Drafting Exclusivity Agreement in an acquisition transaction

Typically in an acquisition transaction, at the inception of the deal (which in practice happen before or during the same time of signing the term sheet), the parties to the acquisition (both buyers and sellers) (Parties) insists on signing an exclusivity agreement (Exclusivity Agreement).  The reasons for signing Exclusivity Agreement are:

•  the buyer wants to buy some time (some specified dated for e.g. from 1^st September, 2011 to 30 September, 2011) from the seller by undertaking a preliminary due-diligence over the target company (Target) to evaluate its interest in the Target;

• while undertaking such preliminary due-diligence, the buyer may dig some price sensitive information, which the seller would not like its opponents or markets to know.

Salient provisions in an Exclusivity Agreement

As a matter of practice, Exclusivity Agreement is not drafted in a form of standard contract/ deed, but as a letter which is at the end signed by both the Parties.  Among other things, some of the salient provisions of an Exclusivity Agreement are as follows:

• the buyer takes a promise from the seller that, the buyer and its affiliates will not during the exclusivity period solicit or enter into any acquisition proposal with other potential buyer;
• terms exclusivity fees paid to the sellers are mentioned;
• signing of exclusivity agreement under any circumstance should not construed as share purchase agreement;
• the exclusivity agreement should be kept confidential unless required by law; and
• the exclusivity agreement is not binding upon the Parties.

Exclusivity Agreement under Indian context

Generally, an Exclusivity Agreement is signed at the signing of term-sheet/ starting of negotiation and as regards the exclusivity period the practice varies.  It could be just prior to making the public announcement (in case of listed company) or could be a week/ month duration. 

But while, undertaking the preliminary due-diligence, the buyer may (and in practice almost every transaction) come across some price sensitive information- as generally while conducting due-diligence, the buyer have full excess to the accounts/documents etc of the Target.  Often, the ever eager seller is happy to disclose the secret information of the Target to the buyer.  At present there is no ‘chinese-wall’ policy etc prescribed under the law for knowing-what information may be disclosed to the buyer and what should not be disclosed.  This may give rise to possible case of insider trading, but this may be defended by inserting a ‘chinese-wall’ clause in the Exclusivity Agreement or any other such document, additional insider trading charges are very difficult to prove in the court of law.

Enforceability of Exclusivity Agreement

Exclusivity Agreement is not a binding document, once the exclusivity period ends none of the parties have any claim over the other, but during the exclusivity period if any breach is committed then that breach may be rectified under the contract laws.  In a recent transaction (acquisition of Wachovia by Wells Fargo), Citigroup Inc. had entered into an Exclusivity Agreement with Wachovia to acquire certain number of its shares, however during the Exclusivity Agreement period, Wachovia was tacitly negotiating with Wells Fargo and in the end Wells Fargo acquired Wachovia, much to the embarrassment of Citigroup.  Citigroup had no alternative but to file a law-suit for damages for $ 6 billion- it did that only to be compensated by Wells Fargo to the amount of $100 million.  So, in practice it can be reasonable concluded that an Exclusivity Agreement is difficult to enforce; only claim which a party has is under the provisions of breach of contract clause.  As a transactional lawyer, (depending on who is being represented), it is required to insert a clear and precise language for the breach of terms of Exclusivity Agreement and if possible (depending upon the negotiation), a right to first refusal clause as to the purchase of shares (if you are acting for buyer) may be inserted in the Exclusivity Agreement.