A great deal of attention in Dutch legal literature is given to the possible legal consequences of breaking off negotiations. Often the question whether an agreement has been formed is not discussed. This question is the subject of this article. We will restrict ourselves to the formation of an agreement to take over a company that is not listed on a stock exchange.
2. CONDITIONS FOR THE COMPLETION OF AN ACQUISITION AGREEMENT
According to the legal provisions on the formation of agreements in the Dutch Civil Code an agreement is formed if there is a meeting of the minds between the parties. A problem in applying these rules to an acquisition agreement is that such an agreement does not consist of one obligation but of a number of mutually connected obligations. The question arises whether an agreement already exists if the parties have agreed on some, but not all, of these obligations. The Dutch Supreme Court decided in a leading case called Polak-Zwolsman (HR 14 June 1968, NJ 1968, 331) that this generally is not the case.
On the other hand, it is not necessary that a meeting of the minds exist on all obligations under the intended agreement. The Supreme Court in Polak-Zwolsman indicated that already on the basis of partial agreement it can be concluded that the parties have the intention that an agreement be formed. Whether or not this is the case will depend on the following circumstances:
- the significance of what has and has not been agreed upon;
- whether or not the parties intended to continue negotiations;
- the other circumstances of the particular case; and
- whether or not the obligations on which the parties have not yet reached an agreement can be determined.
Although Polak-Zwolsman concerned an employment agreement, the criteria listed in that ruling are also applicable to acquisition agreements. How these criteria must be applied in the case of an acquisition agreement will be discussed below.
3. THE SIGNIFICANCE OF THOSE OBLIGATIONS THE PARTIES AGREE OR DO NOT AGREE UPON
There must at least be a meeting of the minds on the essentials of the intended agreement. The essential elements in a global acquisition agreement are in any case the purchase object and the purchase price, as these elements form the essence of the agreement. According to article 7:4 of the Dutch Civil Code it is even possible, however, that an agreement may exist if the parties have not yet agreed on the price. In that case, the said article provides that the purchaser must pay a "fair price". In a recent procedure the parties agreed that the purchaser would buy the shares of a closed corporation for the "equity value". The parties, however, did not agree on the precise meaning of this term. The judge determined the price according to the intentions of the parties and principles of reasonableness and fairness (Pres. Rb. Breda 19 February 1996, KG 1996, 114).
In acquisition agreements, however, an agreement on the purchase object and the price only will be insufficient to determine that an agreement has been formed, in particular in view of the relatively large interests and risks connected with such a transaction.
In case law the following elements have been established as being essential to acquisition agreements: warranties, indemnifications, conditions of the transfer, conditions with respect to payment of claims and debts of the company to be taken over, salary and non-compete clauses in the event one or more managers will be employed by the acquiror (Hof Amsterdam 14 November 1985, KG 1985, 383; Pres. Rb. The Hague 7 November 1986, KG 1986, 515; and Pres. Rb. Haarlem 1 December 1987, KG 1988, 49). Of these additional essential elements the warranties with respect to the balance-sheet in particular are a crucial part of the agreement. Even where the purchaser conducts a thorough due diligence investigation, the acquisition balance sheet is a very important hold for the purchaser with respect to the financial situation of the target company. If this is agreed, the warranties based on such balance sheet are the basis for potential claims against the seller if the information as shown or reflected in the balance sheet turns out to be incorrect or incomplete after the conclusion of the agreement.
In addition, case law mentions a number of examples in which it was concluded that an agreement had not yet been reached on the sole circumstance that no final corporate approval for the transaction had been given. For example in VSH-Shell (HR 23 October 1987, NJ 1988, 1017) the Supreme Court ruled that there was no binding agreement because the board of directors of Shell had not given its permission for the transaction, even though such permission was just a formality. On the other hand, a party may not conclude that an agreement has been reached on the sole circumstance that permission has been given. Also in such a situation it is necessary that the parties have reached agreement on the other essentials of the agreement (HR 1 December 1989, NJ 1990, 191).
The circumstance that the parties have agreed on a due diligence investigation to be conducted could be an indication that no agreement has yet been formed, particularly if the stated purpose of such an investigation is to find potential problems before a definite agreement is reached, in order to enable the purchaser to withdraw, to renegotiate the price and terms, and/or to demand further warranties. On the other hand, a due diligence investigation may also serve the purpose of verifying certain elements of an already existing agreement, for example the value of certain assets of the target that will be taken over (Pres. Rb. Breda 19 February 1996, KG 1996, 114).
