Focus: Takeovers Panel refines approach to deal protection measures
30 September 2010
In brief: Partner Richard Kriedemann and Senior Associate Andrew Wong report on a recent Takeovers Panel decision that has provided guidance on how deal protection measures for an agreed takeover bid or a scheme of arrangement should be structured so as to ensure they are not anti-competitive.
- Deal protection measures generally
- Takeovers Panel guidance on deal protection measures
- Panel considers structure of deal protection measures
How does it affect you?
- In the recent Ross Human Directions decision, the Takeovers Panel required changes to relatively 'standard-form' wording for no-shop, no-talk and no-due diligence restrictions, as well as notification obligations, matching rights and break fees contained in a scheme implementation agreement, to ensure they do not have an unacceptable effect on control of the target company.
- The decision is important for persons involved in negotiating the terms of implementation agreements for change of control transactions for ASX-listed companies.
Over the past decade in Australia, it has become common practice for implementation agreements for schemes of arrangement and takeovers for ASX-listed companies to contain deal protection measures. The most common deal protection measures (otherwise known as 'lock-up devices') are, in general terms:
- no-shop restriction the target cannot solicit a competing proposal;
- no-talk restriction the target cannot negotiate a competing proposal, unless that proposal constitutes, or would constitute, a superior proposal to the original deal;
- no-due diligence restriction the target cannot grant due diligence in connection with a competing proposal, unless the competing proposal constitutes, or would constitute, a superior proposal to the original deal;
- notification obligation the target must provide the original bidder with details of any competing proposal;
- matching right the original bidder has an opportunity to match any competing proposal before the target recommends it to shareholders; and
- break fee the target is required to pay the acquirer an amount (generally around 1 per cent of the target's equity value) if the deal does not proceed as a result of certain events, eg the target board withdraws its support for the deal in favour of a competing proposal.
The Takeovers Panel has published a guidance note on deal protection measures (GN 7: Lock-up devices). In that, the Panel makes clear that deal protection measures such as those described above are not per se unacceptable. The Panel notes that they may help secure a change of control transaction by protecting a bidder against costs that would not be recoverable if the transaction is not completed, and they may reduce an acquirer's risk that the target will not complete the proposal.
The Panel notes, however, that such measures may also deter rival acquirers. Accordingly, they could give rise to unacceptable circumstances. In GN 7, the Panel says that whether any deal protection measure gives rise to unacceptable circumstances will depend on its effect or likely effect on:
- competition involving current or potential acquirers, and whether it is significant; and
- shareholders and whether they may be substantially coerced in accepting the proposal.
However, it was not until the decision of Ross Human Directions Ltd  ATP 8 (reasons published on 17 September 2010) that the Panel has had to consider a broad challenge to the structure of relatively common deal protection measures against its policy in GN 7.
Market practice has developed to a point where there is now generally accepted wording for the common deal protection measures described above. While the particular wording will vary among deals, the framework wording is generally well-known and accepted.
The scheme implementation agreement (SIA) entered into by Peoplebank Holdings Pty Ltd and Ross Human Directions on 19 July 2010 contained more or less market-accepted wording for the deal protection measures, albeit with a few deviations. The SIA provided that Peoplebank would acquire all of the shares in Ross Human Directions by way of a scheme of arrangement for cash consideration. About a month after the SIA was signed, a major shareholder applied to the Takeovers Panel challenging certain aspects of the SIA, including the wording of the deal protection measures.
The Panel found that certain aspects of the no-shop restriction, no-talk restriction, no-due diligence restriction, notification obligation, matching right and break fee contained in the SIA could result in the provisions having an unacceptable effect on the competition for control of Ross Human Directions. The issues were ultimately dealt with by amendments to the SIA.
In reaching its decision, the Panel noted that, while deal protection measures by their nature contain anti-competitive elements, they can (if subject to certain structural requirements) indirectly facilitate competition for control because many acquirers would be unwilling to propose a takeover bid or scheme without such measures. In other words, the Panel confirmed its policy in GN 7 that deal protection measures are not per se unacceptable.
The following principles regarding deal protection measures can be distilled from the Panel's decision. These principles apply for both takeover bids and schemes.
