NEW ZEALAND Law and Practice Contributed by: Ben Paterson, Cath Shirley-Brown and David Hoare, Russell McVeagh
Code Transactions In Control Transactions that are being conducted on a friendly basis (with deal protections incorporated into an implementation agreement or similar), it is common for the target to agree to pay a break fee in respect of any breach of key target obligations, if there is a breach by the target of key obligations (director recommendations, no-shop, no-talk, etc), and if the transaction does not complete. There is no formal guidance from the Panel on this point, but New Zealand tends to follow other jurisdic - tions and limit any break fee to 1% of the value of the target business. Reverse break fees are also becoming reasonably common in New Zealand – generally where there is a failure to complete because of the buyer’s breach or failure to obtain a requisite regulatory consent. As is the case with non-Code transactions, in agreeing any break fee arrangements, consideration must be given as to whether these could constitute a penalty. 6.7 Termination Rights in Acquisition Documentation As is the case with conditionality (see 6.4 Condition- ality in Acquisition Documentation ), any seller will wish to minimise any termination rights. Accordingly, termination is usually limited to failure to satisfy any condition precedent (including any MAC). Note that, in this context, the buyer will usually ensure that material breach of warranty or pre-closing cove - nants falls within the ambit of a MAC (by way of exam - ple, insolvency). Alternatively, a specific termination right in this regard might be sought. Outside these termination triggers, and in the absence of a material breach at closing, other termination rights are typically excluded. The long-stop date generally depends on the nature of the transaction, what is reasonable in the circum - stances and the conditions – for example, whether OIO consent and/or NZCC clearance is required.
potentially place it in breach of its fiduciary obligations to other investors. In the scenario of a highly competitive bid, however, a private equity buyer may seek to strengthen its posi - tion by accepting a “hell or high water” undertaking (or something close to that) if it has had the benefit of advice and is comfortable with that position. If there is a known substantive issue arising in relation to the portfolio, a strategy in relation to this will gener - ally be negotiated upfront. It should be noted that this can be a complicated issue in the context of an OIO application, given the range of potential undertakings that may be required, par - ticularly where sensitive land is involved; accordingly, it is vital that legal advice is taken on this point. For the purposes of these undertakings, New Zea - land’s legal system continues to distinguish between merger control (enforced by the NZCC) and foreign investment conditions (enforced by the OIO). 6.6 Break Fees In the context of a private company acquisition, it is not usual to see break fees or cost reimbursement. There are occasional exceptions to this, however, as follows: • a seller may agree to a break fee in the context of an exclusivity breach; or • a seller may agree to cost coverage in the context of a competitive bid (in lieu of exclusive “preferred bidder” status, in order to keep several bidders in the race). However, these exceptions are relatively uncommon. It should be noted that any arrangement in this con - text needs to be considered carefully in view of the unenforceability of penalty clauses. Generally, this can be dealt with by expressing the payment obligation as a reimbursement of costs, as liquidated damages or as a genuine pre-estimate of loss.
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