M&A Vocabulary – Understanding the experts: “HOHW clause”

An M&A transaction is a complex process in many respects. It involves extensive preparatory actions and procedural stages up to the actual completion of the transaction—from due diligence to signing and on to closing. Especially in M&A transactions involving large, market-leading companies, assessing whether an antitrust clearance is required and, if necessary, obtaining it is a significant factor. Even a carefully prepared transaction can still fail between signing and completion if the competent antitrust authority does not grant clearance or imposes conditions that the affected party (usually the buyer) cannot or does not want to meet. 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.

Origin of the term

In principle, an “HOHW clause” means that one or more contracting parties assume an obligation that must be fulfilled at all costs.

The exact origin of the term “Hell or High Water clause” is not entirely clear. It is mainly traced back to the English idiom “come hell or high water,” which is meant to express acting despite even the most adverse circumstances. This saying allegedly first appeared during the time of the “Wild West” in the United States. The first documented use is said to have been in a newspaper in 1882.

Regardless of the exact time and manner of its origin, there is no doubt about its meaning: neither hell nor any other adversity is meant to release a party from its duty to perform the contract.

In its broad meaning, the clause is experiencing a renaissance— in the context of provisions on “force majeure” and “frustration of contract”—due to current events. “Hell” and “high water” are, for example, being replaced by Covid-19 and by restrictions caused by the war in Ukraine and the corresponding sanctions regimes.

Content of the clause

In M&A transactions, such clauses are typically used in connection with obtaining a required antitrust clearance. The entire risk of this decisive regulatory action for the transaction is intended to be placed on one contracting party. Such a clause is generally structured so that it obligates the buyer involved in the transaction.

If it is drafted against the buyer, the provision typically requires the buyer to take all actions and bear all costs necessary to obtain antitrust clearance and, in particular, to comply with the regulatory conditions for completing the merger. Such regulatory conditions are not unusual and can even go so far as to require parts of the companies involved to be sold in order to prevent an overly dominant market position as a result of the merger.

An “HOHW clause” could read as follows:
“The seller is obliged, within ten business days after the signing date, to make all necessary filings with all competent antitrust authorities and to take without delay all actions required in the relevant proceedings so that the necessary antitrust clearances are obtained in order to complete the transaction in compliance with statutory requirements and regulatory specifications. If the antitrust authorities make their approval conditional upon the fulfilment of certain conditions or obligations imposed on the buyer, the buyer shall fully accept and fulfil these conditions and obligations.”

However, the “HOHW clause” does not have to be drafted in “absolute” terms. It is possible to introduce gradations regarding the buyer’s obligations. For example, it can be agreed that the buyer does not have to accept all regulatory conditions, but only those that relate to the target and not to the buyer’s own company. Another way to soften the clause is to agree a specific reasonableness threshold, for instance in the form of a value cap up to which the buyer must accept conditions. If conditions go beyond that, the buyer is not obliged to accept them.

Such gradations make sense in practice in order to increase the likelihood that the counterparty will accept the clause. An unconditional “HOHW clause” is understandably accepted only reluctantly by the counterparty due to the potentially high financial risk.

Failure to fulfil the obligation can be linked, for example, to a contractual penalty and/or a claim for damages for non-performance. Even if obtaining antitrust clearance is impossible or the reasonableness threshold is exceeded, it is possible, for example, to provide for a clause on liquidated damages in favour of the seller.

Especially in merger control proceedings, the buyer should also bear in mind that, when reviewing the filing criteria, preparing the filing documents and throughout the further process, a wide range of information about the target company must be submitted—information that was often made available only in the course of due diligence. The buyer therefore depends on the seller and the target company providing comprehensive cooperation in order to be able to fulfil its obligations, which is why the type and scope of this cooperation, as well as any required involvement, must be regulated in detail in the acquisition agreement.

In practice, “HOHW” structures with corresponding obligations are also regularly found in relation to other closing conditions, where the obligation to fulfil them and the associated risk is intended to be imposed unilaterally on one party, even though fulfilment depends on the conduct of third parties—for example, third-party consent requirements in change of control (CoC) provisions (contractual counterparties, financing banks, security holders) or existing rights of first refusal.

How should such a clause be handled?

An “HOHW clause” represents a far-reaching financial risk for the obligated party, and comprehensive protection—and thus a comfortable position—for the other party.

Depending on which side the legal adviser is on, it is their task to use such a provision in a targeted manner when drafting the contract, or to review the transaction documentation presented, alert their client to the associated consequences and risks, develop drafting alternatives, and deploy them tactically in negotiations.

One reason a party may accept an HOHW antitrust clause is that it has a weak negotiating position—for example, if the other party makes the entire transaction conditional on acceptance of this clause.

Another reason for acceptance may be that a prior review has already shown that antitrust clearance is not required, or it is expected that it will be granted without issues and unconditionally, and that in return for acceptance the party can secure favourable provisions elsewhere in the contract.

The key takeaway is that unilateral—and especially unconditional—obligations should always be assessed with particular caution whenever the ability to fulfil them also depends on the conduct of other contracting parties or third parties, or is subject to conditions that cannot yet be foreseen.

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