The Corona Crisis and the impact on acquisitions – breaking off negotiations in the Netherlands

Prior to the Corona Crisis, the economy in most developed countries was in rude health. Many companies, especially small and medium enterprises (SMEs), were busy growing, expanding and investing in new opportunities. This was especially noticeable in the M&A practice. Post Corona the world suddenly looks very different. Many companies, face an uncertain future and are understandably postponing decisions about  potential acquisitions as a result.

But what if you are stuck in the middle of an acquisition process? As a buyer or seller. Can you – in the Dutch jurisdictions – simply discontinue ongoing negotiations because of the uncertainties surrounding the Corona Crisis?

There is no easy answer. It depends on how far negotiations have progressed and whether agreements have been made about the takeover process, and in particular about breaking off the negotiations (the so-called pre-contractual agreements) [1] .

Let’s assume for a moment that no pre-contractual agreements have been made. In that case, a buyer or seller can in principle break off negotiations, unless negotiations are at an advanced stage. If so, breaking off negotiations can have unpleasant consequences for the “killjoy” who may have to pay damages to the other party. This is called pre-contractual liability.

What is such an “advanced stage?”
The phase prior to the conclusion of the purchase or sale agreement (also called pre-contactual phase), can be divided into 3 phases [2] :

Phase 1
This is the stage when negotiations have not yet progressed far. In principle, the parties can simply break off negotiations at this stage.

Phase 2
This is the stage of advanced negotiations. The parties may break off negotiations, but the breaking off party must at least reimburse the other party for the negotiation costs incurred by the other party (also known as: negative contract interest).

Phase 3
At this stage, negotiations have progressed to the point where one party could be confident that an agreement would be reached. In principle, the other party may not break off negotiations at this stage. If he does so, the other party can claim that the terminating party is obliged to continue the negotiations or can claim compensation for all costs incurred and lost profits (positive contractual interest).

Facts and circumstances are decisive
It should be emphasized that the above provides only a general outline. To determine whether breaking off negotiations is possible, it will be necessary to look at all the circumstances of the case. In other words, the concrete facts.

There are a number of circumstances that could lead to the conclusion that the buyer and seller have reached phase 2 or even phase 3. For example, if a due diligence has taken place and has been completed to the buyer’s satisfaction, if an agreement has already been reached by the parties on important key points, or if preparatory measures have been taken to effect the acquisition closing.

However, there are also circumstances in which a party may break off negotiations even in phase 3 without liability. Think of a situation where it is not realistic to continue an intended acquisition. For example, if a company’s continued existence has suddenly become uncertain due to a sudden  and unforeseen economic crisis. It would then not be reasonable to force the buyer to conclude the purchase agreement or to oblige the buyer to pay damages. The Corona Crisis may also be regarded as a circumstance that “exonerates” the abortive party.

Seek timely advice
Given the uncertainties of the consequences, it is important to first determine what the possible consequences of breaking off negotiations might be, should you consider doing so. Or, to seek advice if you are faced with breaking off negotiations yourself.

In any case, it is eminent to be thoughtful about breaking off negotiations. A legal battle – and unnecessary detrimental effects – should be avoided as much as possible. The fact that an intended sale or takeover does not go through is unpleasant enough for all concerned.

Incidentally, if you are considering a takeover (purchase or sale), or are in the early stages of a takeover process and are uncertain about next steps due to the Corona Crisis or other adverse changes, it is wise to make prior arrangements with the other party about how to deal with the unexpected cancellation of the takeover process. This provides clarity and peace of mind.

Do you have any questions about the article above, then please contact us. We’re happy to assist you.

May 2020

[1] This applies not only to acquisitions but also to negotiations of other agreements.

[2] Sometimes 2 (and sometimes even 4) phases are mentioned, and not all phases are necessarily successive steps, but possible situations. Thus, parties may never reach phase 2, but may reach phase 3.