Buyers involved in an acquisition often conduct due diligence (the "DD"). In this way, a buyer seeks to identify, as much as possible, whether there are any particular risks associated with the company to be acquired and in what areas warranties or indemnities are desired.
Usually, the DD is initiated and completed before the parties enter into a purchase agreement. However, sometimes the purchase agreement is entered into before the DD is started or completed.
A DD may reveal that the company is worth less than expected or that there are major (liability) risks. This may be reason for a buyer to abort the transaction, which may be difficult or even impossible if a purchase agreement is already in place. The buyer then, knowing that the outcome of the DD was negative, must still complete the acquisition. An unpleasant situation!
Terminating condition
In order to put the buyer in a more favorable position, a resolutive condition can be included in the purchase agreement, allowing the buyer to cancel the transaction in the event of a negative outcome from the DD. Because both parties have significant interests in either completing the transaction or aborting it, it is important to make this provision as tight as possible. Room for discussion and ambiguities regarding the situations in which the provision may be invoked should be limited as much as possible.
Recent ruling
This was also evident from a ruling by the Amsterdam Court of Appeal last year. In that case, a buyer and a seller had concluded a purchase agreement regarding 50% of the shares in a BV. Because the DD had not been completed at that time, the purchase agreement included a resolutive condition to the effect that the buyer was only allowed to cancel the transaction if:
'material facts or circumstances are discovered from the Due Diligence Investigation that, may, in reasonable opinion by the Purchaser, impact the value of the Shares or risk exposure of the Purchaser (...).'
After completing the DD, the buyer believed there were substantial findings and terminated the purchase agreement based on this provision. Following this, the parties had further discussions about the settlement of these substantial findings and the reduction of the purchase price, but no agreement was reached, after which the seller initiated summary proceedings. In these, the seller claimed fulfillment of the purchase agreement. This was rejected at first instance, after which the seller appealed.
The Court of Appeal then addressed the question of how the resolutive condition should be interpreted and ruled that the buyer (because of the words "in the reasonable opinion of the purchaser") has a great deal of discretion as to whether the findings of the due diligence have an impact on the value of the shares. With respect to the preceding question of whether there is a material finding, however, according to the Court of Appeal, the purchaser has less discretion.
The Court of Appeal then concludes on the basis of the buyer's assertions (for the time being) that there are no findings of a substantial nature. The seller's claim is therefore granted. The buyer must purchase the shares within 5 days at the price stated in the purchase agreement.
Lesson learned
When drafting the resolutive condition in the purchase agreement, the buyer's discretion was not sufficiently involved in the question of whether there were "material facts and circumstances," whereas this could have been easily incorporated. This was not done, as a result of which the buyer must now fulfill the purchase agreement despite a negative DD. A harsh lesson!
