In our prior posting, we began to explore deals that require the approval (or consent) of a third party for a deal to be completed and in our scenario, the “Corporate Office” has the right to approve a new buyer. So how do we deal with this legally and practically to protect the integrity of the process and increase the chances of a successful outcome?
First – it starts prior to LOI where we help both sides consider the “approvability” of a buyer (covered here in our last post). We have to assume that both parties believe that the buyer is approvable in order to spend the time and resources to consummate a deal. If we have concerns of this, particularly on the sell side, we may structure our LOI with a longer timeframe, and that approval must be conditionally granted before diligence and definitive documentation (and seller time and $) are committed. On the buy-side however, we want the full commitment by seller and we will seek to have a parallel process with all activities, including approvals. We would say this is the more common structure in an LOI.
Second – depending on the relationship the buyer and/or seller have with Corporate Office, we may recommend informal discussions that may uncover any potential challenges prior to a notification. This may include discussions on potential “Right of First Refusal” (or commonly referred to as “ROFR”) rights that Corporate Office has within their agreements. What this basically means is that once a bona-fide third party offer is received by a seller, the Corporate Office may have a right (within a specified period of time) to assign the transaction to an operator of their choice. This is common in the fast food restaurant and car dealership industries where ownership consolidation is taking place. These informal discussions may also uncover operational or general relationship challenges that may add complexity to an application so if we can uncover and address these at the outset, it makes the formal application process smoother. This is not always easy to uncover and some awareness of Corporate Office dynamics and protocols should be considered.
Third – once the formal notice is sent, this is often the time when Corporate Office has the most leverage with a new buyer and will seek to utilize it. Examples of this may mean that an application is not going to be approved unless certain imaging requirements are met (perhaps the refresh of an outlet or building that the current owner has delayed doing), new sales targets (and penalties) are agreed to or the hiring/firing of key operating staff. These are all potential negotiation points that add complexity and uncertainty to a transaction.
Finally, timing is also a consideration here – if definitive documentation is being negotiated concurrently, often the Purchase and Sale Agreement (or Asset Purchase Agreement) is completed and agreed to prior to formal approval. Often a review of the final documentation is a requirement for firm approval (Corporate Office wants to ensure that there isn’t something negotiated that puts them at a disadvantage). Signing of the definitive documents also typically triggers a goodwill deposit on behalf of the seller. To manage this uncertainty, we almost exclusively ask for an “approval out” in the documentation that basically states that if the Corporate Office delays approval over a specified period or comes back with an outright denial, that buyer can have their deposit returned. Now sellers obviously don’t like this clause as approval is something outside of their control, but for us its basically a non-negotiable deal term. We think of it this way – we don’t know what the relationship is between seller and Corporate Office and in an extreme case, an unscrupulous seller could demand a non-refundable deposit (in the Auto Dealership industry, these can be upwards of $1 million) and then scuttle the deal with the Corporate Office and pocket the deposit. Why would a buyer put themselves at risk that way?
Transactions that require third party approvals can be very complex to orchestrate and at the risk of sounding self serving, we recommend that parties speak to an experienced advisor to assist with this process.
We would love to hear your story – please feel free to contact us anytime (we are good with evenings and weekend chats).