What steps can an acquirer of a target company take to secure deal exclusivity?
Mergers & Acquisitions (2nd edition)
Please refer to the relevant Offshore Chapter.
In private M&A transactions the acquirer often obtains exclusivity in the letter of intent, which prevents the seller for a certain period of time from engaging in negotiations with other potentially interested persons. To further strengthen deal exclusivity a contractual penalty can be foreseen in case the seller breaches the exclusivity obligation. However, under Austrian mandatory law judges are entitled to reduce a contractual penalty if the contractual penalty is considered excessive.
In public M&A transactions, the Code prohibits a bidder (and any person acting in concert with it) and a target company entering into any “offer-related arrangement” including break fee arrangements (see the response to question 13 below). Examples of agreements, arrangements and commitments that are considered to be prohibited offer-related arrangements include the target company agreeing (i) not to engage in discussions with a competing bidder, (ii) not to provide information to competing bidders over and above the level of information required to be provided to competing bidders under the Code, (iii) to notify the bidder of receipt of a competing offer, and (iv) to provide the bidder with the opportunity to match the competing bid or increase its bid beyond the competing bid before the target board recommend the competing bid.
What is permitted however, is a commitment to provide assistance or cooperation in relation to the obtaining of regulatory approvals, a commitment by the target company to maintain the confidentiality of information (provided it does not agree to any prohibited “offer-related arrangement”) and a commitment not to solicit a bidder’s employees, customers and suppliers. What is also permitted is obtaining irrevocable undertakings from directors who hold interests in target shares and from a limited number of shareholders of the target company under which such directors and shareholders agree to vote in favour of and/or accept the offer when it is made. Bidders are also able to enter into letters of intent with shareholders under which shareholders provide a confirmation of their intent to vote in favour of and/or accept the offer. These letters of intent are a lesser commitment than an irrevocable undertaking but can be useful for a bidder to demonstrate the level of support of its bid for the target company. In a Scheme, a bidder may consider acquiring shares in the market (after the offer is announced) to seek to build a stake in excess of 25% of the target company’s shares in order to make a competing Scheme unlikely to succeed. This would not preclude a bidder making a competing takeover offer however.
In private M&A transactions, companies are broadly free to agree whatever deal protection measures they wish and it is not uncommon to see companies in these deals entering into exclusivity agreements and break fee arrangements.
The parties could enter into an exclusivity agreement or introduce exclusivity clauses to the terms sheet/ letter of intent, preliminary agreement or SPA. Usually, the aim is to prevent the seller from selling and negotiating the sale of the shares with third parties. Non-compliance by the seller would enable the acquirer to seek damages and/or penalty for the breach of the exclusivity clauses if such has been agreed.
The only means by which a potential acquirer may secure deal exclusivity is through the execution of an agreement that grants exclusivity to the potential acquirer. Except for competitive or auction M&A transactions, it is usual for the potential acquirer to request the seller to enter into an exclusivity agreement, at least for the term of the due diligence process and a limited term for the negotiation of the transaction documents. However, obtaining exclusivity entirely depends on the leverage of the buyer during the acquisition process.
Once the agreement is executed, it is common practice to include a “no-shop” provision to prevent the seller from soliciting or encouraging third-party proposals.
Exclusive negotiation may be organised through a contract between the parties. It is thus possible to provide in a letter of intent an exclusive negotiation clause aimed at prohibiting, for a certain period of time, either party from negotiating a contract of the same nature with any third party. Such undertakings are generally granted by the selling shareholders as well as, where the target is listed, by the target itself.
In the context of a takeover:
- true exclusivity is not possible as no party can be prevented from making a competing offer;
- exclusivity arrangements around recommendations/due diligence access could be possible, subject to fiduciary outs for the target company; and
- asset lock-ups can be achieved through offer conditions.
A potential acquirer is able to acquire up to 19.9% of target company’s voting shares (in total), assuming it does not control the voting rights of any target shares held by third parties. The potential acquirer cannot exceed 20% without making a takeover offer.
Pre-bid agreements with shareholders, where they agree to accept an offer made on certain terms, are permitted and are standard procedure in New Zealand takeovers. The agreements must state that control over voting rights remains solely with the existing shareholder, to avoid issues under the Takeovers Code. Pre-bid agreements are typically entered into immediately prior to launching the bid (and therefore also after building any initial stake), as they must be publicly disclosed.
For a scheme of arrangement –
- Exclusivity is possible, subject to fiduciary outs in the case of a superior proposal;
- Asset lock-ups can be achieved through the Scheme Implementation Agreement.
Voting agreements (where shareholders agree to vote in favour of a scheme) are not permitted where this would put a person over the 20% ‘control over voting rights’ threshold under the Takeovers Code. Voting agreements may also result in the parties becoming a separate interest class for voting purposes – defeating the purpose of the agreement.
