Exposure for pre-contractual negotiations

Introduction

A recent Australian decision arising out of a trade sale process conducted in relation to MYOB in 2011 provides another timely reminder of the potential exposure for pre-contractual negotiations. Aspects of the decision also underline the scope provided by last year’s changes to the Fair Trading Act to provide certainty about exposures in respect of pre-contractual negotiations.

The risks associated with term sheets, heads of agreement and various other forms of preliminary agreement by any other name that are common not only in M & A deals but also in a host of other commercial negotiations have been highlighted on a number of occasions, such as the ECNZ case (2002).

However, recent developments in the law surrounding pre-contractual negotiations highlight the risk that the parties’ conduct may override, or at least undermine, the express (contractual) position. Since mid-2014, commercial parties have been able to manage this risk by specifically contracting out of their Fair Trading Act exposure – subject to certain conditions.

Recent development – the MYOB sale process

Last month’s decision at first instance of the Australian Federal Court involved a complicated factual matrix which led to allegations that representatives of Archer Capital and Sage Group plc had shaken hands on what Archer claimed was a binding written offer to sell MYOB for A$1.35bn, in August 2011. The judgment contains a 70-paragraph summary of those parts of trade sale process that gave rise to the claim which I attempt to truncate below.

During the trade sale process in 2011, a representative of Sage sent an email to Archer attaching a final offer to acquire MYOB (the “Final Offer”). The Final Offer was stated to be “subject to contract” and, amongst other things, was conditional on a review of ‘black box’ due diligence material – as well as agreement by the party’s lawyers on a small number of technical points outstanding in the draft share sale agreement.

Sage was subsequently provided with the black box materials and the other bidders were informed that their offers for MYOB had been rejected.

Later, after the lawyers had agreed final changes to the draft share sale agreement, Sage informed Archer that it was reducing its offer for MYOB – which Archer claimed amounted to repudiating the binding offer contained in the Final Offer.

Amongst other things, Archer sought damages for what it alleged was misleading or deceptive conduct on the part of Sage, which it claimed had made a final binding (albeit conditional) offer for MYOB and subsequently reneged on that offer. MYOB was subsequently sold to a private equity firm (and was the subject of an IPO earlier this year) and the damages claim was for the difference in consideration.

As part of its submissions Archer alleged that Sage and its advisers had represented that Sage had board approval for the offered price and that subject only to certain conditions (with a process pathway for completing those conditions was included in the Final Offer) Sage would acquire MYOB.

In the Australian Federal Court, Farrell J concluded that there were not any actionable representations made by or on behalf of Sage.

Is there a binding contract?

It is well-known that various forms of framework agreement can provide a useful platform from which to finalise a substantive contract. Often the preliminary document is used to identify a consensus on the key commercial drivers and speed up the process of finalising the substantive deal whilst reducing the risk and expense of seeking to negotiate from scratch only to find there is no consensus on the key terms.

As a matter of good practice, such framework agreements will usually clearly identify whether the parties intend them to be legally binding – although some terms, notably confidentiality, are typically stated to be binding. (The Heads of Agreement for the Sky City Convention Centre being a good example).

If it is clear that the parties to a framework agreement intended additional terms to be negotiated, the Courts have been reluctant to enforce such agreements to agree because of the uncertainty of the totality of the terms – and the consequent difficulty in pinpointing a remedy for breach. However, an agreement can be binding even if some terms remain to be agreed, if:

• the key commercial terms are sufficiently clear – so as to enable the agreement to be enforced; and
• there is sufficient evidence (typically from the circumstances in which the agreement was finalised) that the parties intended to be bound – and did not intend that the framework agreement would simply be a base for further negotiations.

And if an intention to be bound can be shown then, even if important terms are not included, as the ECNZ case made clear – the courts will look for ways to supply that omission, provided the gaps are not so gaping as to make the intention of the parties uncertain. In this regard, it seems that the Courts will look at the conduct of the parties (and not just the drafting of the framework agreement itself).

Therefore, despite the Court having “an entirely neutral approach” when determining whether the parties intended to enter into a contract – having decided that they had that intention, the Court’s attitude will change. It will then do its best to give effect to their intention and, if at all possible, to uphold the contract despite any omissions or ambiguities. As a result, in Australia, the Courts have considered matters such as the conduct of the parties as well as correspondence between them before and after a framework agreement was signed – despite the use of a safety valve such as specifying that the agreement was subject to entry into a binding long form agreement and/or subject to a party obtaining board approval.

Other factors that have been considered by Australian Courts have included contextual matters such as:

• the expiry of an exclusivity period;
• agreed restrictions on public announcements; and
• evidence about the level of negotiation on (the importance of) certain commercial terms.

Exposure to liability for misleading and deceptive conduct

As a result of the approach taken by the Courts, even if a framework agreement is found not to be binding, the scope for a counterparty to seek to recover losses where a framework agreement does not lead to a concluded (final) contract for misleading and deceptive conduct under the Commerce Act and the truth in takeovers regime are still relevant.

Last year’s changes to the Fair Trading Act allow parties in trade (i.e. B-to-B transactions) to contract out of their exposure for misleading and deceptive conduct. As a result, businesses are better able to limit or even exclude their exposure to allegations that pre-contractual representations (and behaviour) breached the Fair Trading Act and thereby provide a more effective, and certain, limitation on their liability to (just) that provided by the express representations and warranties in the contract itself – if any.

The ability to contract out of such Fair Trading Act exposure is subject to certain conditions – including that it is fair and reasonable for the parties to do so. It is uncertain how judges will determine whether it was fair and reasonable for businesses to purport to contract out of the Fair Trading Act – although, when the changes were introduced, it was suggested that this will be measured against a range of factors, including whether there is equality in bargaining power, the transparency of the terms, access to legal advice, and the ability to negotiate. These factors, I suggest, should hold no fears for commercial parties in a contested M & A process.

Action steps

Apart from the need to continue to be clear about the parties’ intentions when signing up to framework agreements because:

• such framework agreements may be enforceable – depending on the intentions of the parties and the significance of any open issues; and
• the need for clarity that the framework agreement is not binding until all (or a number of identified) commercial terms have been finally negotiated – or if the framework agreement is intended to be binding, that it provide a specific pathway for concluding those outstanding issues,

care needs to be taken with both conduct issues and, ultimately, the drafting of the SPA in M & A deals to line up both the wording of such boilerplate provisions as ‘entire agreement’ clauses and expressly address the scope for contracting out of any exposure for misleading and deceptive conduct under the Fair Trading Act.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.