Can you break off M&A negotiations in the Netherlands? The nuclear option

Recently, the NCC (Netherlands Commercial Court) gave a judgement on broken off M&A negotiations as a result of the COVID-19 crisis. The Court denied the claim to carry on with completing the transaction and allowed the claim for the break-up fee, despite defendants invoking unforeseen (COVID-19) circumstances.

On 29 April 2020, the Court in Summary Proceedings (CSP) of the NCC (Netherlands Commercial Court) denied a EUR 169 million claim made by a New York-based company against a potential buyer (Tennor) domiciled in Amsterdam. The alternative claim, for EUR 30 million in cash as break fee, was allowed.

This summary judgment gives a meaningful insight in the dangers and possibilities of M&A negotiations under Dutch law and the influence of the pandemic as taken into account by the Dutch courts.

Let us first address two questions: What is the NCC? & What are the rules for breaking off negotiations under Dutch law?

  1. Netherlands Commercial Court

The NCC forms part of the Amsterdam Court of Appeal since 1 January 2019. It was created to meet the growing need among internationally active companies to swiftly and effectively resolve (complex) international business disputes in Amsterdam and in English.

The rules of Private International Law (IPL) are applicable in the Court’s proceedings, which are conducted in the English language and its judgements are published only in English.

A matter may be submitted to NCC providing that the following cumulative requirements are met:

  1. the Amsterdam District Court or Amsterdam Court of Appeal has jurisdiction according to IPL
  2. the parties have expressly agreed in writing that proceedings will be in English before the NCC (the ‘NCC agreement’)
  3. the action is a civil or commercial matter within the parties’ autonomy
  4. the matter concerns an international dispute.

The jurisdiction of the Amsterdam District Court or the Amsterdam Court of Appeal may be based on a choice-of-court clause or such other rules as the defendant’s domicile.

  1. Terminating negotiations under Dutch law

When parties enter into negotiations in a Dutch law context a legal relationship is thereby created.

The relationship of the negotiating parties is therefrom subject to Dutch law [unless provided otherwise in the agreement governing such negotiations, such as a letter of intent]. The Dutch legal concepts reasonableness and fairness (redelijkheid en billijkheid) then enter into play.

Case law of the Dutch Supreme Court provides that parties to a negotiation may primarily pursue their own interests. Besides acting for oneself, each party must – to a certain extent – take into account the other party’s interests. Whether breaking off negotiations is permitted under the circumstances of the case is assessed by the standards of reasonableness and fairness and accepted case law provides that it is unacceptable to terminate negotiations for an agreement when the terminating party has given the other party an active justification for its expectation that the parties would enter into an agreement.

This range of mutual reasonable expectations is called ‘pre-contractual good faith‘ and it means that parties do not always have the right to unilaterally terminate negotiations.

In addition to this fundamental Dutch notion in contract law, another aspect may confuse foreign parties. According to Dutch Supreme Court case law, an agreement can be deemed to have been concluded even though the parties to that agreement have not fully agreed on all aspects of the agreement.

Under Dutch law it is not a prerequisite that an agreement is in writing. So, an oral agreement may have been reached on certain key elements, such as the object of the agreement, the price and the modalities for completion. That oral agreement may be considered to be a perfect agreement and as such becomes legally binding on both parties.

The essential criterion in assessing whether an agreement has been concluded is the expressed intention of the parties.

  • NCC’s preliminary judgement in the Tennor case

The NCC Tennor judgement describes that the claimant and Tennor Holding spent months on a proposed transaction in which Tennor would acquire claimant’s 50%-stake in an equestrian show-jumping business.

The Parties had concluded an LOI, providing that either party could elect to back out of the deal at any time before the deadline. A breaking party would thereby become liable to pay to the other party a EUR 30 million break-fee.

The case details that Tennor’s advisers (including lawyers) had made various statements to the seller, like “the drafts are final” and “Will revert with the signature pages in a few minutes”. Tennor’s authorised officer, however, never signed the paperwork. This is acknowledged by both parties.

The claimant now seeks:

  1. an order for Tennor to acquire the shares and to pay the agreed purchase price of EUR 169 million; or as the alternative
  2. an order for Tennor to pay the EUR 30 million break-fee.

Tennor’s defense consists of the three elements:

  1. there is no deal because the documents have not been executed by its authorised officer;
  2. on the basis of Articles 6:248 (reasonableness and fairness), 6:258 and 6:260 (unforeseen circumstances) of the DCC (Dutch Civil Code) any deal that may deemed to have been concluded must be dissolved, or the effects of such deal must be modified in light of the current COVID-19 circumstances and their impact on the business of all concerned;
  3. on similar grounds plus Article 6:94 (penalty mitigation) of the DCC the break-fee should be dissolved, modified (decreased) or reduced to nil.

 

  1. NCC’s assessment

Main claim – existence and fulfilment of the agreement

The NCC notes that the parties created a clear mechanism in the LOI: either execute and deliver the paperwork for the deal by the agreed date or pay the break-fee.[1] This was the uncontested binary option available to each party. The plain language of this clause made it clear beyond doubt that the parties’ intention was to create certainty about how termination of the negotiations would affect the relationship.