In a private M&A transaction, counterparties are not restricted from agreeing exclusivity arrangements or other deal lock-ups. Parties should consider the application of New Zealand’s competition laws in relation to procedural aspects of transactions between competitors.
Deal exclusivity can be secured contractually between the parties.
Subject to the Board complying with their fiduciary and other duties, an acquirer can negotiate for exclusivity and a no-shop, no-talk and/or an outright prohibition on supplying due diligence information to or negotiating with other potential bidders.
Exclusivity agreements are the usual practice to secure deal exclusivity.
Parties must conduct negotiations in good faith and cannot withdraw in bad faith. This rule is to be interpreted in the sense that a party, in the event of unjustified withdrawal, is liable for both the costs incurred by the other party throughout the negotiations and the opportunities lost by the other party due to the legitimate expectation that the negotiations would have been duly carried out.
Since this rule does not prohibit the parties from pursuing their own interests and seeking a better deal elsewhere, exclusivity agreements are common in sale and purchase agreements regulated by Italian law.
Normally, the shareholders sign an exclusivity agreement with the buyer; for mergers and equity contributions, exclusivity can be agreed with the target company.
Sometimes exclusivity is guaranteed by a penalty clause, which obliges a party that breaches the exclusivity agreement to pay a predetermined amount, with the possibility (which must be expressly included in the contract) of the non-breaching party to request compensation for any further damage (under Art. 1382 of the Italian Civil Code). With regard to the predetermined amount, the counterparty has the right to start legal proceedings to have the predetermined amount recalculated, which can be granted on a discretionary basis by the judge if the obligation was only partially fulfilled or the judge considers the amount manifestly excessive.
It is not permissible to “tie-up” deals in respect of publicly listed companies in Ireland.
Exclusivity in Brazil is contractual. Therefore, obtaining the exclusivity depends on the leverage of the buyer during the acquisition process. Competitive M&A transactions in Brazil occur as in any other developed market worldwide. There is a stage where multiple potential buyers present non-binding offers. Only a handful - or one - make it to the second round. This is the stage where exclusivity is usually sought. The trick when exclusivity is obtained is to make it enforceable. It has to cover the seller and its economic group, as well as service providers. On top of that, Brazilians frequently establish compensatory fines in exclusivity agreements at a high value to ensure enforceability and, on the other hand, to avoid pointless and lengthy discussions on the damage caused by the breach of exclusivity provisions. The reverse side of this strategy is allowing the seller to “trade” on the exclusivity, since it has a clear value. However, this is almost never the case, as the values tend to be considerable. Several sellers, however, because of cultural issues, tend not to agree on fines. In a nutshell, exclusivity is a very complicated issue in Brazil, specifically when the market is on the rise.
An acquirer of a target company can contractually secure deal exclusivity with the target company by entering into either (i) a memorandum of understanding or (ii) an exclusivity agreement with the target company securing exclusivity of the deal for a specific period of time.
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.
It is unusual for the board of directors of a U.S. public company to grant a meaningful period of true exclusivity to a potential acquirer. This is particularly the case in jurisdictions where courts apply enhanced scrutiny. Granting exclusivity to a potential acquirer precludes the consideration of alternative bids during the exclusivity period, and therefore may make it difficult for directors to fulfill their duties to shareholders to maximize value. However, where there has been an extensive effort to sell the company, whether through an auction process or otherwise, public company directors may be more willing to grant exclusivity to a buyer for a limited period of time to finalize a transaction. Public companies also sometimes grant limited exclusivity in which they agree for a period of time not to solicit other transactions but which is subject to an exception for unsolicited acquisition proposals.
In acquisitions of private companies, particularly where the target company’s shareholders are involved in the sale process, exclusivity is much more common and is often insisted upon by the buyer. In both the public and private markets, a grant of exclusivity is typically embodied in an exclusivity agreement.
Once a definitive agreement is signed, deal protection provisions (including no-shop provisions), which are discussed below, involve limited grants of exclusivity.
It is up to the buyer and the seller to negotiate and agree on terms of exclusivity in a private Swedish transaction and terms of exclusivity are regularly discussed between the parties in negotiations of letters of intent and similar transaction documents.
With respect to publicly listed companies, offer-related arrangements in public transactions are normally not permissible in Sweden, with the exemption of confidentiality commitments or undertakings not to solicit the offeror’s employees, customers and suppliers. That said, in order to increase its chance of success, the offeror will often seek irrevocable undertakings from key shareholders of the target company before making an offer. Such irrevocable undertakings are usually discharged if there is a higher competing offer (the percentage increase may be specified), although they may also include a matching right for the offeror. The announcement of the offer must contain information about the extent to which the offeror has received irrevocable undertakings from target shareholders.
