Focus: Takeovers Panel gives target boards a sporting chance
8 April 2009
In brief: In the recent International All Sports matter, the Takeovers Panel has refused to release a hostile bidder from a standstill undertaking given by the bidder to the target, despite the fact the information which had been provided by the target under the confidentiality agreement containing the standstill undertaking had likely ceased to be price sensitive. The decisions of the initial Panel and the review Panel are important for those negotiating standstill arrangements in the future. Partner Guy Alexander (view CV) and Lawyer James Clifford report.
- Standstills generally
- Panel finds that standstills are a legitimate tool for use by a target board
- Requirement for the term of the standstill to be commercially justifiable
- If the target is conducting an auction, do the terms of the standstills entered into with all prospective acquirers have to be the same?
- What happens if the information provided ceases to be, or never was, price sensitive?
- What happens if the bidder signs up for a standstill, but doesn't receive any confidential information?
- What events should trigger release of a standstill?
- Would a court hear an application by a target to enforce a standstill to prevent a bid?
How does it affect you?
- In order for a target to rely on a standstill, the term of the standstill must not go beyond what is 'commercially justifiable'. What is 'commercially justifiable' will need to be considered when the standstill is entered into.
- In an auction process, the Takeovers Panel (the Panel) may find that unacceptable circumstances exist if there are material variances in the terms of standstills required from competing bidders.
- There is a risk that the Panel will not give effect to a standstill undertaking in a confidentiality agreement where in fact no commercially sensitive confidential information is provided by the target.
- Careful consideration needs to be given when drafting standstills of the events which will trigger a release by the recipient from its obligations under the standstill.
Before a target company enters into merger discussions with, and provides confidential information to, a party interested in bidding for the company, the target will normally require the prospective bidder to enter into a confidentiality agreement under which it agrees to keep the information confidential, and to use it only for the purpose of a transaction recommended by the target board. The confidentiality agreement will also normally contain a standstill provision under which the prospective bidder agrees not to acquire any interest in any shares in the target for a specified period, usually six to 12 months.
Standstills are the price that the prospective bidder has to pay in order to obtain due diligence. From the target's perspective, the standstill serves a number of purposes:
- first, it enables a target board to enter into merger discussions knowing that the other party will not then turn hostile on the target, or acquire a stake to attempt to block a competing transaction subsequently recommended by the target board;
- secondly, it means that if that other party does then acquire shares in the target (assuming it can do so without contravening insider trading laws), the target does not have to prove that that party used confidential information in acquiring the shares in breach of the agreement – only that the standstill has been triggered; and
- thirdly, it provides protection for the target from potential liability for 'tipping' under the insider trading provisions of the Act.
In International All Sports, the Panel was faced with the situation where a party that had signed up to a confidentiality agreement containing a standstill provision had subsequently withdrawn from the auction process being conducted by the target board, and then announced an intention to make a hostile bid for the target during the standstill period. The bid was expressed to be conditional upon either:
- the target waiving any breach of the confidentiality and standstill provisions; or
- the Panel declaring those provisions to be of no further effect.
Both the initial Panel and the review Panel refused to make the declaration of unacceptable circumstances and orders sought by the bidder. Commendably, both Panels recognised that a standstill is a legitimate tool for a target board to use, in that it facilitates a sale process. Clearly, target boards are less likely to be willing to engage with potential bidders if standstill undertakings agreed at arms length are subsequently held to be ineffective. The other point which the review Panel has clarified is that the standstill will not fall away simply because the information which has been provided has ceased to be price sensitive.
However, both Panels made it clear that the term of any standstill needs to be 'commercially justifiable', and the Panels' comments on this issue are important to bidders and targets, and their respective advisers, in negotiating confidentiality agreements.