By setting a clear time and means for Tennor to make its choice (“execute and deliver” on 2 March 2020, 5 pm CET), the LOI defined the parties’ contractual relationship. The NCC argues that this binary mechanism, although it does not function as a formal requirement for contract formation, is clearly intended to apply as a rule for evidence.

The NCC continues, even “more importantly”, that there is not enough evidence that a Tennor authorised officer has in any agreed way conveyed to the claimant (or its advisers) that its (Tennor’s) advisers would be authorised to enter into the final, binding agreement on behalf of Tennor.

The NCC concludes that this cases provides no evidence that a sufficiently clear and reliable communication was made upon which a reasonable person, acting under the same circumstances as the claimant, would justifiably have relied to believe that Tennor wished to enter into the agreement, invoking the Dutch law doctrine of offer and acceptance.

Alternative Claim – payment of the break-fee

When assessing the break-fee, the issue at stake is whether the NCC should enforce the break-fee against Tennor even under the current COVID-19 circumstances. Or should the agreed fee’s effects be modified, mitigated or reduced or should the LOI be even dissolved?

The NCC notes that as a general rule contracts must be enforced as agreed. Any invocation of Articles 6:248 (reasonableness and fairness), 6:258 (unforeseen circumstances) and 6:94 (penalty mitigation) DCC should be assessed cautiously and with reserve.

Interference by the courts in a contract’s operation is only justified in avoidance of an unacceptable impact. Whether something is acceptable is assessed by the standards of reasonableness and fairness. The NCC elaborates by stating that Courts must examine whether the alleged specific circumstances amount to a severe impact or flagrantly contravening conduct warranting such Courts’ intervention.

In absence of authoritative case law on COVID-19 circumstances, the NCC remarkably almost integrally quotes leading commentators on how to handle appeals for reasonableness and fairness and unforeseen circumstances. The concept of “sharing the pain” in the event of unforeseen circumstances relating to the COVID-19 crisis seems to be generally accepted.

The key element of the break-fee, says the NCC, is to allocate risk. It thus provides an incentive to preserve deal security. The allocated risk can be a downside risk like a sudden change in the market causing a substantial decline in the value of the business, or an upside risk like another purchaser offering a considerably higher price. The break-fee allocates these risks and thereby also limits both parties’ exposure.

While perhaps not having contemplated or discussed the (full) impact of the COVID-19 crisis, the parties agreed in the LOI that:

Each of Tennor and [Claimant] confirms that the fee set out in this Section is reasonable and waives any and all rights to claim the contrary.

This shows that the parties intended to generally provide for anything that might happen and to accept those risks.

The NCC observes that the COVID-19 circumstances are so exceptional and disruptive that it is fair to say that such circumstances have not been provided for. Given the abovementioned acceptance of all risks, however, the NCC finds that there is no evidence supporting the proposition that it would be unacceptable for the Claimant to demand strict performance by Tennor.

The reasoning is based on the break-fee’s modus operandi. It allocates risk, limits exposures and expresses full commitment. The NCC points out that it makes perfect sense for the Claimant to demand strict performance of the contractual risk allocation. According to the NCC, the “sharing the pain” approach is here best served by respecting the LOI’s arrangements. Whereas in the views of Tennor, observing the “sharing the pain” concept would lead to mitigation of the fee.

The NCC finally concludes that the fee is not a penalty in the sense of Article 6:94 DCC but a risk allocation, a reciprocal right and an option to be exercised or not exercised at the electing party’s discretion.

  1. Observations

If anything, this preliminary judgement provides an interesting insight on what the impact of COVID-19 crisis on transactions in the pre-signing stage looks like.

In the basis the NCC judgement confirms that Courts will exercise caution for a claim based on unforeseen circumstances, corroborating that contracts, especially between professional parties,  must generally be enforced as agreed.

What is interesting in this case, is that the NCC embraces the “sharing the pain” concept that has been brought forward by legal commentators such as Professor R.J. Tjittes and H.N. Schelhaas to serve as a benchmark for assessing unforeseen circumstances in the COVID-19 era. This explanation of “sharing the pain” differs from that envisaged by Tennor, who insisted to “share” the break fee.

For our M&A-practice it is even more interesting that the NCC has attached paramount importance to the effect of the binary fee option in the LOI – either execute and deliver the paperwork for the deal by a pre-set agreed date, or pay the fee. This opens the gate to a nuclear option in an LOI, blasting away all deal uncertainty that remains related to the Dutch law concept of pre-contractual good faith.

It comes at a price: the fee in this case was considerable (nearly 18% of the envisaged purchase price), expressly allocated all risks and left no doubt as to the effects of commitment in the language of the agreement.

The question that remains is: would the NCC, in the complete absence of a break-fee and with only the binary option of: execution on a pre-set date and time or walk away from the deal, have come to a different conclusion in relation to the main claim that an agreement was in fact concluded and Tennor was no longer free to walk away?

[1] We note execution and delivery is an Anglo-Saxon concept. We shall assume that the parties have intended execution of the agreement by signature of an authorised representative. [We note that the judgement does not specify whether the LOI was stated to be governed by Dutch law or that the NCC concluded to the applicability of Dutch law based in IPL – this question would lead to an interesting further exploration of the notion of pre-contractual good faith in the Netherlands when the governing law lacks such a concept.]

credits: vegaseddie (source: flickr)

Deze publicatie is geschreven door Thom Schölvinck

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