The Middle Ground

A GUIDE TO DEAL TERMS IN PLAIN ENGLISH


+ Introduction

+ Purchase and Sale

+ Closing

+ Representations & Warranties - Seller

+ Representations & Warranties - Buyer

+ Covenants

+ Conditions to Closing

+ Indemnification

+ Termination

+ Miscellaneous

No Solicitation of Other Bids


Classification: Situation-Specific
Section: Covenants
Negotiation Time: Minimal to Moderate
Transaction Costs: Insignificant
Major Impact: Risk Management and Transaction Completion


What is This? As the Buyer spends more resources on the transaction, it wants to know that the Seller is serious about completing the deal. Agreeing not to ask for or facilitate competing bids is a signal of the Seller’s intent, and from a practical standpoint it lowers the chances that a successful competing bid will be made.

The Middle Ground: This covenant restricts the Seller from encouraging third parties to provide a competing bid by actively soliciting bids, negotiating with third parties, or providing those third parties with information that would be useful in preparing and making a bid. It is essentially an exclusivity clause aimed at preventing the Seller from trying to increase the Purchase Price by encouraging competitive bids. However, it does not prevent the Seller from accepting an unsolicited, superior offer should one be made.

Purpose: This covenant is essential if there is a meaningful time period between the parties signing the Agreement and closing the deal. That is because this covenant provides the Buyer with some assurance that the Seller is serious about the deal and is not using the Buyer’s interest as a bargaining tool with other buyers. Such exclusivity removes one major source of deal risk and empowers the Buyer to commit further time and resources to conducting due diligence and closing the transaction. Typically, the parties will agree on exclusivity as part of the letter of intent, but the time period will be limited to a set time frame or will expire once the Agreement is signed, so an exclusivity provision in the Agreement itself is necessary to protect the Buyer’s interests.

Buyer Preference: The Buyer wants this provision to be as strict as possible, and some even go so far as to prohibit acceptance of unsolicited, superior offers. Others will require the Seller to inform the Buyer of any unsolicited offers so the Buyer can either match the offer or limit its spending in connection with the deal. Additionally, the Buyer can include a specific performance provision that requires the Seller to move forward with the deal even if it breaches this clause and obtains a higher offer, on the grounds that the damages to the Buyer for the Seller’s breach would be impossible to quantify. One alternative to a specific performance provision would be a liquidated damages provision that sets a monetary amount to be paid upon the Seller’s breach. If using a liquidated damages clause, the Buyer wants to avoid setting the amount too high to avoid characterization as a “penalty clause.”

Seller Preference: The Seller likely wants to exclude this provision, or at the very least include one or more exceptions within it. For example, it may want to be able to negotiate with third parties with the understanding that it would only move forward with them if the deal with the Buyer falls through. Or it may seek a “fiduciary out” (common in public company acquisitions) that requires it to accept the highest offer even if that offer is made during the exclusivity period.

Differences in a Stock Sale Transaction Structure: None.


DISCUSSION

We want The Middle Ground to be an ongoing dialogue for and resource to the lower middle market M&A community. The outline above is generally applicable, but there is always specific case law and nuance around certain industries that can be useful in helping buyers and sellers come together. If you are a lawyer or deal professional, we encourage you to add your perspective below.