Takeovers panel issues revised guidance on deal protection arrangements

No shop

Restricts the target from soliciting a rival bid.

A standard no shop is not required to be subject to a ‘fiduciary out’.

A standard no shop is not required to be subject to a ‘fiduciary out’.

No talk

Restricts the target from negotiating with any potential competing bidder. It might be graduated from the least restrictive form (allows negotiations if the approach was unsolicited) to the most restrictive form (no negotiations, even if the approach was unsolicited).

No talk restrictions must be subject to an effective ‘fiduciary out’.

‘Hard’ exclusivity at the non-binding stage (ie a ‘no talk’ and / or a ‘no due diligence’ restriction without a ‘fiduciary out’) is unacceptable unless there are circumstances which justify it.

The Panel gives four examples of such circumstances, including where the target board has conducted an auction process or a fulsome sounding of the market and considers that granting ‘hard’ exclusivity at the non-binding stage will encourage the bidder to make a binding offer.

A period of ‘hard’ exclusivity should be no more than 4 weeks (including any extension).

The Panel expects that if a target board decides to grant due diligence access at the non-binding stage, the default position would be for such access to be granted on a non-exclusive basis. In some circumstances, exclusive due diligence access or a short period of ‘hard’ exclusivity are acceptable where the circumstances referred to above justify it. Again, any period of ‘hard’ exclusivity must be no more than 4 weeks.

No due diligence

Restricts the target from providing material non-public information to third parties.

No due diligence restrictions must be subject to an effective ‘fiduciary out’.

Notification obligations and equal information rights

Requires the target to disclose details of any potential competing offers or approaches (notification obligations) or any information about the target that is made available to a competing bidder which was not previously provided to the original bidder (equal information rights).

A notification obligation may reduce the likelihood that a competing bidder will want to make an approach. Limiting the details required to be disclosed reduces the anti-competitive effect of those arrangements.

Equal information rights may also reduce the likelihood that a competing bidder will approach the target. In combination with other exclusivity arrangements, it may increase the anti-competitive effect of those arrangements.

A ‘fiduciary out’ is not required for a notification obligation or equal information rights.

Where the exclusivity package includes a notification obligation which requires the target to provide the identity and/or terms of the competing proposal to the bidder, the Panel expects public disclosure of the material terms of the exclusivity arrangements.

We note that ASX Guidance Note 8 (footnote 156) states that ASX does not expect disclosure of an exclusivity arrangement at the non-binding stage, provided the requirements in ASX Listing Rule 3.1A.2 and 3.1A.3 continue to be satisfied. The Panel considers that the words “may give rise to unacceptable circumstances” in paragraph 55 of Guidance Note 7 may reduce the potential conflict with the continuous disclosure requirements under the ASX Listing Rules.

Matching rights

Allows the bidder an opportunity to “match” the terms of any competing offer made by a third party.

The duration of a matching right should be no more than 5 business days. A material extension to a matching right period is likely to be unacceptable because of the effect on the willingness of a potential competing bidder to make a competing offer.

The Panel will also consider any terms of the matching right provision that may have the effect of limiting competition.

A ‘fiduciary out’ is not required under matching right regime.

It is open for target boards to grant matching rights at the non-binding proposal stage, and the same considerations apply as at the binding stage.

Break fees

A fee payable by a target if discussions are terminated under specified circumstances.

A break fee must generally not exceed 1% of the equity value of the target (on a fully diluted basis). However, there may be factors which make a break fee within the 1% guideline unacceptable eg if the triggers for payment are not reasonable (ie coercive to target shareholders). Generally, break fee triggers will not be unreasonable if they are within the target’s control.

The Panel will apply the principles set out in paragraph 49 of the Guidance Note when determining whether a break fee is reasonable.

Generally, the Panel does not expect that target boards will agree to a break fee at the non-binding stage. In considering whether a break fee at the non-binding stage is acceptable, the Panel will have regard to the same principles that apply at the binding stage (among other things).

