully documented release and forfeiture provisions.
11.6 In some cases, conditionality can give rise to bureaucratic difficulties in connection with M&A transactions in respect of which any approval or registration action is required from relevant State licensing authorities in order to achieve completion.
In private M&A transactions, the parties are generally free to agree on any type of closing conditions. In the context of public transactions, the permissibility of conditions is restricted. Under the TOO, a bidder may make a voluntary offer subject to conditions that are not within the bidder's control and in which the bidder has a justified interest. If a condition requires a contribution by the bidder in order to be satisfied, the bidder has to take all reasonable actions required for the satisfaction of the condition. Within this framework, the takeover practice has established a recognized catalogue of conditions that are generally permissible and typically included in voluntary offers, including a minimum acceptance condition, receipt of required regulatory approvals, resignation of existing and election of new board members, removal of share transfer and voting right restrictions from the target's articles, no material adverse change (generally defined as an event, fact or circumstance that, alone or together with other events, facts or circumstances, results in a sustainable reduction of the annual consolidated EBIT/EBITDA of 10% or more, sales of 5% or more or equity of 10% or more, in each case measured against the last financial statements), absence of certain undisclosed liabilities or non-occurrence of share issuances, mergers and spin-offs by the target. The TOB will review these and any new, untested offer conditions and reject or order the amendment of any conditions that do not meet the legal requirements. In principle, offer conditions must be either fulfilled or waived at the expiration of the initial offer period. However, the TOB may authorize an offeror to make its offer subject to conditions that will only be fulfilled (or waived) at the settlement of the offer. In any event, acceptance and No MAC conditions will lapse at the expiration of the initial offer period. In contrast to voluntary bids, mandatory offers must not be made subject to any offer conditions except for important reasons, especially as they are required to comply with regulatory filing or approval obligations.
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 the actions of 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.
Most medium-size and large acquisitions are subject to various conditions (the most frequent of which is merger clearance). Even small acquisitions tend to become conditional.
It is not.
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.
For transactions involving private companies in Sweden it is standard to include conditions to closing for mandatory regulatory approvals such as competition authority clearance in the transaction documentation. Other than that it is normally quite unusual that the seller accepts deal conditionality such as the absence of “material adverse changes”, buyer’s financing and similar provisions that we know are common in other jurisdictions. This can however naturally change on a case by case basis depending on the negotiation powers of the parties and the nature of the transaction.
With respect to publicly listed companies, rules prohibiting offer-related arrangements, e.g. break fees, have relatively recently been implemented in the Takeover Rules. Consequently, a target company may normally not commit itself to any offer-related arrangements (any and every arrangement related to the offer which entails an obligation on the target company in relation to the offeror) vis-à-vis an offeror. However, confidentiality commitments or undertakings not to solicit the offeror’s employees, customers and suppliers are exempted from the prohibition.
With respect to voluntary takeover offers, it is common that the offer is conditional upon certain conditions. The specific offer conditions vary, but will usually include conditions such as e.g. the offeror receiving acceptances of the offer of more than a certain percentage of the shares (and possibly also voting rights) in the target company and obtaining of all necessary approvals and clearances, including any competition clearances, on terms acceptable to the offeror. Mandatory takeover offers cannot be made subject to conditions, other than a condition of obtaining requisite regulatory approvals.
Most M&As contain some degree of conditionality where consummation is subject to the occurrence or non-occurrence of certain events. M&As which trigger the merger control regime are by law, subject to the condition of antitrust clearance being obtained.
Conditionality is an accepted market feature on acquisitions, for example, making the transaction conditional upon, amongst other things, obtaining all necessary regulatory approvals.
Where the approval of CICRA is required, there are two application routes available:
- if the acquiring entity is a credit or financial institution, the shortened merger application route may be used. Upon receipt of the application, CICRA will register the application and post a notice on its website inviting comments from the public for a period of 7 days. If no comments are received and CICRA has no concerns over the proposed merger or acquisition, a short form decision will be published on the next working day after expiry of 14 days from the date of registration of the application. If CICRA does have concerns, it will require the parties to prepare a standard application form; and
- in all other circumstances, the standard application route must be used. If the transaction is unlikely to raise substantive competition issues, a draft application form should be submitted to CICRA at least 5 working days in advance of the intended final form being filed. If the application is likely to raise significant issues, CICRA also expects the parties to request a pre-filing meeting to discuss the proposal and potential issues. Upon receipt of the application, CICRA will register the application and publish a notice on their website inviting comments from the pubic for a period of 2 weeks. Whilst there is no deadline for a response on the application form, CICRA endeavours to reach a decision within 25 working days of registration, subject to requiring any further information. If issues arise that mean that CICRA may refuse the application or grant consent but with conditions, CICRA will undertake a second detailed review. Again, there is no statutory deadline for a response but CICRA aims to reach a final decision within 6 months from the date of first registration.
If a proposed merger or acquisition involves a company which is itself, or which is a (direct or indirect) parent undertaking of, a GFSC regulated entity, certain notifications or applications will need to be made to the GFSC. These will depend on the type of regulatory licence held by the Guernsey entity and the particular transaction. By way of example, the GFSC may take up to 60 days to consent to a change of controller application whereas some changes need only be notified to the GFSC within 14 days after the event has taken place.
The Takeovers Panel regulates M&A of Guernsey companies which are subject to the Takeover Code.
Additional regulatory approvals may be required depending on the specific business sector of the target, for example, the Alderney Gambling Control Commission; CICRA in exercise of its regulatory powers over utilities companies.
Parties to an acquisition of stock or assets involving a private company are generally free to contract on whatever terms they may agree and are often made conditional upon satisfaction or waiver of various conditions. For example, most such agreements related to private companies contain conditions regarding the absence of any breach of representations and warranties and covenants, and, if applicable, the receipt of regulatory approvals. In addition, the parties often negotiate to include other conditions such as the absence of material adverse changes and the financing of the acquirer.
By contrast, it should be noted that the withdrawal of a tender offer bid on a listed company is only permitted under the fairly limited circumstances enumerated in the FIEA, such as the decision of the target company to implement anti-takeover measures or the suspension of the target company’s business. In practice, there have been almost no cases where a tender offer bid has been withdrawn after its commencement.
Isle of Man
Conditionality is an accepted standard practice in accordance with practice in the UK.
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.
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 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 is an accepted market feature on acquisitions. Conditions typically include prior approval from regulatory authorities in order for the deal to conclude, or that certain risks are eliminated or specific actions are taken by the parties prior to the ultimate transfer of ownership. These generally come up in the form of conditions precedent in a share purchase agreement.