As mentioned in the first blog post of our series, the purchase and acquisition of a business is typically a complex and dynamic process. From experience, we know that parties involved in an acquisition process can encounter various pitfalls. Prevention is better than cure, which is why we will highlight some of these pitfalls here.

Pitfalls for buyers and sellers

The lead-up to the legal documentation is often long - ranging from a few months to even a few years in some cases. During this period, the parties have already met, spoken to each other frequently, and made various (commercial) commitments. As a result, the legal documentation phase is sometimes seen merely as the phase where ‘everything is put in writing.’ However, this phase can take longer than expected, especially if there are disagreements over the wording of the terms and the parties feel the need to negotiate further. It is important to remain sharp during this phase and be prepared for a sometimes time-consuming and intense process.

Imagine, for example, a scenario where the target company has failed to comply with the GDPR (General Data Protection Regulation) obligations and is therefore not fully compliant with privacy laws. The buyer will likely qualify this as an "issue" and, as a result, will include a broadly worded indemnity clause in the sale and purchase agreement. This means that any penalties imposed by the Dutch Data Protection Authority (Autoriteit Persoonsgegevens), claims from affected data subjects, and costs incurred to achieve compliance will fall entirely on the seller. The question is whether the seller will accept that risk, as it could significantly reduce the purchase price. The seller will likely seek to limit the indemnity, for example by capping liability to a specific amount.

Advisors will inform the parties of the implications of the terms and the risks associated with them, which may lead to new insights for the parties. What may have initially seemed like simple and clear verbal agreements can become quite complex during the written phase and require further negotiations between the parties. We often see that the parties' emotions can also play a role in this process.

Pitfalls for buyers

A buyer may become very enthusiastic about a target company and eager to close the deal quickly. However, a crucial part of a thorough acquisition process is conducting due diligence on the target company. If the buyer rushes through this audit, it can have unfavorable consequences later.

A few years ago, a hotel chain (the buyer in this transaction) was heavily criticized - and thus fined - by a regulatory authority for failing to conduct due diligence on the systems and security measures of a target company. This case highlights that an acquisition is a “trigger” for conducting due diligence. This is particularly true in the hotel industry where sensitive personal data - such as name, address, credit card information, etc. - are processed. If security is inadequate and hackers steal these data, it can have serious consequences (e.g. fraud) for affected data subjects. Thus all the more reason to conduct meticulous due diligence.

Pitfalls for sellers

The seller aims to secure a good purchase price for the sale of their business as well as a clean exit to the extent possible. This means avoiding post-closing claims from the buyer that could reduce the purchase price and, consequently, their proceeds. 

The seller can be held liable by the buyer if they fail to disclose material information that would have been important for the buyer to know. For example, imagine a scenario where the seller is aware of a pending legal dispute with a key supplier. Every now and then, we hear a seller say that they've mentioned this to the buyer and that it’s been taken care of. 

However, the question remains whether such informal disclosure is sufficient. We advise sellers to clearly document such issues in the data room, as this ensures that there is a clear record of the disclosures they make to buyers, thereby preventing them from successfully claiming that they were unaware of the issue or that the risk was not sufficiently clear. 

It is common practice to include a provision in the purchase agreement stating that if the buyer, based on the information available in the data room, has become aware of a specific issue, they cannot make a claim under a corresponding warranty (for example, the warranty stating “The target company is not involved in any legal disputes”). Of course, it is possible that the buyer may want to include a purchase price adjustment or another arrangement related to the legal dispute in the agreement, but there will be little to no surprises on this issue going forward.

In short, it is important for both the seller and the buyer to avoid unnecessary pitfalls throughout the entire acquisition process. In the next blog post in this series, we will discuss the key legal documents involved in the purchase and acquisition of a business.