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.
As discussed in Parts 1 to 4 of our Series, the Target board has successfully navigated the initial approach and expertly guided the Target through the initial discussions, due diligence and negotiations to a point where the potential acquirer is now willing to pay a handsome premium for the Target, provided that the deal has board support. It is now time to formally document and announce the deal. By this stage of the process, it is likely that a decision will have been made by the potential acquirer on the ultimate transaction structure (with schemes of arrangement becoming the dominant choice for agreed transactions). Depending on which deal structure has been agreed, the board will now be negotiating either a Bid Implementation or Scheme Implementation Deed / Agreement (Implementation Deed).
In Part 5 of HopgoodGanim Lawyer’s Australian Takeover Defence Series, we consider some tactical insights for Target boards in negotiating the exclusivity provisions of an Implementation Deed.
Implementation Deeds
Implementation Deeds are broadly consistent in their content (excluding the necessary required difference in process for where the transaction proceeds by way of scheme of arrangement or takeover bid) and detail:
- the terms and conditions on which the scheme or bid will proceed (this will include heavily negotiated matters such as the price and conditionality to the transaction);
- the terms upon which the board of the Target must recommend, support and facilitate the transaction; and
- the process through which the transaction will proceed and the parties’ respective obligations.
From the perspective of the board of the Target, there are key provisions which must be carefully negotiated and included, including those related to “exclusivity”.
Exclusivity provisions – General
Exclusivity or ‘deal protection’ provisions are common and expected in an agreed transaction, however, not all clauses are built or operate the same. These provisions should be a key focus of negotiation in the process of agreeing the Implementation Deed. Your legal adviser will be able to guide you through where market practice has evolved over time and ensure that a ‘fiduciary exception’ or ‘fiduciary out’ is hardwired in (where possible) in order to preserve the Target’s ability to engage with potential competitors. As a general comment, while it is acceptable to grant the original bidder various exclusive dealing rights, the Target board needs to ensure that it does not completely fetter its ability to engage with competitors (including, by agreeing to lock-ups which push the envelope in terms of their acceptability and practically destroy the likelihood of a competing bid eventuating).
Certain common key definitions will also need to be negotiated that relate to the exclusivity provisions and the ‘fiduciary out’, including what does and does not constitute both a ‘competing proposal’ and a ‘superior proposal’ and what steps the Target must take in order to free themselves from their exclusivity obligations and engage with a competing proposal.
A breach of the exclusivity provisions generally will allow the bidder to terminate the agreement and be paid the break fee (if one has been agreed).
Exclusivity provisions – Cease existing discussions
This is a common, perhaps universal, inclusion in Implementation Deeds and like the title suggests, requires the Target and its advisers to cease existing discussions with other parties that may or could reasonably be considered to result in a competing proposal.
While agreement to this provision is generally expected, the Board should carefully consider how they manage this requirement (particularly where a multi-party process is being run) and ensure that in ceasing such discussions / removing unsuccessful parties from the data room that they do not inadvertently give the game away too early by signalling to other market participants that a deal has been done.
Exclusivity provisions – No shop
Under a ‘no shop’ clause, the Target agrees that it (and its advisers) will not solicit a ‘competing proposal’. No ‘fiduciary out’ is required for this type of clause and a Target board will often be more comfortable agreeing to such a restriction where it has already run a sale process, or is otherwise comfortable that agreeing to such a provision is necessary to get the current deal done (knowing that announcing the deal may just cause potential other acquirers to sit up and take notice).
Exclusivity provisions – Go shop
This is a somewhat unusual clause, but one that does emerge in particular specialist situations. For example, where the bidder is extremely confident, or where the Target board is perhaps unhappy with the premium offered and is only willing to agree to the current transaction where it is permitted to run a sale process for a limited period of time.
Another scenario where such a clause may have assisted is in the locked-stalemate that arose in 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 and seven applications to the Australian Takeovers Panel. In the Cardinal transaction, Shandong Gold and Nordgold had been engaged in a bidding war with a series of price increases ratcheting the price per share offered from A$0.60 per share to A$1.00 per share. Following Shandong Gold increasing its offer to A$1.00 per share it made a ‘last and final’ statement that its offer was “best and final in the absence of a higher competing offer”. Nordgold cleverly latched on to the precise language of this statement and matched Shandong’s bid at A$1.00 per share and also made a ‘last and final’ statement. In doing so, it said that while it had matched Shandong’s bid, its bid was not a “higher competing offer” (rather, it was an equal offer).
The share price of Cardinal consistently traded above the A$1.00 per share mark, suggesting that the market did not believe or rely on the ‘last and final’ statements and it was clear that the competing bidders had more money left to offer, if only they could find a way through the stalemate.
While the stalemate was ultimately broken by the emergence of Engineer and Planners Co at A$1.05 per share (independent of the parties), this specific “matched” scenario is one in which there would be appeal for the Target and agreed bidder to negotiate a variation to the Implementation Deed to permit the Target to “go shopping”.
Exclusivity provisions – No talk
A ‘no talk’ restriction is where the Target (and advisers) agree not to negotiate with any third party, even if the approach is unsolicited. This provision must be subject to a ‘fiduciary out’ clause which permits the Target to negotiate with a third party who approaches the Target on an unsolicited basis, provided that the directors determine that those discussions are necessary for the directors to discharge their fiduciary duties to the Target.
The specific terms of the ‘fiduciary out’ may require the Target to obtain financial advice that a third-party approach is superior to the existing bid, and legal advice that the Target directors would be likely to breach their fiduciary duties if they did not discuss the proposal with the third party.
These restrictions can be a key area of focus for the Takeovers Panel, the Courts and ASIC (depending on the nature of the transaction) and ensuring that they comply with relevant law and guidance can make the difference between a smooth and difficult transaction process.
In addition, the no talk obligation should have other “outs” as well for provision of information required by law, to auditors and to allow the Target to make normal presentation and respond to enquiries from brokers, investors and analysts in the ordinary course of business.
Exclusivity provisions – Notification and matching rights
Notification rights (which require the Target to notify the bidder of receipt of a competing proposal or approaches) again require careful analysis and consideration in the context of the Boards’ duties, as such rights can exacerbate the anti-competitive effect of the overall exclusivity package.
Matching rights should similarly be carefully negotiated and from the Target’s perspective, agreement to successive or lengthy matching right processes should be resisted – having successive or multiple opportunities to put forward a better deal is likely to tip an exclusivity package into being an ‘unacceptable lock-up device’.
In the next part of this series, we will continue to formalise the deal and consider break fees and reverse break fees in detail.
Don't miss the next part of the Australian Takeover Defence series where we will consider the approaches that may be made by a bidder. Subscribe to our Corporate Advisory and Governance mailing list here.