The main aim of an auction is for a seller to seek competing bids for the target company. The process usually starts with the 1) distribution of an information memorandum to prospective bidders, followed by a first round of indicative bidding, 2) a due diligence investigation and review of the seller’s draft pro forma sale documents by bidders, which is followed by a second round of bidding from a limited number of bidders accompanied by their responses to the seller’s draft sale documents and lastly 3) negotiations with the bidders leading to the sale.
Advantages for the seller include being able to reach more potential buyers as well as increasing the chance of achieving a better price and more favourable sale terms, being able to control the disclosure of information through the use of a data room (which can now be easily set up and managed online) and being able to control the timetable of the sale.
However, not all business are suitable for sale by auction, such as if there are limited buyers and if the business structure is complicated. The seller will also risk their usual business operations being disrupted, the reputation of the company being damaged if it fails to be sold and confidential information being leaked during the auction. Although potential buyers will have signed a contract with the seller, before accessing the dataroom, which will contain covenants and indemnities in respect of confidential information, inlcuding provisions to use the information only for the purposes of evaluating the target and preventing the bidders from talking to each other.
The seller will usually use a suitably qualified third party to deal with the sale but must also be aware of the various financial restrictions in regulations imposed by the FCA in particular with regards to the FSMA. Evaluation of the bidders will look to their market share (possible regulatory problems), the need for shareholder approval or consultation with employees, if operations can continue after the sale and if the structure of the sale is one that is desirable by the bidders.
The information memorandum distributed by the seller will give the bidders a reasonable amount of information about the target in order to elicit meaningful bids yet aim not to reveal too much confidential information about the company. The seller must ensure that its behaviour would not be likely to give a false or misleading impression which could amount to market abuse or a misleading statement under the FCA’s regulations. This also goes for the preparation of the data room for the disclosure process. The seller should put itself in the position of the bidder and anticipate its concerns.
The bidders will propose amendments that they would like to make to the seller’s preferred standard sale documents. The seller will then examine all the bids and their terms for the most advantageous offer while trying to play off all the other bidders against each other. The seller might even offer a costs indemnity in order to keep more than one bidder at the table. Sellers also have to be wary of creating contractually binding contracts with the bidders until they are ready.
Leading up to completion of a sale, the seller should be wary of time consuming negotiations with a preferred bidder which might break down in the end, leaving the seller finding it hard to revive any other negotiations with other bidders. If an exclusivity period is agreed between the parties then the seller should ensure they are sufficiently well remunerated for granting such exlusivity.