Hell or High Water Clause

What is a hell or high water clause?

Hell or High Water Clause (unconditional clearance undertaking, in German unbedingte Freigabeverpflichtung) is a clause in a company purchase agreement by which the buyer undertakes to accept all conditions and other measures that authorities require for clearance. This refers above all to the competition authorities in merger control and to the authorities that protect public security in foreign investment screening (FDI screening, after Foreign Direct Investment). The measures may include the divestment of business units as well as behavioural commitments or action against a prohibition, that is, an official ban on the purchase.

The name derives from the English phrase “come hell or high water”, meaning roughly “under all circumstances”. The clause originates in US contract practice and is common there in large takeovers with antitrust risk. In German purchase agreements it is seen less often in practice and is usually agreed in limited form. It is the strongest form of the undertakings by which buyers must promote the occurrence of regulatory closing conditions, that is, the prerequisites for the transfer of the shares against payment.

The clause matters when a prohibition is a serious threat. This is the case, for example, with a strategic buyer whose business overlaps with the market of the target company, or with an acquirer from outside the EU in a security-relevant sector. It is regulated in the section of the purchase agreement on regulatory procedures.

Gradations: from commercially reasonable efforts to hell or high water

Purchase agreements distinguish several levels, which in the market are usually referred to by English terms:

• Commercially reasonable efforts: The buyer files the notification, answers requests for information and cooperates in the procedure, but need not make any significant concessions.
• Reasonable best efforts: The buyer must also offer commitments, to the extent they are reasonable for it when the circumstances are weighed.
• Best efforts: an extensive obligation, which however by its wording still recognises a limit of reasonableness.
• Hell or high water: The buyer must accept every measure that leads to clearance, without being able to rely on unreasonableness.

Under German law these formulas have no fixed content. Like any contract clause, they are interpreted according to their wording, their purpose and the circumstances. In the US market too, it has not been conclusively settled how far the levels differ in substance. Many contracts therefore list the measures owed expressly and quantify limits instead of relying on the English sequence of levels.

Content and limits of the obligation

Conditions and commitments

The Federal Cartel Office (Bundeskartellamt) may attach conditions and obligations to a clearance (Section 40(3) of the German Act against Restraints of Competition, Gesetz gegen Wettbewerbsbeschränkungen, GWB). Structural commitments concern the market structure, for example the divestment of a business unit or the granting of licences to competitors. Behavioural commitments oblige a party to a particular market conduct, for example access to interfaces or the supply of competitors. In foreign investment screening too, a clearance may be tied to orders or contractual commitments by the acquirer, for example on security of supply or the handling of sensitive data.

Burden caps

Buyers often limit their obligation by a burden cap. It is measured by revenue, earnings or the value of the business units to be divested. Other common limits: the obligation covers only business units of the target company, not those of the buyer's group, or excludes measures affecting the buyer's core business. Strictly speaking, a clause limited in this way is no longer a hell or high water clause, but the market uses the term for such versions as well.

Legal remedies and ministerial authorisation

It must be settled whether the buyer must take court action against a prohibition or apply for a ministerial authorisation (Ministererlaubnis) under Section 42 GWB. Both routes take a long time. Such an obligation makes sense only if the latest closing date (drop-dead date) is set accordingly or extends automatically.

Conduct of the procedure

The buyer usually conducts the procedure. In return the seller receives information and participation rights: deadlines for the notification, sight of drafts, participation in discussions with the authority. The buyer also frequently undertakes not to make any further acquisitions until clearance that could complicate the procedure.

Significance in the sale process

For the seller the clause is an instrument of transaction certainty. In an auction process, a bidder's willingness to assume the clearance risk forms part of the evaluation of its offer. In a sale to a strategic buyer the risk is usually higher than with a financial investor with no overlaps in the market. For technology companies, a further point is that the transaction value threshold of German merger control can trigger a notification at a very high purchase price even where the target's revenue is low.

If a buyer refuses an unconditional obligation, a reverse break-up fee serves as compensation: the buyer pays if clearance fails. A combination of both instruments is common, that is, a limited obligation together with a payment in the event of failure. During the procedure the ordinary-course covenants continue to apply. Coordination between the parties must respect the prohibition on closing; before clearance the buyer may not influence day-to-day business.

