Australian Takeover Defence Series Part 7: Formalising the deal (conditions)

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 5 and Part 6 of HopgoodGanim Lawyer’s Australian Takeover Defence Series, we considered some tactical insights for target boards in negotiating the exclusivity and break fee provisions of an Implementation Deed. In Part 7, we consider the conditions to the transaction and how best to navigate the negotiation of such conditions.

Bid conditions

An off-market bid can be made subject to conditions¹ which, if triggered, will enable the bidder to let its bid lapse and all acceptances will be voided. There are restrictions on what conditions can be imposed. In particular, a condition cannot be ‘self-triggering’, meaning it cannot be dependent on the bidder’s opinion, events within its control, or events which are a direct result of the bidder’s actions.

Other prohibited bid conditions include a condition on the maximum of shares that may be accepted or a condition that discriminates certain acceptances into the bid (so that the bidder will only acquire securities from certain persons who accept the bid).

Common bid conditions include:

1. in a takeover bid, minimum relevant interest threshold (often 90% to tie in with the compulsory acquisition threshold or 50.1% for practical control);
2. regulatory approvals (e.g. FIRB etc);
3. no material adverse change in relation to the target;
4. no material transactions by the target; and
5. no ‘prescribed occurrences’ in relation to the target (e.g. no new equity issues, no insolvency events, and no sale of the main undertaking).

In a takeover bid, the bidder must nominate a date (which must be between 7 and 14 days before the end of the offer period) on which it will notify the market as to the status of its bid conditions. This date will usually be extended by the same period as any offer period extension.

In a scheme of arrangement, the conditions must generally be satisfied before the Court approves the scheme. In rare instances, unresolved conditions precedent in schemes can be converted to conditions subsequent.

Generally speaking, the less conditions that are attached to a transaction, the better, as a bid with few conditions is always going to be more attractive to target shareholders.

Material adverse change clauses

The inclusion of a material adverse change (MAC) clause is a common feature in the Australian M&A landscape. Broadly speaking, this clause allows a bidder to walk-away from the transaction if the target is in a materially worse position due to the occurrence of a particular event.

Generally speaking, MAC clauses contain one of two types of triggers, either a quantifiable trigger (i.e. a reduction of 10% in EBITDA or an event that impacts at a dollar amount over a particular threshold) or a qualitative threshold (often expressed as something that impacts on the whole of the target’s business or assets).

While the Australian corporate securities regulator (ASIC) has expressed a particular view that MAC triggers should generally be structured to have quantifiable triggers, market practice and logic dictates that qualitative triggers should not be ruled out, particularly where there is no element of subjectivity involved in the determination.

From the perspective of the target board, carefully negotiating the exclusions from what will in fact constitute a MAC will be key, and commonly negotiated exclusions include:

1. changes arising from general economic conditions, currency exchange rates, securities markets and commodity prices (provided that the target does not suffer disproportionally when compared to other participants in its industry);
2. matters generally affecting the relevant industry in which the target operates (again, provided that the target does not suffer disproportionally when compared to other participants in its industry);
3. matters arising from an act of terrorism or war (often excluding pre-existing conflicts);
4. impacts arising directly or indirectly from acts of God;
5. matters fairly disclosed to the bidder and in public filings;
6. changes in law, accounting policy or government policy; and
7. matters occurring as a result of transactions contemplated by the Implementation Deed or with the consent of the bidder.

In Part 8 of our series, we will consider the potential treatment of convertible securities in a control transaction. 

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¹. An on-market bid must be unconditional (although it can be withdrawn in certain prescribed circumstances) – on-market bids are relatively uncommon for this reason, however in appropriate circumstances they can be employed by bidders to quickly put a bid into the market.