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published on 22 June 2022 | reading time approx. 4 minutes
In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner present an important term from the specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give or refresh a basic understanding of a term and provide some useful tips from our consultancy practice.
An M&A transaction is a complex process in many respects. It includes extensive preparatory measures and procedural steps up to the actual closing of the transaction – from due diligence to signing and closing. Especially in the case of M&A transactions involving large, market-leading companies, an aspect that should not be underestimated is the examination of the necessity and, if necessary, the obtaining of an antitrust clearance. Even a carefully prepared transaction can still fail between the signing of the contract and its execution if the competent competition authority does not grant clearance or imposes conditions for this which the party concerned (usually the buyer) cannot or does not want to fulfil. Accordingly, it is not surprising that negotiating parties try to keep this risk as low as possible. This is exactly where the so-called “Hell or High Water (HOHW) clause” comes into play.
Basically, a “HOHW clause” means that one or more contracting parties agrees to assume an obligation to be fulfilled at all costs.
The exact origin of the term “hell or high water clause” is not entirely clear. It generally refers to the English phrase “come hell or high water”, which is meant to express that one is determined to do something, despite any difficulties that there might be. This saying allegedly first appeared in the USA at the time of the “Wild West”. The first documented use is said to have been in a newspaper in 1882.
Regardless of the exact time and type of origin, however, there is no doubt about the meaning of the term: Neither hell nor any other adver-sity will release you from an obligation you are required to meet in order to fulfil the contract.
In its broad meaning, the clause – in the context of clauses on “force majeure”, “Interference with the basis of the transaction” – is experiencing a renaissance due to current events. “Hell” and “high water” today are Covid-19, for example, and restrictions caused by the war in Ukraine and the corresponding sanctions.
In the context of M&A transactions, such clauses are usually found with regard to obtaining a required antitrust clearance. Here, one of the contracting parties is to one-sidedly shoulder the entire risk involved in handling the official measure crucial for the transaction. Such a clause is generally drafted in such a way that it creates an obligation on the buyer involved in the transaction.
If formulated in respect of the buyer, this clause usually requires the buyer to take all measures and bear all costs necessary to obtain an antitrust clearance and, in particular, to comply with the official require-ments for the completion of the merger. Such official requirements are not uncommon and may even go further by requiring that parts of the companies involved in the transaction be sold in order to prevent an overly dominant market position as a result of the merger.
A "HOHW clause" could read, for example, as follows:
“The Seller shall, within ten business days after the Signing Date, make all necessary filings with all relevant competition authorities and promptly take all actions required in the relevant proceedings to ob-tain the necessary antitrust clearances to enable completing the Transaction in accordance with legal and official requirements. If the competition authorities make their approval conditional upon the ful-filment of certain conditions or obligations imposed on the Buyer, the Buyer shall accept and comply with any and all such conditions and obligations.”
However, the “HOHW clause” does not have to be formulated as “absolute”. It is possible to gradate the buyer's obligations. For example, it can be agreed that the buyer does not have to accept to meet all offi-cial requirements, but only those that affect the object of purchase and not the buyer's own company. Another way of agreeing a slightly less strict arrangement can be the agreeing of a certain threshold up to which a condition is still acceptable to the buyer, for example, in the form of a value limit. If a condition exceeds this limit, the buyer is not obliged to accept to meet it.
Such gradations make sense in practice to increase the chance that the contracting party will accept this clause. It is understandable that a contracting party would be reluctant to accept an absolute “HOHW clause” due to the potential high financial risk.
The failure to meet the obligation can, for example, be linked to a contractual penalty and/or a claim for damages for the failure to fulfil it. Also in cases where it is impossible to obtain an antitrust clearance or the acceptable condition threshold is exceeded, it is possible to include a clause, for example, regarding a lump-sum claim for damages payable to the seller.
Particularly in the case of merger control procedures, it is also important for the buyer to bear in mind that, when examining the notification criteria, preparing the notification documents and for the further procedures, a wide range of information about the target company must be provided, which was often only made available as part of due diligence. Thus, the buyer is dependent on the seller's and the target company’s cooperation in all matters in order to be able to fulfil its obligations, which is why the type and scope of this cooperation as well as possible involvement requirements must be regulated in detail in the acquisition agreement.
In practice, obligations similar to “HOHW structures” are found also in the case of other conditions necessary for the completion of a transaction, the obligation to fulfil and the associated risk of which is to be allocated to one party one-sidedly, although the fulfilment is dependent on the behaviour of third parties, such as obligations regarding requirements of obtaining consent of third parties in change of control (CoC) clauses (contracting parties, financing banks, collateral takers) or in the case of existing rights of first refusal.
A “HOHW clause” is a source of considerable financial risk for the obligated party, and great protection for the counterparty and thus puts the latter in a comfortable position.
Depending on which side the legal advisor is on, it is his task to use a corresponding clause in a targeted manner when drafting the contract or to check the submitted transaction documentation for this purpose and to draw his client's attention to the associated consequences and risks, and to work out drafting alternatives and use them tactically in negotiations.
One reason why a party accepts an HOHW antitrust clause may be a weak bargaining position of that party, for example if the other party claims the entire transaction is dependent on the acceptance of that clause.
Another reason for accepting this clause may be that an upfront examination has already shown that an antitrust clearance is not necessary or that it is expected to be granted without any problems or conditions and that, in return for accepting this clause, the accepting party may include provisions favourable for them elsewhere in the contract.
It should be noted that unconditional obligations imposed on only one party should always be assessed with particular caution if that party’s ability to fulfil them is also dependent on the behaviour of other contracting or third parties or is subject to conditions that cannot yet be foreseen.
Tobias Kohler
Partner
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Transaction advisory | Mergers & Acquisitions
