Auction Sales Flashcards
· The stages in a typical sale by way of an auction are:
- Preliminary considerations
- Investigation
- Negotiation
- Completion
- Post-completion
Preliminary considerations in auction sales?
· The initial stage when the seller will typically engage a financial adviser and prepare an information memorandum and process letter. Potential bidders are identified and they execute confidentiality agreements before receiving the information memorandum and process letter and submitting preliminary indicative bids based on the information memorandum and any publicly available information. The parties also consider any necessary regulatory or other consents that may affect the bid timetable.
What happens during investigation for auction sales?
· The shortlisted bidders (chosen on the basis of their indicative bids) carry out their due diligence investigations, usually by examining the information in a data room established by the seller and attending presentations given by the target’s management. The seller may have engaged accountants and other professionals to prepare vendor due diligence reports on the business which may be made available to the bidders admitted to the data room.
What happens during negotiation for auction sales?
· The acquisition agreement (and sometimes other key transaction documents) will be drafted by the seller and marked up by the shortlisted bidders. Bidders may submit second/final bids (including details of their financing if required by the seller) following their due diligence investigations and review of the acquisition agreement. The key transaction agreements including the disclosure letter will then be negotiated between the seller and, possibly, a single preferred bidder.
Signing and completing in auction sale?
· The successful bidder completes the sale. This may be immediately after signing the acquisition agreement (a simultaneous signing and completion) or, where the agreement contains conditions precedent that need to be satisfied, at a later date (a split signing and completion). Completion may involve several board meetings and shareholder resolutions as well as the signing of the main contractual documents and a number of completion documents to effect the transfer of the target (the precise nature of the completion documents will depend on the terms of the transaction, including whether the transaction is a share sale or an asset sale). The consideration will be paid by the bidder at completion (adjustments or deferred consideration payments may also be made after completion).
· Signing and completions often take place “virtually” rather than having a meeting at which all parties are physically present.
Post-competion - auction sales?
· There will be a variety of tasks that need to be carried out after the sale has completed which may include the payment of stamp duties, filings/registration to perfect title to the assets acquired, preparing bibles of the final form transaction documents and possibly, analysing completion accounts, depending on how the consideration is to be calculated.
- Preliminary documents?
· Bilateral sale
* Confidentiality agreement
* Heads of terms
* Exclusivity agreement
· Auction sale
* Confidentiality agreement
* Process letter and Information memorandum
* Indicative bids
· Confidentiality agreements are as, if not more, relevant on an auction sale as the potential buyers will still wish to learn all about the target to ensure that:
- it is a worthwhile acquisition; and
- it is worth the consideration being offered;
- but there may be many potential bidders which will mean that the risk of a leak of confidential information is potentially higher than the risk on a bilateral sale.
When are confidentiality agreements signed in auction sales?
· all the potential bidders in an auction will be required to sign confidentiality agreements before any information about the target or the transaction in question is released to them.
How could confidentiality agreements be drafted in an auction sale?
· In an auction sale, the confidentiality agreements may be drafted to state that they are for the benefit of the future owners of the target from time to time, as well as for the benefit of the current owner, i.e. the seller and its group. Under the Contracts (Rights of Third Parties) Act 1999, this will allow the successful bidder to enforce the obligations in the confidentiality agreement against unsuccessful bidders.
How could sellers limit disclosure in auction sales?
· Despite bidders having signed confidentiality agreements, sellers will often still be concerned about disclosing commercially sensitive information (whether in relation to key contracts or claims against the target). Sellers may deal with these concerns by withholding some information initially from the data room, providing summaries of relevant contracts, redacting certain information from the versions of relevant contracts included in the data room or indicating that oral presentations will be provided on certain aspects.
- Process letter and Information memoranda?
· Once the confidentiality agreements have been signed by the potential bidders and returned to the seller’s solicitors, a letter will typically be sent to the bidders on behalf of the seller, setting out the procedure and timing requirements for the proposed auction sale. This “process letter” will typically set out the process for the auction and will include a list of questions the bidders are required to answer to help the seller analyse, on a like for like basis, which bidders are most committed to / able to complete the acquisition.
· This process letter will also usually enclose the information memorandum. This memorandum is a document containing enough information about the target to give the bidders a basis on which to make an indicative offer for the target. There is no similar letter in a bilateral sale and there is also not usually an information memorandum.
- Indicative bids?
· In a bilateral sale, the document that sets out the initial understanding between the parties is typically the heads of terms (also referred to as the term sheet or MOU) although these are not always used. Heads of terms do not usually form part of the process in an auction sale.
· In a successful auction there will be several bidders and each of those bidders will draw up a document setting out the basic terms upon which it is prepared to buy the target. These documents are generally known as indicative bids and are based only on the information about the target provided by the seller in the information memorandum and information otherwise available to the bidders in the public domain. The seller then reviews the indicative bids and decides which bidders to invite to move forward in the process and conduct due diligence.
· The preliminary documents used in a bilateral sale and an auction differ for the following reasons:
- there are no heads of terms in an auction as there are often several bidders and so this document is replaced by the indicative bids;
- exclusivity will not be granted in an auction until the preferred bidder is chosen, if at all. A seller would prefer not to grant exclusivity and will not do so if it is in a strong bargaining position; and
- due to the nature of an auction with the involvement of several bidders, the information memorandum and process letter are used to give all bidders information about the target and how the sale process will work (these may be accompanied by vendor due diligence reports). This is not necessary in a bilateral sale.
· The document common to both types of sale, however, is the confidentiality agreement also known as an NDA, the non-disclosure agreement.
- Warranty and Indemnity (‘W&I’) Insurance?
· W&I insurance is designed to cover against financial loss that may arise from a breach of warranty in a share or asset purchase agreement. While it was originally a product taken out by a seller to protect it against claims under the warranties, most W&I insurance policies are now taken out by buyers, often in the context of deals where recourse against the seller under the warranties is capped at a nominal amount (e.g. £1).
· Commonly W&I insurance is proposed by a seller in an auction sale in a “stapled” manner, allowing it to maximise transaction value by offering improved warranty recourse and providing the buyer with access to a pre-arranged package of insurance as part of the arrangements for the auction.
· Areas for negotiation will include the size of premium (and whether the seller contributes to payment of the premium), the warranties covered by the policy, the extent of the cover (often between 10% and 30% of the target’s enterprise value – so a long way down from 100% of the consideration), and the size of the excess before the insurer becomes liable (generally at least 0.5% of target enterprise value).
· The primary negotiation over the insurance policy will be between the buyer and the insurer. The buyer and its advisers will review and comment on the W&I policy and it will be their responsibility to make sure it aligns with the acquisition agreement.
· The seller is not involved with this negotiation and will simply want to ensure that that the subrogation waiver from the acquisition agreement is reflected in the W&I policy. The buyer will usually seek permission from the insurer to share an extract of the subrogation wording from the final policy.
