What steps can an acquirer of a target company take to secure deal exclusivity?
Mergers & Acquisitions (2nd edition)
Exclusivity agreements (no-shop) are the most common deal protection measure used by acquirers in connection with acquisitions of non-listed companies in Norway. The exclusivity agreement is normally be entered into between the shareholders of the target and the potential buyer. Such agreements are legally binding under Norwegian law, even if they do not provide for payment of any consideration.
Measures commonly used to obtain exclusivity in connection with acquisitions of listed companies include:
- Signed support agreement (transaction agreement) between the target and the potential bidder under which the target’s board agrees to support the potential bidder’s bid for the target’s issued shares .
- Lock-up (pre-acceptance) agreements with principal shareholders.
- Exclusivity or non-solicitation provisions between the target and the bidder.
Note that a bidder’s influence over the target in a public tender process is quite restricted under Norwegian law. The STA and the Norwegian Code of Practice (which all Oslo Stock Exchange listed companies must comply) imposes strict limitations on a target’s board to make controversial decisions preventing other bidders from entering the scene without the risk of being held liable for damages. No-shop / no-talk provisions will generally take the form of covenants from the target not to solicit or encourage other offers, not to provide information to competing bidders; and not to enter into discussion or negotiations with any other bidder. The Code of Practice now includes a provision recommending that no-shop arrangements should only be entered into by the target if they are clearly in the common interests of the target and its shareholders.
Exclusivity arrangements are negotiated contractually in Myanmar.
It is not unusual that preliminary agreements are concluded at the start of the negotiations, which contain an exclusivity clause next to a confidentiality undertaking.
a) Public M&A Transactions
The bidder and the target company may enter into a business combination agreement or a standstill agreement according to which the target commits to support the offer and which also often includes an exclusivity undertaking not to negotiate with any other potential acquirer, nor to recommend a competing offer to its shareholders, in each case subject to applicable takeover regulations. There is some legal debate in Germany as to whether the target can enter into an exclusivity agreement, given the principle of equal treatment for the acquirer, and also whether it can withdraw from such an agreement if a better offer is received. Since the management of the target company is obliged to act in the best interest of the company, deal exclusivity can pose potential risks of conflict, particularly if a higher offer by a different party comes into play. To prevent this, agreements often contain “fiduciary out” clauses in case of a higher or better offer.
b) Private M&A Transactions
In private M&A transactions, the acquirer is typically interested in an exclusivity undertaking by the seller. Especially in auction processes, an interested buyer will require an exclusivity agreement before it conducts comprehensive due diligence. Exclusivity agreements are legally binding and usually provide for cost coverage which a party may incur due to a breach by the other party of the exclusivity provisions. If the seller initiates a private auction, the acquirer will in general not obtain an exclusivity undertaking before the negotiations have reached an advanced stage and definitive agreements appear within reach.
In private M&A, exclusivity arrangements are quite common. Parties often agree not to negotiate with any other party for a certain period time.
A target’s board is required to act in the best interest of the company. In view of this requirement, granting deal exclusivity is not always that straightforward.
Bearing this in mind, certain circumstances may allow the board of a target in a voluntary public offer to agree to a no shop commitment and not to solicit alternatives for a fixed period of time.
12.1 By far the most common scenario is for vendors to require the execution of a binding or partially binding Memorandum of Understanding or similar, providing for the payment by the purchaser of an up-front deposit (which is normally expected to be calculated as a percentage of total purchase price, with 10% being very common). In many cases, vendors will strongly insist upon such deposit arrangements, before they are willing to grant exclusivity or facilitate the conduct of due diligence.
12.2 In many cases, vendors expect that deposits will be paid to them directly (as opposed to placed into escrow) and subject to forfeiture if the transaction does not complete in any circumstances except for 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.
12.3 In some cases, where the purchaser has a comparatively high degree of bargaining power, vendors are sometimes willing to grant exclusivity in the absence of an up-front deposit, although such circumstances are comparatively uncommon.
In private M&A transactions the parties are free to agree on exclusivity. In public transactions the possibilities to grant a bidder exclusivity are limited. To comply with its fiduciary duties the board of the target will generally refrain from granting exclusivity prior to signing a transaction agreement. In the transaction agreement the target board will require a fiduciary-out in case it is approached by a credible third party proposing a competing transaction.
In 2015 the Civil Code of the Russian Federation was supplemented with Article 434.1 ‘Contractual negotiations’. This Article requires bona fide conduct of negotiations and establishes so-called pre-contractual liability of a party to negotiations that is acting in bad faith.
Unreasonable and unexpected withdrawal from negotiations in a situation where the other party cannot reasonably predict such termination of negotiations is now viewed as bad faith negotiating and may result in a breaching party’s liability in the form of payment of other parties’ damages.
In addition, the Civil Code now explicitly provides that parties to negotiations are entitled to enter into an agreement in relation to conduct of contractual negotiations, setting out relevant procedures and other covenants of the parties, including, inter alia, exclusivity undertakings. Such an agreement may provide for a penalty in the event of breach of relevant undertakings.
The acquirer may enter into an exclusivity agreement with the seller. An exclusivity clause is usually provided in the memorandum of understanding (MoU) / letter of intention (LoI).
Only by way of an agreement to do so.