- Pre-contractual negotiations
Is there an implied duty of good faith to continue to negotiate?
Negotiations should be distinguished from an offer to enter into a contract or any other preparatory contracts under which one of the parties will be required to enter into a contract with the other party. These types of pre-contractual agreements will usually lead to the payment of contractual damages in case one of the parties decides not to continue to negotiate.
Under Luxembourg law, during negotiations the parties cannot in principle be required to enter into an agreement. However, depending on the status of the negotiations and the intention of the parties, they will be subject to an implied duty of good faith to continue to negotiate, the breach of which can lead to the payment of damages.
What are the consequences of termination of negotiations by one party unilaterally?
If the termination of negotiations is done wrongfully, the terminating party may be liable to the other party for damages arising from the breach of the duty of good faith. In this case, the non-defaulting party may claim damages on the grounds of tortuous liability on the basis of Article 1382 of the Luxembourg Civil Code. This will be the case, for example, when one of the parties terminates the negotiations without reasonable cause and has made legitimately believe the other party that the entry into the contract will be certain.
What is the potential impact on third party rights?
- Confidentiality agreements
Are there implied confidentiality obligations where there are no formal confidentiality agreements entered into by the parties?
Under Luxembourg law, there are no express legal provisions requiring that the parties be bound by confidentiality obligations during negotiations. However, it is generally accepted that the implied duty to treat any information disclosed during negotiations as confidential and to refrain from granting third-parties access to this information arise from the duty of good faith. The existence of this duty of confidentiality will exist depending on the type of contract being negotiated. Therefore, it is advisable for parties to enter into a written confidentiality agreement in which they clearly define what kind of information is to be considered confidential.
What are the consequences of breach?
The disclosure of confidential information made in breach of a confidentiality agreement may result in contractual liability to pay damages. The burden of proof is on the claimant to show that the defendant has disclosed or used the confidential information. In practice, remedies are often set out in the confidentiality agreement itself.
Are specific terms/formalities required for a binding confidentiality agreement?
Notwithstanding the common rules of validity of contracts that should be complied with, there are as such no specific terms/formalities required for a confidentiality agreement to be binding. However, the terms used in the confidentiality agreement should be defined thoroughly, eg the information subject to confidentiality, the parties’ obligations, and available remedies in case of a breach.
- Exclusivity arrangements
Can an obligation to negotiate exclusively be implied where no formal agreements are entered into by the parties?
Under Luxembourg law, there is no implied duty to negotiate exclusively as a result of the principle of freedom of contract. Therefore, a party who wishes to negotiate exclusively with the other party, will often enter into an exclusivity agreement which should be limited in time and may be expressed as either a “lock-in” or “lock-out” agreement.
However, an obligation to negotiate exclusively with the other party may also arise without such agreement as a consequence of the duty good faith where, for example, one of the parties indicates clearly to the other party that it/he/she has and will not enter into any other negotiations with a third party.
Are any specific terms/formalities required to make exclusivity arrangements enforceable?
There are no required terms/formalities for a valid exclusivity agreement to be enforceable. However, it is advisable to enter into a written exclusivity agreement which should be limited in time and set out thoroughly the obligations of the parties.
- Heads of agreement
Are they legally binding?
The will of the parties to create legal binding obligations in their heads of agreement will determine whether these will be legally binding. In this respect, heads of agreement might be considered by a court as legally binding if it clearly appears that the intention of the parties was to make it legally binding. This is the case, for example, where a clause is included in the heads of agreement which sets out in details the principal terms of the transaction or the contract. With respect to a promise of sale, Article 1589 of the Luxembourg Civil Code expressly provides that it is equivalent to a sale, and, hence, the parties entering into the promise of sale will be required to proceed to the sale subject to the consent of the parties on the object of sale and price. Where heads of agreement contain confidentiality and/or exclusivity clauses, these particular clauses will usually be considered as binding.
Are any specific terms/formalities required to make them legally binding?
For the purpose of making heads of agreement legally binding, a clause should be included which expressly states that the heads of agreement are intended to be legally binding. The clause should be as much detailed as possible with regards to the transaction and clearly states that the parties commit to enter into a contract.
What are the consequences of breach?
Any breach of terms of legally binding heads of agreement may entitle the other party to contractual damages.
Can heads of agreement have any tax implications/adverse consequences?
- Break fees
Are break fees usually payable?
Break fees can either be contractually agreed or in the absence of any contract, arise from the breach of the duty of good faith when one of the negotiating party terminates wrongfully negotiations. Usually, the amount and the conditions under which a break fee becomes payable are set out by the parties in a precontractual agreement.
What are the main legal issues to be considered eg enforceability?
When contractually agreed, the amount agreed between the parties as break fees should be reasonable given that break fees of a significant high amount could be considered as penalty clause the amount of which could be reduced if considered by the judge as excessive in view of the damages incurred.
In the absence of any contractual agreements on the break fees to be paid in case of termination of negotiations, the Luxembourg judge will appreciate discretionarily on the basis of factual elements the amount of break fees to be paid by the terminating party that should in principle repair the situation as if contractual negotiations did not take place.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
M&A - Comparison of private share acquisition regimes
Our international corporate team has put together a comparison guide that summarises some of the key legal issues in certain EU jurisdictions that may arise for parties involved in a cross-border private share acquisition. See here.