4. THE INTENTION TO CONTINUE NEGOTIATIONS
This criterion is closely connected to the condition that there is a meeting of the minds between the parties on the essentials of the agreement. If a party imposes a restriction or condition that further negotiations are necessary with respect to certain essentials, there will be no binding agreement. If a party claims that an acquisition agreement was entered into at a certain date, but at the same time the parties have continued negotiations on one or more essentials of the transaction after this date, this argument will probably not stand. In that case, the parties will be considered to have reached a preliminary agreement only. Generally, on the basis of a preliminary agreement a party cannot withdraw from the negotiations, but there will be no definitive agreement between the parties.
As a general rule, the withdrawal of one of the parties from negotiations will be an indication that no agreement has been formed. In an acquisition situation, however, this will not always be necessarily so. For example, in certain situations there may be a binding agreement even though one of the parties has withdrawn from negotiations (for instance, if no agreement on the "non-essential" elements could be reached).
5. THE FURTHER CIRCUMSTANCES
Other relevant circumstances can be the nature and magnitude of the transaction, the identity of the negotiator(s) and whether or not any written documentation exists.
In some cases the interests that are involved in the acquisition agreement are of such a complex nature and magnitude that an agreement has not yet been formed despite the fact that the parties have reached consensus on the essentials of the intended transaction. In that case parties are not bound until the essentials have been worked out in detail and the parties can form a complete and unambiguous picture of the transaction (Rb. Haarlem 10 October 1989, KG 1989, 259).
If the person who actually negotiates the transaction is authorised to enter into a binding agreement (for example if negotiations are conducted at board level or by the owner of the shares to be taken over), it is more likely that an agreement has been entered into than if the negotiator does not have such authority. The other party must be aware of this issue and when in doubt, ask questions (Pres. Rb. Middelburg 24 February 1984, KG 1984, 85). Reversely, false impressions created by the negotiator may be imputed to his principal.
The sole circumstance that the acquisition agreement has not been put down in writing does not mean that no agreement has been formed. Writing up a document is of course a means to establish the terms that the parties have agreed to, and is meant to facilitate proof thereof. On the other hand, some circumstances may indicate that the parties intended that the agreement would only be binding once executed in writing. One or more of the parties can make such an explicit condition (HR 24 November 1995, RvdW 1995, 248). In that case, the parties are not bound to a draft agreement in which only some details remain to be completed (HR 18 February 1966, NJ 1966, 272).
Even if one of the parties has not stipulated such an explicit condition, the knowledge of one party that the other party will only commit itself in writing may preclude the first party from arguing that it trusted that the agreement would be entered into without a written document. This circumstance can be evident from the wording of the draft document, for example a statement at the end of the document that the agreement will be entered into at a certain date. The fact that a party in that case has not yet signed the deed is an indication that no agreement has been reached.
6. WHETHER OR NOT THE OBLIGATIONS ON WHICH THE PARTIES HAVE NOT YET REACHED AN AGREEMENT CAN BE DETERMINED
In order to have a binding agreement it is necessary that any gaps in the intended agreement must be able to be completed on the basis of the intentions of the parties, customs and, if necessary, the law, in particular the principles of reasonableness and fairness.
As indicated in section 3 above, a judge can determine the purchase price on the basis of article 7:4 of the Civil Code, if the parties have not yet reached a final agreement thereon. However, if the parties have the intention that the price is not to be determined as a fixed sum on the transaction date, but rather as a deferred payment subject to, for instance, future profits of the target, this may be different. In that situation, article 7:4 may not provide an adequate basis for price determination if the parties have, for instance, not yet reached agreement as to how "profit" must be defined.
In that situation, however, a solution according to the principle of reasonableness and fairness could be that an independent accountant is appointed to give an expert's opinion (Pres. Rb. Haarlem 1 December 1987, KG 1988, 49).
7. CONCLUSION
As will be clear from the above, a large number of the principles of general contract law apply to acquisition agreements. In order to apply these principles, however, one must take into account the specific characteristics of these kinds of transactions, in particular in determining the essential and non-essential elements of a transaction at hand. The factual circumstances in each case are of great importance. Accordingly, in certain cases one must deviate from these general principles, for example if the transaction is very complicated and involves large interests. Nonetheless, negotiating parties may sometimes be closer to a definite agreement than they would expect. This is particularly relevant for non-Dutch acquirors contemplating the acquisition of a Dutch target company. It is prudent to timely seek legal advice on these matters.
In a subsequent article, we will deal with some aspects of financial assistance under Dutch law.
The contents of this article are intended to provide a general outline of the subject matter only, and should not be taken or construed as advice in any particular matter. For further information, please contact Ewout J. Stumphius at Loeff Claeys Verbeke, Rotterdam, tel. 31.10.4034777, fax 31.10.4149388.
