An auction process involves multiple “bidders” (i.e. potential buyers) competing to buy a target company. The below provides an overview of a typical auction process, although not all auction processes are identical. There may be additional/fewer stages and the seller may grant greater/more restricted access to the data room and the target’s management team depending on the circumstances.
Stage 1: Pre-auction/sale
Once the seller has signed an engagement letter and mandated its chosen law firm on the deal, the seller’s law firm may start by putting together a “vendor due diligence” report.
Vendor due diligence report: vendor due diligence refers to the process under which a seller and its advisers carry out an investigation into the company (or group of companies) that the seller is intending to sell. The findings of this investigation are then typically set out in a “vendor due diligence” report, which the seller may then make available to a select number of bidders. This can significantly speed up the sale process and avoid the target’s management team having to repeatedly answer identical questions for different prospective buyers. The process can also enable the seller to identify and rectify at an early stage any issues that consequently come to light, which can reduce the risk of potential buyers walking away from the deal or attempting to negotiate a lower purchase price.
This process will involve the seller’s lawyers working closely with the seller’s management team and any relevant third party advisers to source the necessary documents, resolve any questions that arise and rectify any remediable issues.
Stage 2: Initial documents
Next, potential bidders will have to sign a non-disclosure agreement, which is typically drafted by the seller. The scope for negotiation will depend on the parties’ bargaining power. The seller’s financial advisors will then typically send a “process letter” to potential bidders, which will likely include the “Information Memorandum”.
Information memorandum: this is essentially a sales pitch designed to entice potential bidders into joining the auction process. It usually gives a high-level introduction to the target business, including a summary of its financials and information about its key personnel.
Following this, potential bidders are usually expected to submit an initial, non-binding bid, which includes information about their motivation for wanting to purchase the target.
Stage 3: Data room access
Based on these non-binding bids, a select number of bidders might then be granted access to the vendor due diligence report (if one exists) and a data room containing documents relating to the target (e.g. key contracts, more detailed financials, further information about the target’s assets etc.). Whilst conducting their own due diligence on the target (which might simply be “top up” due diligence to cover off anything of particular importance to each bidder that isn’t covered in the vendor due diligence report), bidders tend to go through a “Q&A” process, which - as mentioned - involves submitting questions about the target to the seller’s solicitors. Where the solicitors do not know the answers, these questions will typically be passed onto the seller’s management team, although some sellers may also give bidders direct access to the target’s management team at this stage.
Following this stage, the bidders will have to submit binding bids or drop out of the process, although these bids may be subject to certain conditions (e.g. the transaction receiving competition or other regulatory clearance).
Stage 4: Final negotiations
Once the binding bids have been submitted, the seller will select a “preferred” bidder (although there may be additional stages before this stage is reached, depending on the structure of the auction). A seller will generally want to maintain competitive tension by waiting as long as possible before selecting its preferred bidder, as this can lead to greater bargaining power.
The preferred bidder will typically be granted exclusivity in respect of the deal for a limited period of time. This involves the seller agreeing to shut other bidders out of the process during the agreed period, meaning the preferred bidder essentially has first dibs until the relevant exclusivity period expires (this deadline can sometimes prompt a manic race against time to get the deal done).
The preferred bidder will also typically be granted the legal right to rely on the information contained within the vendor due diligence report at this stage. This means the bidder would potentially have the right to sue the seller (and/or the advisors that produced the report) if it transpires that the report contains any material inaccuracies, omissions or misleading statements that were not subsequently disclosed against by the seller. The seller and the preferred bidder will then enter into final negotiations, which will be documented in the legally-binding transaction documents.
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