STANDARD OF DISCLOSURE FOR SPECIFIC DISCLOSURE

Contractual protections where delay between exchange and completion

Conditional contract = where the parties sign and exchange SPA, but there is then a delay between exchange and completion normally because S is waiting to obtain consents, clearances or approvals from third parties which are critical to the acquisition.

EXAMPLES:

landlord consent to assign a lease
third party waiver to a change of control clause
shareholder approvals
transfer of a market sector regulatory license from S to B
clearances, e.g. tax clearance from HMRC on roll-over relief being applicable on securities exchange or competition clearance from Competition Authorities

Completion will not take place until that condition has been fulfilled

if it has not been fulfilled within a certain period of time, B will normally have the right to rescind the contract and withdraw from the acquisition.

ALTERNATIVES…

Delay exchange
1. Problem? not contractually bound:
  1. S problem - B may withdraw
  2. B problem - S may find better offer
2. Uncertain - may lead to constant renegotiation
3. Delay - change in the market/business may lead B to want to walk away.
4. Time and cost

May be better bring negotiations to a close, put the agreement to bed, exchange contracts and then wait to complete

Exclusivity arrangement in separate contract
1. B won't be worried if S gets better offer
2. avoids need to exchange too early
Complete and take the risk, then adjust the price afterwards
1. Take the risk that the consent or approval will be obtained
2. Negotiate two separate prices for each eventuality:
  1. If condition is fulfilled, price X
  2. If condition is not fulfilled, price Y

Risk allocation – conditional contracts are risky for B:

B is agreeing to acquire the company but won't actually gain control until all SPA conditions are satisfied.
S will no longer own the company after completion, it may begin to neglect business between signing and completion.
S will want to retain as little risk as possible and will be reluctant to allow B to withdraw or renegotiate terms, as it will argue that any change in circumstances are risks assumed by B.
How risk is actually allocated between the parties will be a matter of negotiation and bargaining power.

(1) Repetition of warranties & right to terminate for breach of warranty

B will want S to repeat the warranties:

at exchange;
daily between
on comp

B will also want the corresponding right to terminate the agreement for breach of warranty.

Why?

This will protect B from breaches of the warranties between signing and completion.

Negotiation

Warranties unlikely to remain true on completion and so S will request the following limitations:

to be able to disclose breaches on completion
termination for 'material breaches' only
reciprocal right to terminate to avoid situation where B elects to complete agreement and then brings a damages claim for breach of warranty.

B will resist disclosure before completion as B is contractually bound to purchase and disclosing breaches of warranty will provide B with little protection from breaches (by contrast B can walk away after disclosure pre-exchange)

Conclusion (matter for negotiation)

Repetition of warranties - S bears risk
Full disclosure - B bears risk
Compromise - disclosure in limited circumstances

Restrictions on Management Actions

On exchange, B is contractually committed to proceed with the acquisition, but will not take control of the target until completion occurs. B has risk that S will neglect business before comp, knowing B must go ahead with the purchase.

Undertaking not to do anything except ordinary course of business (e.g. lend money, grant charge, settle claims, dispose or acquire, hire of fire)
Notify and obtain B's consent for non-routine
B to attend board meetings and review mins
S to supply information to B on reasonable request

B will want S to bear the risk of the target company reducing in value,
S may agree, but NOT where the reduction in value is the result of something which B has pushed for or is the result of meddling in the running of Business pre-completion.

Negotiation between B and S

B will want some control (i.e. notification and consent), but at same time will not want to hinder the running of Business.
S will be reluctant to give this as B does not own the company until the necessary conditions are satisfied. It is close to a done deal, but it is still possible that B could walk away which would leave S with a company which B has interfered with.

Material Adverse Change

B will want a right to terminate the agreement in the event there is a 'material adverse change' to the company as the result of the economy / market (rather than breach of warranty).

What constitutes a 'material adverse change'?
Should the test be subjective or objective? who decides what is material?
Should any particular events be carved out of the provision?

Negotiation

S will argue that the risk should pass to B on signing the agreement and will resist a MAC clause on Basis that the deal will be public and if it falls through, will have adverse consequences on Business.
If forced to accept, S will want to limit the provision:

negotiate heavily the meaning of 'material'
limit it to specified events (e.g. loss of a particular customer)
carve out changes in the market, industry or legislation.

B will want to limit the changes in the market to only those which affect the company in proportion to other companies in the market and/or industry. Changes which disproportionately affect the target company should be capable of being a 'material adverse change'.

Contractual provisions to protect both B and S when there is a delay between exchange and completion

(1) Condition itself:

Set out what the condition actually is
Obligation to take all reasonable steps to procure satisfaction (not implied by law and must be enforced contractually)

If you are advising B, place the obligation on S (do not self-impose on B)
If you are advising S, place Same obligation on B as well.

Long-stop date as follows:

date by which the condition must be fulfilled
date by which completion must take place
date by which completion must take place after condition satisfied

(2) ...

#15689 - Standard Of Disclosure For Specific Disclosure - Mergers and Acquisitions (Private Acquisitions)

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