1. No-shop restriction. A no-shop restriction need not be subject to a fiduciary carve-out for target directors (to enable them to comply with their fiduciary duties). However, the restriction should not prevent the target responding to an unsolicited approach altogether (ie it should not operate in practice as a no-talk restriction).
2. No-talk restriction and no-due diligence restriction. A no-talk restriction and no-due diligence restriction must be subject to a fiduciary carve-out for target directors (to enable them to comply with their fiduciary duties). However, the following structural requirements for a fiduciary carve-out must be adhered to.
- The carve-out must not be subject to fetters or constraints which unreasonably restrict the target's ability to rely on it in the Ross Human decision, the Panel said it is not appropriate to impose a 'reasonableness' requirement on the target board in determining what are its fiduciary duties, beyond requiring that the target obtain legal advice that failing to respond would likely breach those duties.
- If the carve-out is linked to responding to a superior proposal, it must ultimately be the target board and not the external financial advisers or anyone else - who decides whether a competing proposal constitutes a superior proposal.
- If the carve-out is linked to responding to a superior proposal, it is not acceptable to require the target board to determine there is already a superior proposal. It may not be possible for a target board to determine that a competing proposal is superior until such time as the target has held discussions with the potential competing acquirer and provided due diligence information to it. Accordingly, a target should be able to respond to, and grant due diligence in respect of, a competing proposal that the target board determines is, or may reasonably be expected to lead to, a superior proposal.
3. Conditions for granting due diligence to potential competing acquirers. A no-due diligence restriction may require a competing bidder to enter into a confidentiality agreement with the target which restricts the disclosure and use of the information and the poaching of target employees. However, that agreement should not be required to reflect the terms of any confidentiality agreement between the target and original acquirer, unless the terms of that other confidentiality agreement are disclosed. Otherwise, a potential competing bidder will not know what other restrictions it would need to agree to in order to obtain due diligence.
4. Length of exclusivity period. It is appropriate for the period during which the no-shop, no-talk and no-due diligence restrictions operate (known as the 'exclusivity period') to match the likely timetable for implementation of the proposal. In the Ross Human case, that period was approximately five-and-a-half months and the Panel noted that there are a number of court decisions on schemes where the court determined that a six or seven month exclusivity period was not unreasonably long.
5. Notification obligation. Where the target is obliged to provide the original acquirer with any information provided to a competing acquirer that has not previously been disclosed to the original acquirer, that should be limited to information on the target, not the competing proposal itself. The Panel has not indicated that a notification obligation must be subject to a fiduciary carve-out. However, what the Ross Human case makes clear is that, if there is a fiduciary carve-out, it should operate if the target board, acting in good faith and in order to satisfy what it considers to be its fiduciary or statutory duties (after having taken advice from its external legal advisers) determines that complying with the notification obligation would be likely to constitute a breach of such duties.
6. Matching right. The period within which an original bidder has the right to match a competing proposal before it is recommended by the target should not be so long that it will affect the willingness of a third party to put such a proposal. In the Ross Human case, the Panel did not object to a period of five clear business days, for the key reason that the bidder's shareholders were based offshore and the bidder needed time to respond to a competing proposal. The Panel has not indicated that a matching right must be subject to a fiduciary carve-out. However, what the Ross Human case makes clear is that, if there is a fiduciary carve-out, it should operate if the target board, acting in good faith and in order to satisfy what it considers to be its fiduciary or statutory duties (after having taken advice from its external legal advisers) determines that complying with the matching right would be likely to constitute a breach of such duties.
7. Break fee. A break fee trigger linked to a change of target board recommendation must not apply where the change is due to an independent expert not concluding that the transaction is in the best interests of target shareholders. (Similarly, a target board should not be prevented from changing its recommendation of a transaction for the same reason.)
The Takeovers Panel decision in the Ross Human case is likely to result in refinements to how parties involved in the negotiation of takeover bid or scheme implementation agreements approach the drafting of deal protection measures.
- Richard KriedemannPartner,
Ph: +61 2 9230 4326
- Cameron PricePartner,
Ph: +61 3 9613 8923
- Andrew PascoePartner,
Ph: +61 8 9488 3741
- Andrew KnoxPartner,
Ph: +61 7 3334 3356
- David WengerPartner,
Ph: +852 2903 6256
Ph: +976 7711 0231