In determining whether the term of the standstill was commercially justifiable, the initial Panel looked to market practice and to the nature of the information to be provided under the confidentiality agreement. Here, the information provided included management profit forecasts for the financial year ending 30 June 2010. Having regard to this information, and the Panel's view that market practice is for a six to 12 month standstill following withdrawal from discussions, the initial Panel found that the 12 month standstill was commercially justifiable.1
The review Panel looked at this question not only by reference to market practice and the nature of the information, but also by reference to the nature of the business providing the information and the nature of the recipient of the information. Here, both International All Sports (IAS) and Centrebet operated gaming businesses in Australia, and the information provided by IAS to Centrebet was commercially sensitive in the hands of a competitor. Having regard to these factors, the 12 month term was commercially justifiable.
If the target is conducting an auction, do the terms of the standstills entered into with all prospective acquirers have to be the same?
The review Panel noted that as part of the auction process being run by the target, standstill agreements had been entered into with 23 potential bidders. Some of those bidders had negotiated a shorter standstill term than the 12 months. One had actually become free of the standstill, but hadn't had access to the data room. The Panel did not think that it was essential for the company to have negotiated identical standstills for all parties involved in the sale process, but indicated that material variances between the release dates may give rise to a question whether the release of some potential bidders and not others gives rise to unacceptable circumstances.
While we understand that the Panel was simply putting down a marker to say that this may be an issue in the future, we do not think that material variances between release dates should of itself be unacceptable. It would only be where the target had released a party from its standstill undertaking because it had made a bid recommended by the target board should it then be unacceptable for the target to refuse to release another party from its standstill in order to make a superior offer for all of the shares in the target.
Here, Centrebet argued that IAS should not be permitted to insist on the standstill because the management forecast information provided by IAS had ceased to be price-sensitive. Centrebet argued that although those management forecasts went out to 30 June 2010, a significant period of time had passed, and material events had occurred, since they had been prepared, such that they were no longer price sensitive.
The initial Panel appeared to contemplate that a standstill could cease to have effect if the information provided had ceased to be price-sensitive, but didn't have to answer the question because it concluded that here the information was still price sensitive. This approach – that a standstill could cease to be binding if the information ceases to be price sensitive – seems driven by a view that the sole purpose of the standstill is to protect a target from liability under the tipping provisions, which is not the case. Also, targets will often disclose commercially sensitive information on due diligence which is not price sensitive. If a bidder which has been provided with this information could then launch a hostile bid despite a standstill provision, few target boards will be willing to engage with prospective acquirers, particularly when they are competitors.
Thankfully, the review Panel took a different approach. Here, the review Panel doubted whether the forecast information was price sensitive. However, in its opinion, the information did not have to be price sensitive in order for the standstill to be effective, provided the information was commercially sensitive. For example, customer lists may not be price sensitive, but could be damaging if used by a competitor, and a target board has a legitimate interest in protecting this commercially sensitive information.
What happens if the bidder signs up for a standstill, but doesn't receive any confidential information?
The review Panel did say that if the target signs a potential bidder up to a standstill in a confidentiality agreement, but the information made available is no more than is already in the public domain (e.g. previous ASX announcements), then that may be a reason for releasing a party from the standstill to make a bid. But that was not the situation in this matter.
We don't think the Panel was saying, however, that the provision of commercially sensitive information will always be a pre-condition to the Panel's willingness to uphold a standstill. Often a target will make it clear in the confidentiality agreement that there is no guarantee that any confidential information will be provided, in which case the standstill is the price which the bidder must pay for the target being prepared to commence discussions. If the parties go into the agreement on this basis, but the discussions collapse without confidential information being provided, the Panel should not then interfere to override the standstill2 3. If the bidder has an issue with this, it can always require that the standstill be expressed to be conditional upon provision of certain confidential information. We have also seen two-stage standstills – a shorter standstill period while the parties have their initial discussions on price followed by a longer period if confidential information is actually provided.