The use of exclusivity agreements is standard practice in Guernsey. Where the provisions of the Takeover Code apply, the board of the target company are not permitted to agree to not solicit or recommend other offers.
In a transaction that is subject to the Takeover Code, the terms of any agreement between the bidder and the target are heavily restricted by Rule 21.2 of the Code. Any such agreement is generally prohibited, except to the extent that it deals with irrevocable commitments and letters of intent (for example, the shareholder directors of the target may provide an undertaking to accept the offer in respect of their own shares, if the bid is made on the terms indicated).
Where the Takeover Code does not apply (for example, in relation to a company listed on the TSX with a majority of directors outside the UK, Channel Islands and Isle of Man) it is common to have an implementation agreement or an arrangement agreement which may include the following:
- The target board agreeing to take certain steps in relation to the transaction (such as providing information to the bidder, recommending the offer, preparing documentation for a scheme of arrangement and so on) in accordance with a proposed timetable;
- Undertakings from the target not to solicit a competing offer and to inform the bidder if a competing offer is received;
- Actions which the target can take if a superior competing offer is received; and
- A break fee payable to the bidder in certain circumstances.
The target board can generally agree not to solicit other offers, but the directors should carefully consider their fiduciary duties in the context of any commitment not to recommend a superior offer. If such a commitment is given, it should bind the target only, and not the directors, so that the directors are free to recommend a superior offer in accordance with their fiduciary duties, even if a break fee may then become payable by the target.
In addition, the target's board of directors are not permitted to agree to not solicit or recommend other offers (Rule 21.2, Code).
Deal exclusivity is typically only found in transactions in which the controlling shareholders of the target company are involved in the marketing and sales process and when the acquirer is able to successfully negotiate a grant of deal exclusivity from the controlling shareholders.
If the controlling shareholders of the target company are not involved in the marketing and sales process, the acquirer will need to negotiate with the target company to obtain deal exclusivity. It is more difficult and less common for the acquirer to receive deal exclusivity in such case, because there is concern among directors that granting deal exclusivity may result in the breach of their duties to the target company.
Isle of Man
The use of exclusivity agreements is standard practice in the Isle of Man and follows market practice in the UK.
The board of the target company may solicit or recommend other offers. However there are no rules prohibiting the board from agreeing to deal exclusivity, provided that the directors are satisfied that they are acting in the best interests of the company and are fulfilling their fiduciary duties.
As is the case in many other jurisdictions, once an agreement has been reached to commence formal negotiations it is common to see arrangements whereby the parties agree that they will only negotiate with one another for an agreed period of time with a view to agreeing a definitive deal.
When negotiating and documenting the terms of any agreed deal, particularly where there will be a large gap between signing and closing, we are often asked to advise on “no-shop” provisions. These seek to prevent a target company from soliciting or encouraging third-party proposals once a binding transaction agreement has been executed.
Deal exclusivity provisions tend to vary from a less restrictive provision that permits the target company to provide information to unsolicited bidders, to the much more restrictive "no-talk" provision prohibiting the target company from responding to any third-party advances. Because of their potential for discouraging what may be superior competing offers, no-shop provisions are subject to increasing scrutiny.
Whilst such provisions are common in Bermuda M&A transactions, those which are overly restrictive could be subjected to scrutiny on the basis that the target board breached its fiduciary duty to act in the best interest of the company (including the shareholders as a whole) both on the basis that the target was locked into a transaction that did not reflect its true value and that its shareholders were unable to realise the same.
Occasionally provisions try to push so far as to commit a board to move forward with a transaction or recommend the same to the company’s shareholders when it is clearly no longer in the best interests of the company (for example, because a third party has made clear that it wishes to enter into negotiations and has demonstrated a clear indication that should such negotiations be successful, they would represent a far superior proposal.
As a result, when negotiating exclusivity provisions, clients are well advised to seek a carve out where, in order to comply with director fiduciary duties, they will no longer be bound to refuse to negotiate with third parties and recommend that shareholders accept inferior proposals.
British Virgin Islands
Subject to directors of the BVI constituent company (whether acquirer or target) complying with the terms of the Act and their fiduciary duties, the BVI entity may permit exclusivity, however the directors of the target company will be required to consider whether granting exclusivity will be in the best interests of the Company or whether they should be holding out for a better offer or creating more competitive tension.
The Takeover Code, if applicable, imposes a general prohibition on offer related arrangements between a bidder, or any person acting in concert with it, and the target.
In all other cases, there are no rules prohibiting the target from agreeing to deal exclusivity, provided that the directors are satisfied that they are acting in the best interests of the company and are fulfilling their fiduciary duties.
At the onset, potential acquirers typically demand an exclusivity clause to be included in the letter of intent or the memorandum of understanding that designates a certain period for exploratory negotiations.