What steps can an acquirer of a target company take to secure deal exclusivity?
Mergers & Acquisitions (3rd edition)
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.
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.
An acquirer will normally request exclusivity in letters of intents, memoranda of understanding and other preliminary agreements whereby an “in-principle” figure of the principal commercial terms of the transactions is provided. Exclusivity obligations in Colombia are valid and remedies available in case of a default will comprise monetary damages (penalties and the right to claim additional damages) arising from the contractual breach.
The bidder and the target company may enter into a business agreement pursuant to which the target company commits to support the offer, under a certain conditions and within a pre-defined timeframe. Such agreement often includes an exclusivity commitment not to negotiate with any other potential acquirer(s), nor to recommend a competing offer to its shareholders.
To strengthen agreement exclusivity, a contractual penalty may be foreseen in case either party breaches the exclusivity obligation. The parties should be careful and within the applicable market thresholds when determining the amount of agreed contractual penalty as it could be challenged in the court proceeding if the court would decide the amount is excessively high.
By means of an agreement to that effect.
Making binding offers that allow signing exclusivity agreements with very high penalties for non-compliance.
It is common to agree an exclusivity during due diligence and for a certain period of time during the negotiation.
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 private M&A transactions, an exclusivity can be agreed upon in an agreement. In order for the exclusivity agreement to be enforceable, it is preferable for the acquirer to request a contractual penalty (liquidated damages) in case of a breach to be included in the agreement. Depending on the negotiation power it is however not very common for sellers to accept such contractual penalties.
As in other legal jurisdictions, the acquirer of the target company often obtains exclusivity in the letter of intent, concluded by and between the acquirer and the seller, which ensures the deal exclusivity for the acquirer because the seller is obliged no to engage in any negotiations with other potentially interested buyers for an agreed period of time.
Public M&A transactions do not have exclusivity agreements legally strictly restricted; however, due to other limitations, such as an obligation of the executive bodies of the target company to act in the best interest of the company, it is not recommended for the target company to secure the deal exclusivity because it is usually not in the best interests of the target company.
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.
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.
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.
A preliminary agreement may be concluded at the start of the negotiations, containing an exclusivity clause next to a confidentiality undertaking.
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.
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.
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.
Exclusivity arrangements are negotiated contractually in Myanmar.
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 will 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.
Under Peruvian regulation, there is no instrument that can secure at a one hundred percent rate the possibility to obtain a deal exclusivity in an M&A negotiation. However, a potential acquirer should base its acts under two principles, act on a fast timeline and pay a reasonable price, in order to secure the deal before other potential buyers can approach the target company with a better offer.
In competitive processes, exclusivity is normally accepted once one bidder has been selected.
Preliminary agreements which impose reciprocal obligations to negotiate in good faith and confidentiality obligations provide a form of lock-up as the acquirer negotiates with the target company. Break-up fees are also becoming more common in M&A agreements as a deal exclusivity-securing feature. The parties may stipulate that if a deal fails to proceed to closing, the party causing the failure will be liable to pay the other party a “break-up fee.” This feature potentially deters parties from conveniently reneging on their deal, especially if the break-up fee involves a substantial amount.
Isle of Man
The use of exclusivity agreements is standard practice in the Isle of Man and follows market practice in the UK.
In private M&A deals, exclusivity is usually secured at the latest stage of an auction sale between the selected bidder and the seller or in early stages of a direct negotiation between the relevant parties.
Exclusivity is usually imposed by the selected bidder/purchaser in: (i) a non-bidding or binding offer, which can then be accepted by the seller by countersigning such document; or (ii) other pre-signing arrangements (e.g., MoU or terms sheets).
In public M&A deals, any agreements about the transfer of shares risk triggering the obligation to launch a mandatory PTO (see 25 below). Accordingly, preliminary arrangements such as exclusivity agreements are not advisable.
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).
Article 434.1 ‘Contractual negotiations’ of the Civil Code of the Russian Federation 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.
It is permissible to grant potential offerors exclusivity. The prevailing view in the local market (although this has not been tested by a South African court) is that:
12.1. “No shops” are probably enforceable.