Another important issue on standstills which did not arise in International All Sports, but which the Panel is likely to have to consider at some stage in the future, is whether a target should be required to release a party from a standstill once another party has made a bid. Our thoughts on that issue are as follows:
- We don't think that the mere making of a hostile bid by a third party should require release of the first party, although the target board may well wish to do that. The reason for this is that the target should not be compelled to release a party from a standstill only for that party to make a hostile bid at what the board considers to be an undervalue, merely because another party has made a hostile bid at an undervalue.
- The position will be different, however, if the target has recommended another bid. In that situation there are strong arguments for the target being compelled to release other potential bidders from their standstills to allow them to make a competing bid for all of the shares (but not simply to buy a minority stake where those shares may be used to block the transaction recommended by the board).
- But even here, some parties have argued that this should only apply where the other potential bidder is a financial buyer, and that a target should not be required to release a trade buyer who is also a competitor. This will be an interesting question for the Panel in the future.
In this regard it is interesting to note the trend for a bidder in a recommended transaction to require that the implementation agreement with the target include an obligation on the target to fully enforce the standstill provisions in confidentiality agreements between the target and other parties who have participated in the preceding auction process. This makes it even more important for the standstills which the target has signed with those other parties to include an appropriate release in the event of a recommended bid.4
The other unresolved issue on standstills is whether the target could obtain an injunction in the court to prevent a bid in breach of the standstill. In International All Sports, it was the bidder which applied to the Panel for orders declaring the standstill provisions to be of no effect. But in the future it may be the target wishing to restrain a bid, and it may look to do this by bringing an application to the court for an injunction rather than an application to the Panel.
Here, the court would need to look at the provisions of the Corporations Act which are designed to make the Panel the exclusive forum for resolving disputes in relation to takeovers. Under s659B of the Corporations Act only ASIC and certain government entities can commence court proceedings in relation to a takeover bid or proposed takeover bid during the bid period. The question will then arise whether the dispute is in relation to a confidentiality agreement and standstill undertaking, or in relation to a proposed takeover bid.
We think that the court in this situation is more likely to regard the dispute as being in relation to a potential bid, and require that the matter be dealt with by the Panel. In the 2007 Lionsgate decision5, the court was willing to hear a dispute in relation to a pre-bid agreement between a bidder and a major shareholder on the basis that this was not a dispute 'in relation to takeover bid'. While we think that this decision is likely to be distinguishable in the context of enforcing a standstill agreement, since the purpose of the target board in seeking the injunction is to restrain the potential takeover bid, the issue is, however, not free from doubt.
While the International All Sports decisions appear to have settled a number of the questions in relation to standstills, several issues remain unresolved, and standstills are likely to continue to be an area of dispute before the Panel and perhaps the courts.
- While we agree that market practice is six to 12 months, it is more difficult to say there is a market practice over when the six to 12 months commences. While there are many examples of the six to 12 months running from withdrawal from discussions, there are also many examples where this period runs from the date of the agreement. In International All Sports, it ran from the date of withdrawal, which was some months after the date of the agreement.
- Another way of looking at this is that the fact that the target entered into discussions with the potential acquirer in response to an indicative bid from that party, and the target's position in response to that indicative price, is itself 'commercially sensitive' information sufficient to justify the standstill.
- This is consistent with the position in the US and Canadian cases. In Aurizon Mines Ltd v Northgate Minerals Corp (2006), the Supreme Court of British Columbia upheld the validity of a standstill in circumstances where the bidder had not been provided with any confidential information.
- The outcome may well be different before the Panel, but in the Canadian case of Ventas Inc v Sunrise Senior Living Real Estate Trust (2007), the court required a target to comply with a provision in the implementation agreement to enforce standstills entered into with other interested parties where those standstills did not contain a carve out where a bid had been recommended, even though the effect of doing so was to stymie a competing bid.
- Lionsgate Australia Pty Ltd v Macquarie Private Portfolio Management Limited (2007) 240 ALR 385.
- Guy AlexanderPartner,
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- Andrew KnoxPartner,
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- Andrew PascoePartner,
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- Marcus ClarkPartner,
Ph: +61 2 9230 4260