Worked example: hell or high water clause with a burden cap

An industrial company buys a software provider with revenue of around EUR 20 million, mainly in Germany, for EUR 60 million. The contract obliges the buyer to accept divestments as long as the business units to be divested together generate annual revenue of no more than EUR 10 million. If clearance fails, the buyer pays a reverse break-up fee of 3% of the purchase price.

• Case 1: The Federal Cartel Office requires the divestment of the buyer's unit A with revenue of EUR 6 million. EUR 6 million is below the cap of EUR 10 million, so the buyer must offer the commitment.
• Case 2: The divestment of unit B with revenue of EUR 5 million is also required. Together 6 + 5 = EUR 11 million, the cap is exceeded, and no obligation exists.
• If in case 2 the buyer refuses and the merger is prohibited, it owes EUR 60 million × 3% = EUR 1.8 million.
• The buyer expects synergies from the transaction (savings and additional revenue from the combination) of EUR 8 million. It estimates the loss of value from divesting both units at EUR 4 million.
• Accepting the divestment: 8 minus 4 = EUR 4 million benefit. Refusing: EUR 1.8 million payment and no synergies. The buyer therefore offers the divestment voluntarily.

The compensation payment thus also works above the cap, because it makes failure more expensive for the buyer. For the seller, the level of the cap determines in which cases the transaction is legally secured. A reference measure oriented to the actual overlaps is more meaningful than a flat amount.

Distinction: hell or high water, efforts obligation, reverse break-up fee

• Closing condition: Regulatory clearance remains a condition. The clause obliges the buyer to contribute to its occurrence.
• Reverse break-up fee: compensates financially for failure instead of preventing it. Both instruments are often combined.
• General efforts obligation: concerns any cooperation in closing. The hell or high water clause is its strongest form in the regulatory procedure.
• Hell or high water clause in leasing: In US leasing and financing business the expression denotes a payment obligation that exists regardless of objections to the performance. It shares only the name with the clearance undertaking in company acquisitions.

Common mistakes

• English formula without content. An obligation to use “best efforts” without listing the measures leaves open what the buyer owes in a serious case.
• Unclear reference measure. A burden cap that does not specify whether revenue, earnings or value counts and which financial year applies leads to dispute.
• Group-wide effect overlooked. Commitments may affect business units of the buyer's group that it regards as indispensable.
• Obligation to pursue legal remedies without a matching deadline. If the buyer must take action against a prohibition, the contract otherwise ends before the procedure is complete.
• No procedural rights for the seller. Without information and participation rights, the seller cannot check whether the buyer is meeting its obligation.

Frequently asked questions

Do hell or high water clauses exist under German law too?

Yes. It is a contractual obligation that can equally be agreed in German purchase agreements. The English name is merely customary in the market. An unlimited version is, however, the exception in German transactions; obligations with a burden cap are common.

Must the buyer challenge a prohibition in court?

Only if expressly agreed. Many clauses limit the obligation to the administrative procedure and exclude legal remedies.

Does the clause also cover financing risk?

No. It concerns regulatory clearances. Sellers secure the financing risk through proof of financing from the buyer at signing.

Does the clause also apply to foreign investment screening (FDI)?

Only if the contract extends it to that. Purchase agreements often regulate merger control and investment screening separately, because the Federal Ministry for Economic Affairs requires different commitments from the Federal Cartel Office, for example to protect sensitive data or ability to supply. How far the obligation extends there is therefore usually negotiated separately.

What applies if the buyer does not offer the required commitments despite the obligation?

It breaches the contract and as a rule owes damages. The missing clearance cannot be replaced by the contract, because the prohibition on closing applies by operation of law. In addition, an agreed compensation payment may fall due. An action for performance (specific performance) is possible under German law but usually comes too late because of the duration of proceedings.

The Roemer Capital view

In sales to strategic buyers, we assess the clearance risk early together with the client's law firm: overlaps between business fields, the states concerned, possible investment screening. In the second round of an auction process, we ask bidders to state their clearance obligation concretely, including burden cap and compensation payment.

We place this information next to the purchase price when comparing offers. A somewhat lower bid with a reliable clearance undertaking can be worth more to the client than a higher bid with a mere efforts clause.