Motion to Buy, Sell, Merge or Explore Sets Process in Motion

By Judd Vande Voort | August 15, 2011

The decision to voluntarily buy or sell an ethanol company or its facilities often can be a long and drawn-out affair. Occasionally, the decision to sell is involuntary and outside the control of the board. Increasingly, however, the decision to buy or sell is entirely within the control of the board of directors.

The decision to explore an acquisition or sale strategy often originates from discussions board members have with each other or with other equity holders who think they see an opportunity to buy or sell an ethanol company. This debate can sometimes be the most time-consuming part, occurring before any motion to act at the board level is ever made. The buyers and sellers in the group will be balanced by the folks in the middle who are unable to draw any conclusions from their analysis of prospective events and will often favor the status quo. Each of these perspectives will likely be represented at the board meeting when the chairman is asked to entertain a motion to explore an acquisition, sale or merger strategy. The motion may fail, and that is fine. But, what if it passes?

If the motion passes, the company will embark on a quest for the right deal, be it an acquisition, sale or merger. It is at this point that the company will assemble a team to begin negotiating the first of several preliminary agreements to be executed. Once legal counsel has been identified and retained, often the next critical task is to identify a firm to provide the company with financial advisory or investment banking services. After several proposals are circulated, the first agreement will usually be an engagement agreement with the advisory firm.

Defining the scope of advisory services is critical. Is the company simply looking for valuation and market analysis at this point, or has the board decided to engage a firm to actively solicit offers to buy or sell, facilitate negotiations and follow the preferred offer with an opinion contemplating the financial fairness of the consideration being received or paid in a transaction? These items, as well as the exclusive or nonexclusive nature, change the scope of the engagement and, therefore, affect the negotiated fees for the advisory firm’s services.

After the selected advisory firm has rendered its strategic and financial advice, the pursuit of the right partner, target or buyer usually starts with at least one, and oftentimes several, confidentiality agreements (CA). In the merger and acquisition context the CA is of primary concern to the seller, which is likely the disclosing party. The disclosing party needs a broad definition of “confidential information” and considerable limitations on the access to and use of that information. The available remedies and liability for breaches of the CA is also of primary importance to both parties and often become points of negotiation. 

At the time the company and its counsel are thinking through confidentially agreements, the buyer will start expressing concerns about exclusive dealing or “no shop” provisions to be negotiated and agreed upon. These provisions can show up at various times in the negotiations, but the buyer will typically ask for exclusivity prior to executing a letter of intent. The no shop provisions prevent the seller from negotiating with a second buyer while the first buyer is conducting its due diligence and are often used to leverage the other material terms contained in a letter of intent. The decision to engage in exclusive negotiations is a significant and often necessary step in the process that is usually considered along with a break-up fee.

The letter of intent can follow a term sheet or be signed in lieu of a term sheet. The letter of intent should clearly outline the material terms of the transaction and is generally nonbinding with the exception of certain limited provisions. The process of negotiating and drafting a letter of intent often helps to expose the points of contention early in the discussions. 
With the guidance of experienced counsel and a competent financial advisor, the decision to voluntarily buy, sell, merge or to simply explore a company’s options does not have to be unnecessarily long and drawn out. 

Author: Judd Vande Voort
Attorney, renewable fuels and corporate law at BrownWinick
(515) 242-2440
vandevoort@brownwinick.com