400 11 Takeovers: Introduction
The parties typically try to mitigate the risk of opportunistic behaviour. Before
negotiations start, the parties normally sign agreements covering confidentiality,
standstill, and non-solicitation. The terms of such agreement are complemented by
sanctions for breach of contract (for fiduciary outs, breakup fees and liquidated
damages, see section 12.4.3).
The confidentiality agreement enables the target’s board to open its books to
the potential acquirer. Where the securities of a party have been admitted to trad-
ing on a regulated market, the confidentiality agreement can also allow the parties
to negotiate without the listed company having to publicly disclose the proceed-
ings (section 19.7).
In a share deal, the standstill agreement commits the potential acquirer not to
purchase target shares in the market during negotiations. A standstill is particu-
larly useful where the target is a listed company.
Non-solicitation ensures that neither the potential acquirer nor the target tries to
hire key employees away from the other firm. It is also common for the potential
acquirer to obtain tender agreements from target insiders, under which these insid-
ers forsake the right to tender to a rival bidder.^13
A due diligence will be necessary, and the parties normally agree on many
forms of disclosure (Chapter 13). Generally, the purpose of due diligence is to re-
duce risk by increasing the availability and usefulness of information, and to in-
crease price. Due diligence can vary according to the nature of the transaction and
nature of the business.
Part of the acquirer’s due diligence is to verify disclosures made by the seller.
There is a link between the seller’s disclosures and the seller’s representations and
warranties. Many disclosures will be made in a disclosure letter (section 13.2).
Where one of the parties has issued shares admitted to trading on a regulated mar-
ket, public disclosures will be governed by a mandatory disclosure regime com-
plemented by civil, administrative and criminal sanctions.^14
Auction sales. The process will also depend on the choice between an auction
sale and a sale by private treaty. There is a typical order of events and documents
for auction sales. For example, an auction sale typically requires a process letter
that describes the order of events and the terms of the auction, an information
memorandum that contains basic information that can be disclosed to potential
bidders, and a data room where a number of serious bidders can verify the con-
tents of the information memorandum. Compared with sales by private treaty, in-
formation management will be particularly challenging in auction sales because of
the larger number of parties to whom information will be disclosed. The distribu-
tion of an information memorandum will also raise questions of potential liability
misstatements.
(^13) See Betton S, Eckbo BE, Thorburn KS, op cit, Chapter 15.
(^14) See, for example, section 397 of the Financial Services and Markets Act 2000.