What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
Mergers & Acquisitions (2nd edition)
Other deal protection measures most frequently used in connection with acquisitions of listed companies include:
- Matching rights
- Break fees, inducement fees, termination fees and reimbursement of expenses.
A matching right, is normally included into a transaction agreement between the bidder and the target, and provides the bidder a right to amend its offer within a short period of time and announce a revised offer to match any alternative and superior offer, which the target is open to accept. This is one of the most commonly used deal protection mechanism used in the Norwegian market. The purpose of such clause is however, mainly to keep an initial bidder in the game, but it will not prevent a determined competitor from potentially winning a bidding competition.
As such, there is currently no general prohibition under Norwegian law against agreeing, break fees. Break-up fees have, however, generally been less common in Norwegian M&A-transactions compared with other jurisdictions, but for a period; such fees gained increasing popularity also on Norwegian public transactions. The enforceability of a break-up fee arrangement under which it is the target itself that undertakes to pay such fees is however to some extent unclear.
The Norwegian Code of Practise now unconditionally recommends that the board must not hinder or obstruct any takeover bids. The Code of Practise also recommends that the target company should not undertake to pay compensation to the bidder if the bid does not complete (break-up fee) unless it is self-evident that such compensation is in the common interest of the target company and its stockholders. According to these recommendations any agreement for financial compensation (break-up fee) to be paid to the bidder should be limited to compensation for the costs incurred by the bidder in making a bid.
Asset lock-ups (crown jewel), buyer share options, sign-and-consent deals and limited window shops may occur, but are rather unusual in the Norwegian market. Some of these arrangements may, depending on how structured, also be in conflict with the latest version of the Code of Practise.
Deal protection and cost coverage mechanisms typical to mergers and acquisitions (such as confidentiality or non-disclosure agreements, non-solicitation agreements and break-up fees or reverse break-up fees) are not prohibited in Myanmar and may be used to protect deals from third party bidders as in other jurisdictions.
Common deal protection mechanisms include letters of credit, letters of guarantee, or escrow accounts for gradual payment of the price, which serve as a guarantee for the protection of transactions and especially for the payment of the purchase price. Break-up fees are not common but are enforceable in principle; the contractual structure for the legal basis of break-up fees is critical for their enforceability. Limitations based on general principles of law (e.g., fault or the abusive exercise of rights) will apply. Furthermore, in order to mitigate the risk of not receiving the necessary approvals for the transaction, the parties often define the granting of the relevant approvals as a condition precedent for closing. Each party carries its own transaction costs through the performance and until the closing of an M&A deal.
a) Public M&A Transactions
Management of the target company may agree to deal protection measures only if such measures are in the best interest of the company. Also, the “neutrality obligation” must be kept in mind. Based on these strict premises, some deal protection measures can be installed.
No-shop-clauses prohibit the target’s management to actively seek an alternative buyer. It may also contain restrictions on talking to third parties (“no-talk-clauses”). However, in order to not violate above mentioned premises, in these cases, certain exceptions from the no-shop-clauses are usually allowed, e.g. window-shop or go-shop clauses, granting the right to look for an alternative bidder in a certain time period. Fiduciary out clauses in case a better offer can be reached by a third party are then provided accordingly. As an answer to fiduciary out clauses or exceptions from no-shop agreements, a right of the bidder to match a potential better offer by a third party may be agreed upon.
Break-up fee arrangements are not yet common, as the legal enforceability is uncertain and such arrangements are subject to a number of limitations (for example, the target company’s management board can only enter into them if they are in the best interests of the target).
b) Private M&A Transactions
Break-up fees are increasingly demanded in cross-border transactions and sometimes seen in private acquisitions. Even without a break-up fee arrangement, there might be, subject to rather strict prerequisites, a pre-contractual liability if one party breaks off negotiations unreasonably after it has induced confidence that an agreement would be reached.
Earn-outs are increasingly demanded and protect the buyer from overpaying the future upside.
Other measures, as mentioned for public M&A, can be and are used more freely, as the takeover code-based “neutrality obligation” does not come into play.
A bidder could build a stake in the target company prior to announcing the bid.
Break fees payable by a target in in public M&A are not common in Belgium. The board of a target company should take into account the company’s interest when deciding whether to agree to such break fees.
Belgian publicly traded companies typically have one or more reference shareholder(s). A bidder can approach such reference shareholder(s) with the purpose of enhancing and securing the success rate of the public offer. It may seek certain commitments from these shareholders to support the offer, not to solicit any bid by another party and not to dispose of its shares.
13.1 In the context of Vietnam M&A transactions, it is increasingly common for vendors and purchasers to agree upon arrangements consisting of:
- the lodgement by the purchaser of an up-front deposit, calculated as a percentage of the proposed total purchase consideration (with 10% being common);
- the deposit being placed into escrow, in an account opened in the dual names of the parties with a mutually-acceptable escrow services provider such as a neutral bank; and
- the release or forfeiture of the deposit being subject to balanced, reasonable, and carefully documented contractual provisions.
13.2 The use of contractual protections such as indemnity provisions entitling innocent parties to recover from the defaulting party any loss or damage suffered as a result of unlawful and unilateral termination is also increasingly common in Vietnam (whether on a liquidated damages basis or a full indemnity basis).
13.3 From a costs perspective, it would be unusual to see any arrangements other than each party bearing its own transaction costs on its own account, regardless of the completion or non-completion of the transaction, regardless of the circumstances.
A way for a bidder to receive some degree of deal protection is to include a break fee in the transaction agreement. The parties are, however, not entirely free to determine the magnitude of the break fee payable by the target. According to the practice of the TOB, a break fee has to be reasonable and limited to the expected costs of the bidder. In addition, the bidder may request the target not to solicit competing takeover proposals (no-shop provision), whereas a clause prohibiting the target from passively discussing alternative proposals with third parties (no-talk obligation) would not be permissible. Also, an undertaking from the target to inform the bidder about interloper approaches or requests for due diligence is permissible. The same goes for a contractual matching right under which the target must give the bidder the opportunity to match the price and other offer terms offered by the competing bidder before the target board withdraws or changes its recommendation of the initial offer.
The most common deal protection and cost coverage mechanism is a security deposit, whereby a buyer deposits with a seller an agreed amount in cash which is retained by the seller if the buyer unreasonably refuses to complete the transaction or is returned by the seller if the seller unreasonably withdraws from the negotiations (sometimes in double amount). After recent amendments to the Civil Code, this type of security is explicitly provided for by Russian law.
The parties usually cover their own costs. Break fees are sometimes used, but they are not the norm in M&A deals.
Leak protection mechanism, which prevents leaks of information.