Australia's takeover laws and regulations limit aggressive defensive tactics commonly seen in other jurisdictions. ASX-listed companies also face additional restrictions during control transactions. However, Australian takeover targets are not without defences and strategic and advanced planning is essential to resist undervalued bids and maximise value.
In Part 5 of our Australian Takeover Defence Series, we considered some tactical insights for target boards in negotiating the exclusivity of an Implementation Deed, including the importance of preserving the ability for competing proposals to emerge after an initial control transaction has commenced, and ensuring that the target has the flexibility to engage with such proposals. In Part 10, we consider how a target board can best respond to competing proposals, both in circumstances where the target is subject to an Implementation Deed and also where it is not.
Responding to competing proposals
In the majority of circumstances, the emergence of a competing proposal is usually embraced by target directors, as competition often drives up the target’s price and leads to better overall value for shareholders. From a target director’s perspective, a hard-fought auction process also firmly establishes that the target company has ultimately been sold for a fair market price.
However, sometimes the emergence of a ‘competing proposal’ is a poisoned chalice which forces the target directors to make hard decisions, sometimes in the absence of key information. One example that target directors may face in dealing with competing proposals is where the interloper’s proposal is at a higher price but subject to additional conditionality. A careful analysis is then required to determine whether the potential additional higher price offsets the additional conditionality (and requires close consideration of how likely the relevant conditions are in fact to be satisfied).
The emergence of this example competing scenario can raise different considerations for the target board depending on whether or not an Implementation Deed is in place with the incumbent bidder. If an Implementation Deed is in place, then it will inevitably contain certain ‘notification rights’ and ‘matching rights’ in favour of the original bidder. If this is the case, the target will need to comply with these provisions which generally require notification to be made to the original bidder of the emergence of the competing proposal, and for the target to also afford the original bidder an opportunity to put forward a matching or superior proposal before recommending any competing proposal.
The ‘matching rights’ process can be highly technical and also expensive (for example, some matching rights regimes require the target board to obtain advice from a Kings Counsel as to their fiduciary duties in a competing scenario) and often involves a delicate dance being undertaken by the target directors with statements being made for shareholders to “take no action” while the matching rights process takes place.
Other provisions of the Implementation Deed should also be carefully scrutinised during a competitive deal process to ensure the target does not inadvertently breach an ancillary but related provision and thereby provide the original bidder with a right to walk away and collect the break fee or compensating amount.
Competing proposals without an Implementation Deed
In circumstances where an Implementation Deed is not in place, there is generally no restriction on the original bidder making a further matched or higher counter-proposal to the competing bid, they just do not have a contractual right to do so on a specific set of timeframes and steps (which can represent a key benefit to an original bidder who is able to successfully negotiate entry into an Implementation Deed).
The only caveat to the ability of the original bidder to make a further matched or higher counter-proposal is where, through that bidder’s own actions, they have prevented themselves from doing so by way of a public statement to the effect that their bid is “best and final” or “will not be increased” and such statements are not appropriately qualified to reserve their ability to compete further in the event of another competing proposal emerging.
The target’s legal adviser will be able to guide it through the process of responding to a competing proposal to ensure that target directors adequately take into account their statutory and fiduciary duties, as well as comply with any exclusivity provisions in an Implementation Deed (if one exists).