The awkward three-way struggle between Perpetual (the Bidder for Pendal, but now also the Target of a proposal from the Regal Partners Consortium), Pendal Group (the Target of Perpetual) and the Regal Partners Consortium (the Bidder for Perpetual) appears set for a Court showdown on Wednesday 16 November 2022, where the Supreme Court of New South Wales will reconvene to answer key questions and consider whether to convene the meeting of Pendal shareholders to seek approval for the acquisition of Pendal by Perpetual.
This saga publicly commenced in July with Perpetual and Pendal both responding to various media leaks about the potential for a deal between the parties. On 25 August 2022, Perpetual and Pendal announced that Perpetual would acquire Pendal by way of a scheme of arrangement offering both Perpetual shares and cash.
Enter the Regal Consortium, who on 3 November 2022 lobbed in a conditional, non-binding indicative proposal (NBIO or Proposal) to acquire Perpetual at A$30 per Perpetual share. Importantly, the Consortium’s proposal includes a condition that the scheme implementation deed with Pendal be terminated. The Perpetual Board announced its receipt of the Proposal and its rejection on the same day.
The Regal Consortium hit back on 10 November 2022, with Perpetual announcing that it had received (and again rejected) an improved proposal from the Regal Consortium at A$33 per Perpetual share (with the potential for some form of scrip alternative).
Today, on 14 November 2022, Pendal announced that Pendal and Perpetual have sought declarations from the Court in relation to the operation of the Scheme Implementation Deed between Perpetual and Pendal, including clarifying the remedies which may be available to Pendal in the event that Perpetual breaches the Scheme Implementation Deed or indicates that it will do so.
The deferral of the Court date and the questions to be determined at that hearing appear to indicate that the Board of Perpetual may be looking to engage with the Regal Consortium to determine whether there is in fact a deal that can be done which is in the best interests of Perpetual’s shareholders.
To provide some context, in a standard agreed or “friendly” Australian takeover, the implementation agreement almost always contains deal protection mechanisms in the form of exclusivity provisions which prevent the Target from soliciting competing transactions or talking to, or otherwise providing due diligence to a potential third-party acquirer. These “no shop, no talk and no diligence” provisions are often either insisted upon by the Bidder or offered as an inducement to the Bidder to make their bid in the first place. There are particular rules that apply to exclusivity provisions so as to ensure that they are not overly anti-competitive or restrictive, but broadly speaking, provided that the “no talk” restriction is subject to a “fiduciary out” (which allows the Target directors to engage with a potential Bidder, if to do otherwise would not be in the best interests of their shareholders) they are considered part of the Australian M&A landscape.
The implementation agreement between the Bidder and the Target will usually contain a mechanism where if the Target directors determine that a new bid or approach is a “superior proposal”, then subject to any matching rights that the original Bidder may be afforded, the Target directors will change their recommendation to recommend the new superior approach and exercise an express right of termination under the implementation agreement (while also likely paying a “break fee” or compensating among to the unsuccessful Bidder).
So far so good.
But what happens when the hunter (the Bidder) becomes the hunted and is faced with an unsolicited approach by an interloper trying to acquire it? Well, the answer like most difficult legal questions is, it depends.
Where the implementation agreement between the Bidder and the Target contains mutual deal protection provisions, the answer may be contained within those provisions.
But often, the answer is not immediately clear.
Instead, the exclusivity arrangements as they relate to the Bidder are often drafted or included on the assumption that no-one would surely bid for the Bidder during the process. This often results in:
- the Bidder providing mutual exclusivity to the Target; and
- the Bidder’s directors having the ability to respond to competing proposals, but no ability to in fact terminate the implementation agreement in such circumstances (and rather, the termination right is instead vested in the Target, who may be particularly disinclined to exercise that right).
The Australian Takeovers Panel considered a similar situation (a bid being made for a Bidder) last year in Gascoyne Resources Limited [2021] ATP 10, where they said at [28]:
We did not on first view understand the utility of [the Bidder] having a fiduciary out to a no talk restriction in the [Implementation Agreement] with no corresponding termination right. It appeared that if a [Bidder Superior Proposal] emerged which [the Bidder] wished to pursue instead of the [Target Scheme], [the Bidder] was reliant on [the Target] exercising its own termination right under the [Implementation Agreement]. We considered this unusual and were concerned that it had the potential to impact the ability of a rival bidder for [the Bidder] to be successful if [the Target] decided not to exercise its termination right…
The Perpetual and Pendal implementation deed is drafted differently to the agreement in Gascoyne Resources Limited [2021] ATP 10, but the outcome appears similar. It would seem that here, the Perpetual Board would be able to talk to the Regal Consortium in reliance on their “fiduciary out” to the no-talk provisions contained in the agreement, provided that they consider the Regal Consortium approach bona fide (and that it otherwise constitutes a “Perpetual Major Transaction”). However, there does not appear to be an express right of termination for Perpetual should they wish to walk-away from the Pendal deal. Instead, Perpetual would need to perhaps argue there exists some form of implied right of termination where such termination would be said to be in accordance with their equitable fiduciary obligations owed to their shareholders.
The difficulty with this argument is that the clause immediately below the relevant “fiduciary out” provisions in the implementation deed expressly provides that Perpetual is not entitled to terminate the deed in order to pursue a Perpetual Major Transaction. The relevant clause goes on to state that if Perpetual breaches the deed in a manner which causes the implementation of the scheme to become impossible or otherwise breaches the deed to pursue a Perpetual Major Transaction, Perpetual must pay to Pendal A$23 million even if Perpetual’s board determined that the breach was required in order to fulfil the fiduciary or statutory duties of the directors of Perpetual.
This would appear to leave Perpetual’s Board in a difficult position, which is exacerbated by the fact that it appears to be a key condition of the Consortium’s proposal that the Pendal deal not proceed.
No doubt all three parties involved eagerly await the Court’s declaration on Wednesday on the operation of the implementation deed.
The Perpetual and Pendal situation and the situation in Gascoyne late last year, both highlight an area in Australian public M&A which may require more detailed consideration.
In the meantime, we would suggest that in particular, ASX-listed Bidders who enter into implementation agreements which provide for mutual exclusivity, ensure that they seek to include an express right of “fiduciary out” termination for the Bidder should someone seek to acquire them (coupled with a payment to the Target of a break fee as the sole remedy against the Bidder by the Target as a consolation prize).