Seller's Guide to the Auction Process

Practical Law Legal Update 6-528-1445 (Approx. 5 pages)

Seller's Guide to the Auction Process

by Practical Law Corporate & Securities

Initial Preparation Steps

The number of steps in an auction differs from transaction to transaction, but almost invariably include these initial steps:

Engagement of advisors. An auction is more complicated than a single buyer sale because the seller will simultaneously negotiate with multiple parties. The seller therefore needs to engage additional advisors to ensure a smooth process. The seller must also assemble its internal team and its legal advisors and clearly define each member's responsibilities at an early stage. For more on these early-stage organizational steps, see Preparing a Company for Sale Checklist.
Internal due diligence. One of the potential benefits of an auction is that the seller controls the due diligence process. In a typical single-buyer sale, the buyer supplies its own list of requirements. For more information on due diligence tailored for a private or public deal, see Standard Documents, Due Diligence Request List: Public Mergers and Acquisitions and Due Diligence Request List: Private Mergers and Acquisitions.
Preparation of the data site. The most common method of distributing due diligence materials is via an online data site (as opposed to a physical data room or CD-ROM). An online data site permits multiple bidders password protected access to the same documents without knowledge of each others' identities. Usually the seller can limit access of certain documents to certain parties, track a bidder's usage of the site or restrict dissemination (such as the ability to view documents without printing them).

Each of these and other initial steps is further described in Practice Note, Auctions: From the Seller's Perspective: Transaction Steps: Sellers Role in the Auction. In addition, for a graphic outline of the auction process, see Auction Timeline.

Initial Deal Documents

In an auction, the seller prepares the first draft of all documents. This gives the seller a substantial negotiation advantage. In a competitive auction, the bidders may accept the seller's drafts with only minor negotiations. If the auction is less competitive and the bidders have more leverage, then the negotiation process more closely resembles a single buyer sale process. The key documents drafted by the seller are listed below in order of distribution.

Confidentiality Agreement

While confidentiality is important in all sale transactions, in an auction, confidentiality becomes crucial because of the greater number of parties involved. The risk of a leak of confidential information or the existence of sale discussions is greater than in a single-buyer transaction. The bidders should also be prevented from talking to each other without the seller's consent. Bidders may negotiate the terms of the confidentiality agreement, but typically avoid lengthy negotiations that delay the distribution of materials. For more information about confidentiality agreements in M&A transactions, see Practice Note, Confidentiality Agreements: Mergers and Acquisitions. For a form confidentiality agreement for M&A deals, see Standard Document, Confidentiality Agreement: Mergers and Acquisitions.

Confidential Information Memorandum

The seller and its investment bankers prepare the confidential information memorandum (CIM). A key document in an auction, the CIM serves as a marketing document, giving bidders a reasonable amount of information about the target company to elicit meaningful bids.

Bid Package

The bid package typically includes a bid process letter and the purchase or merger agreement (see Auction-form Stock Purchase Agreement). The bid process letter explains the rules and procedure of the auction, including:

How to communicate with the seller.
The date when bids are due.
How many bidding rounds are expected.
What each bid submission must include.

The seller may send the disclosure schedules in the bid package or wait until a later round to distribute them. In some cases, the seller offers a prearranged financing package (known as seller financing or staple financing), although the Del Monte and Rural/Metro decisions have thrown this practice into disrepute.

It is crucial that sellers and their advisors include clear and precise language in bid process letters to minimize the risk of lawsuits instigated by unsuccessful bidders. Counsel must therefore ensure that:

Auction procedures are clear.
Appropriate disclaimers are made regarding the seller's control of the process.
Amendment and interpretation of the auction rules and procedures are reserved to the seller.
Written procedures govern.
Restrictions on collusion are included.
Decision-making process is documented.

Each of these action items is described in full in Practice Note, Bid Process Letters. For a checklist highlighting best practices and important issues for consideration when designing bid procedures in an auction, see Best Practices in Bid Procedures Checklist.

Auction-form Stock Purchase Agreement

In an auction, seller's counsel prepares the first draft of the stock purchase agreement, favoring the seller. While the seller may be tempted to make the agreement one-sided, it may be better off presenting a more reasonable draft to bidders, especially if the auction is less competitive and the bidders have more leverage. If the stock purchase agreement is too seller-friendly, a bidder may feel justified in making major modifications because it assumes the other bidders will do the same. Bidders may be less likely to propose wholesale amendments to the stock purchase agreement if the initial draft is reasonable and appears to have taken into account at least some of the bidders' likely concerns.

For a reasonable, seller-friendly auction-form stock purchase agreement, see Standard Document, Stock Purchase Agreement (Auction Form).

Seller's Guide to the Auction Process | Practical Law