12.2. Directors’ fiduciary duties would require them to deal with and entertain an unsolicited bid even if they have signed an exclusivity with a prior bidder.
In order for a preferred bidder to succeed with the transaction, it is not unusual for it to seek irrevocable undertakings from major shareholders of the target company. In these circumstances, bidders need to be careful that the irrevocable undertakings do not extend beyond mere voting support as there is otherwise a risk that the parties could be seen to be acting in concert (that is, the supporting shareholder could be seen to become part of the offeror).
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.
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.
It is common for a memorandum of understanding or letter of intent to contain an exclusivity period given by either the major selling shareholder (in case of secondary share sale) or the target company (in case of primary share sale).
An exclusivity period is commonly included in the confidentiality agreement or similar preliminary transaction documentation, which compels the seller to refrain from engaging other potential buyers. It is also common to add a liability clause under which the buyer may hold the seller liable for breaching the exclusivity clause. Such liability clauses are commonly drafted as a liquidated damage provision. Under UAE law, liquidated damage clauses are treated differently than in western jurisdictions. In particular, the amount of damages agreed on may be adjusted by the courts to reflect the actual amount of damages incurred by a party to the relevant contract.
The acquirer can enter into an exclusivity agreement including a no-shop covenant with the target and/or its majority shareholders in order to secure exclusivity for the deal. The acquirer may impose break-up fees on the target and/or its majority shareholders.
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.
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.
The acquiror can enter into an exclusivity agreement, or letter of intent/MOU that includes a legally binding exclusivity clause with the target company and its shareholders. The definitive transaction documents often also include exclusivity clauses covering the period from signing to closing.
Exclusivity and confidentiality clauses are customarily included in non-binding offers submitted by a potential acquirer and in preliminary agreements entered between the parties.
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 Takeover 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 The International Stock Exchange (TISE) 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, Takeover Code).
Please refer to the relevant Offshore Chapter.
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.
A target company may, however, provide assistance or cooperation in relation to the obtaining of regulatory approvals, maintain the confidentiality of information (provided it does not agree to any prohibited “offer-related arrangement”) and commit not to solicit a bidder’s employees, customers and suppliers. A bidder may also acquire irrevocably undertakings from the target company’s directors and/or shareholders in relation to their offer, however, these may (depending on their form) fall away in the event a competing offer is made. 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, although it wouldn’t prevent a competing takeover offer from being made.
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.
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.
Usually, acquirers and sellers sign term sheets or letters of intent in Hungarian M&A transactions. In these documents, the seller may be required to undertake exclusivity, i.e. for an agreed period of time, the seller shall not engage in discussions with third parties regarding the sale of its participation in the target company, shall not offer the deal to any other person, and shall not respond to any such approach from third persons. The parties may agree that the breach of such undertaking triggers penalty obligations for the seller (if so stipulated in the term sheet or letter of intent) and liability of the seller for the damages of the acquirer (by the force of law). However, in case of a dispute regarding the facts, the breach must be proven by the acquirer which may not always be easy.
Generally, under Hungarian law, the acquirer cannot claim damages merely because the other party walked away from the transaction without concluding the contract. This is due to the Hungarian legal standpoint that the parties do not have the obligation to conclude the contract. In most cases the party will not even be liable for implied conduct. However, as a specific case of culpa in contrahendo set out in the Hungarian Civil Code, a party may bear liability ex delicto for the damages incurred by the acquirer as a result of the other party’s breach of its obligation to inform and cooperate with the acquirer in the course of the negotiations. The respective party will bear such liability if, upon commencing, conducting or terminating the negotiations for the transaction, it has breached its obligation to act fairly and in good faith.
Only by way of an agreement to do so.
The acquirer and the seller usually sign a letter of intent which can include an agreement on a limited period of exclusivity of negotiations. An agreement on break-up fees is generally allowed as well. It should also be considered that the Slovenian Obligations Code (OZ) provides in Article 20 that a party that has negotiated without the intent of concluding a contract shall be liable for any damage inflicted on the other party.