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 maximize value.
In Part 3 of our Australian Takeover Defence Series, we discussed the requirements in responding to the approach made by potential acquirers. In Part 4, we examine the process for continued engagement and tactics that can be employed to seek to extract maximum value for the benefit of the Target and its shareholders as a whole.
Navigating the ‘no shop’ undertaking
If following an initial approach and deliberations, a decision is made to continue discussions with the potential bidder and commence negotiations for an agreed transaction, there are a number of further issues (e.g. price and preferred transaction structure) which the directors of the Target should take into account during those negotiations.
Ordinarily at this point of discussions, the potential bidder may request that the Target enter into a ‘process’ or ‘exclusivity’ deed in respect of the ongoing discussions, negotiations and due diligence proposed to be undertaken.
A potential offeror may seek or demand a period of exclusivity (or “no shop” undertaking) before it will proceed with substantive discussions with the Target.
The Target should generally seek to resist giving any such undertaking at the non-binding indicative proposal stage, so as to retain greater flexibility throughout the process.
Case Study: HopgoodGanim
Lawyers and Cardinal Resources Limited
HopgoodGanim Lawyers acted for Cardinal Resources Limited (ASX/TSX:CDV) (Cardinal) in what was described by the Australian Financial Review as “2020’s craziest takeover fight” that involved a year-long four-way bidding war between Shandong Gold (the ultimate successful bidder), Nordgold, Engineer and Planners Co and Dongshan Investments. Cardinal not granting early exclusivity to a single party was perhaps instrumental in securing a 330% premium for its shareholders (the largest premium in public M&A in at least the past 10 years).
Key considerations for exclusivity arrangements
Of course, it will not always be possible to resist granting exclusivity and a key consideration for the Target may be that the potential acquirer has required a “no shop” undertaking as a non-negotiable pre-condition to substantive discussions being held (and the board believes that the proposed discussions with the proposed acquirer are very much in the interests of the Target as a whole so as to outweigh the downside to providing the undertaking). If this is the case, then the board should ensure that the period of such restraint is reasonable and limited. Ancillary provisions of a “no shop” agreement need to also be assessed for any substantial anti-competitive effect.
In considering other exclusivity asks at this stage of the process:
- Fiduciary Exception: The board should ensure that any “no talk” agreement contains an appropriate “fiduciary exception” – allowing the directors to respond positively to a better proposal if they form the view that to do so would be in the best interests of the Target’s shareholders;
- Non-Exclusive Due Diligence: If due diligence access is granted, it is granted on a non-exclusive basis (or perhaps a limited basis – particularly so when the acquirer is a competitor in the industry);
- Standstill Provision: Consideration should be given to incorporating a ‘standstill’ provision to at least attempt to prevent the acquirer undertaking diligence and then nevertheless proceeding with a hostile takeover; and
- Legal Advice: Advice should be obtained to ensure that the exclusivity provisions that are ultimately agreed do not result in the transaction having to be prematurely announced due to the potential acquirer insisting on certain rights (such as notification obligations at the NBIO stage, break fees or where the board must recommend a transaction if the bidder makes a binding offer on certain terms).
The next part of this series will consider the next stage of negotiations in Part 5 – Formalising the deal (exclusivity). To receive the next update, subscribe to our Corporate Advisory and Governance mailing list here.