| DEFINITION | A controlled auction is the sale of a company or business where the seller seeks competing bids for the target. The issues that arise on this type of transaction are very similar to those that arise on most private sales. | A buyer for assets or shares may be sought either directly by the seller or by an intermediary such as a financial adviser, bank or accountant. |
| PROCESS | The timing and order of the steps in the auction process differ from transaction to transaction, but they almost invariably include the following: Advertisement of Sale: - By S.755(1) CA 2006 Private Co.’s cannot offer shares for sale to general public. BUT, - By s.756(3) and advertisement issued to specifically identified B’s is the exception, BUT - Note FSMA 2000 The distribution of an information memorandum and letter detailing the auction process to prospective bidders. - does not create a binding contract, - inviting B’s to submit indicative offers, - Co. is sold without finance - Co is sold by “debt free/cash free “ price p.23 - Outlines Co.s information (eg. General assets, tax position, potential liabilities, strengths, weaknesses) -Buyer will see warranties from S A first round of "indicative" bidding. A DD investigation and review of draft sale documents by bidders. A second round of bidding from a limited number of bidders, accompanied by their responses to the seller's draft documents. Negotiations with one or more bidders, leading to the conclusion of a sale. | B and S already know each other; they have agreed the main commercial terms of the proposed acquisition and possibly an agreed period of exclusive negotiations. The usual procedure for negotiating the contract documents on a private sale is as follows: The buyer’s lawyer prepares the draft sale and purchase agreement. He submits this to his client and, with his client’s agreement, forwards it to the seller’s lawyer. The seller’s lawyer considers the draft sale and purchase agreement with his client and amends it, returning the amended draft to the buyer’s lawyer. The seller’s lawyer prepares a draft disclosure letter based on information provided by the seller which, after the seller has approved it, will be sent to the buyer’s lawyer. The buyer’s lawyer considers the draft disclosure letter with his client, and amends it appropriately, returning it to the seller’s lawyer. Both parties’ lawyers agree final versions of the sale and purchase agreement and the disclosure letter (there may have been many drafts before getting to this stage). |
| ADVANTAGES FOR THE SELLER | The seller seeks a number of benefits from the auction process: The Seller drafts the SPA The seller can usually reach more potential buyers through an auction. The competitive tendering process is intended to maximise the price by encouraging potential buyers to bid against each other. In some cases, the seller will run a dual-track process with a view to eliciting a pre-emptive offer from a bidder before the second round of bidding has been completed. As well as a higher price, the process should enable S to obtain better sale terms than might be achieved on a more typical private treaty sale. S prepares the first draft of the sale documents, and the competitive process is used to encourage bidders to make only those changes to the documents which they feel they absolutely need. S has the advantage of being able to continue negotiations with more than one bidder until the terms have been agreed, enabling it to defer committing to any one buyer until the principal terms have been settled. The seller seeks to use the data room set up for the sale (seePreparation of the data room) to control the amount of documents disclosed and limit the investigation permitted to bidders. The seller has the opportunity to control the timetable, in particular to reduce the time it takes to proceed from agreement in principle to completion of the sale (seebox, Specimen timetable). A well-marketed auction can enable directors to demonstrate to shareholders and creditors that they have obtained the best price for the target. | The Buyer drafts the SPA Continuity of trade Confidentiality may be an advantage as documents are disclosed to a very limited number (usually 1 or 2) of potential buyers. It is not as disruptive as auction sale in relation to employees. Do not go through the potential embarrassment of having an auction and not having a buyer. Smother process of negotiations as S is dealing with one B and not multiple parties as in an Auction Sale. Auction sale may take longer than a private sale If the target business is a highly complex and regulated business (e.g. a sector with high competition, or national security issues) the better option will be a Private sale as the auction may make available information that a company will want to keep private. |
| DISADVANTAGES FOR THE SELLER | There are nevertheless a number of counter-balancing considerations from the seller's perspective: Not all businesses are suitable for sale by auction. If the market sector is limited and there are only one or two potential buyers, an auction may not be appropriate. An auction may also be inappropriate where the structure of the business is particularly complicated or where there are significant external factors affecting the transaction, for example, regulatory or competition issues, or material third party consents. Such factors may make the production of a standard form of agreement and a standardised process for all bidders impractical or impossible. The cost to the seller is usually higher than on a typical private treaty sale. In addition to the fees payable to its financial adviser, the seller's legal fees are likely to be higher than usual because its lawyers and not the buyer's will generate the initial suite of documents and may be involved in negotiations with more than one buyer. The knowledge that a target is for sale inevitably interrupts the normal conduct of its business; at worst, it can lead to permanent loss of customers, but even at best it may involve loss of sales and possibly key staff during the course of the sale process. Although the securing of suitable confidentiality undertakings is an important element in the auction process, it is more difficult to maintain confidentiality because of the number of parties involved (seePractice note, Confidentiality: acquisitions). The process of negotiating with more than one bidder imposes additional stresses on the seller and on the management of the target. More management time is involved, and additional problems can arise if the management of the target is itself a potential bidder. Some bidders may not be serious about acquiring the target and are interested only in finding out information about a competitor. While confidentiality undertakings are intended to deal with this, it is not...
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