16.7 Excursion: Auction Sale 48716.7 Excursion: Auction Sale
A voluntary auction sale of shares is initiated by the vendor in co-operation with
the target company, and a voluntary auction sale of assets is initiated by the ven-
dor. It can be initiated as part of a planned search for an acquirer or after an unso-
licitated offer has been received by management (see also section 10.3.2).
Advisers. The vendor’s board of directors typically retains financial advisers
such as an investment banking firm as well as legal advisers.
Process. Prior to commencing an auction, the vendor will have to organise the
auction process and choose the auction form (section 10.3.2). For example, a
closed auction can be effective even if there is only one bidder: “A bidder has no
way to know whether there are other bidders, and can be expected to put forward
its best bid, particularly if the process is structured to involve only a single round.
In addition, the seller in a closed auction can negotiate with bidders to try to elicit
higher bids.”^94
Information management. The vendor will take various steps to speed up the
process. For example, the vendor will take care of time-consuming inspections
such as environmental inspections, take internal corporate action, obtain permits,
and so forth. A vendor due diligence will reveal questions of concern. Typically,
an auction seller will engage reputable firms of outside accountants and legal
counsel to prepare one or more due diligence reports covering material legal, ac-
counting, and tax matters relating to the target business. Depending on the nature
of the business, the vendor may also engage other third party consultants to pro-
vide other vendor due diligence reports such as environmental reports.^95
As there are many bidders at the early stages of the auction process, informa-
tion management will play an important role. The vendor will need to disclose
enough information when searching for serious bidders. At the same time, it needs
to protect its confidential information. In addition, the vendor will need to control
outgoing information flows in order to manage the risk that statements made on its
behalf during the auction process will add to its obligations (section 16.2) or be in-
terpreted in an adverse way. The vendor will also have to manage the potential li-
ability for misstatements.
It is therefore characteristic of auction sales that the vendor and its financial ad-
visers prepare an information memorandum. The information memorandum de-
scribes the target and the auction process. The information memorandum is given
to prospective bidders.
The vendor can require a commitment letter from a bank as a screening mecha-
nism that separates serious bidders (with good prospects to raise acquisition fund-
ing) from unserious bidders (who have not been able to convince lenders). The
(^94) Cole J Jr, Kirman I, Takeover Law and Practice. In: PLI, Doing Deals 2008: Under-
standing the Nuts & Bolts of Transactional Practice. New York City (2008) p 170.
(^95) Schmidt KM, Private Equity: Current M&A Issues for Buyers. In: PLI, Eighth Annual
Private Equity Forum, Corporate Law and Practice Course Handbook Series (2007).