Disclosure of exclusivity arrangements at the non-binding stage

Under the Consultation Draft, target boards would need to disclose the material terms of deal protection arrangements entered into at the non-binding stage where the exclusivity package included a notification obligation.

Under the updated guidance, the Panel no longer expects disclosure of pre-deal exclusivity arrangements unless the notification obligation requires the target to provide to the potential bidder: (i) the identity of a competing bidder; and/or (ii) the terms of a competing proposal.

The Panel also expects public disclosure of pre-deal exclusivity arrangements where the target board has agreed (under a ‘process deed’ or similar) to recommend a transaction if the bidder makes a binding offer on the terms of its indicative proposal, or if a material fee would be payable by the target if the target board fails to recommend a binding offer on the same or better terms than the indicative proposal.

In our view, this is a sensible change which strikes a good balance between ensuring that potential bidders are not discouraged from making an approach, and the need to maintain a competitive and informed market. A notification requirement, without an obligation to disclose the identity of the bidder or terms of the proposal, is less anti-competitive in nature. A bidder may have a legitimate expectation to be informed that it is no longer the only bidder in the running.

However, it would have been helpful for the Panel to provide additional guidance on when a process deed should be disclosed to the market in full instead of summarised. This remains an open question.

Limited period of ‘hard’ exclusivity at the non-binding stage

The Panel has clarified that the default position for due diligence access at the non-binding stage is for it to be granted on a non-exclusive basis. In the Consultation Draft, the Panel indicated that a period in which exclusive access to non-public due diligence is provided would be short and limited to no more than 4 weeks (and any no talk would be consistent with this period).

The revised guidance has been updated to state that any period of ‘hard’ exclusivity would be short and limited to no more than 4 weeks. There is an open question as to whether the Panel is content for the period of ‘hard’ exclusivity to conclude 4 weeks after either: (i) the signing of exclusivity arrangements; or (ii) the date that the bidder receives access to substantially all of the due diligence materials or data room access.

‘Fiduciary outs’ at the non-binding stage

The Panel acknowledges the potential for matching rights at the non-binding stage to reduce meaningful competition by allowing a potential bidder to simply increase its bid to maintain exclusivity, noting it is not legally required to make that bid. The Panel has sought to address this by clarifying that:

• the Panel expects a ‘fiduciary out’ at the non-binding stage to give the target board scope to consider the likelihood that any matching proposal made by the original bidder is likely to lead to a binding proposal at that price; and
• target boards (in exercising their discretion when considering deal protection arrangements) are expected to consider whether deal protection devices have the effect of reducing their ability to engage with a competing proposal.   

The Panel has also clarified that an unacceptable ‘fetter’ or constraint on a ‘fiduciary out’ may exist where the ‘fiduciary out’ specifies that the target board can only consider a competing proposal to be a superior proposal if the competing proposal is a particular type of transaction (eg acquisition of 100% or more than 50% of shares in the target).

There is no real discussion in the revised guidance on why matching rights are considered acceptable at the non-binding stage.

As the Panel has acknowledged, matching rights in respect of non-binding proposals can lead to a situation where an existing bidder continues to increase its indicative price simply to maintain exclusivity. While any ‘fiduciary out’ at the non-binding stage must give the target board scope to consider the likelihood that a binding offer will be made, it is not necessary for a matching right to have a ‘fiduciary out’ – in our view, there is still a risk that target boards will be forced to comply with a matching rights regime even where there is no certainty that it will lead to a binding proposal at that price.

Break fees at the non-binding stage

The Panel has clarified that break fees in respect of non-binding indicative proposals will be guided by the non-exhaustive list of factors that apply in relation to break fees at the binding stage.

As noted above, the Panel does not expect that a target board would agree to a break fee at the non-binding stage, and that if one is agreed, the quantum would be “substantially lower” than for an equivalent binding proposal. There is no indication of what “substantially lower” means (ie where the upper limit is 1% of the target’s equity value).

In our view, it would have been more helpful for the Panel to indicate with some specificity what is meant by “substantially lower” than for an equivalent binding proposal. We also query whether the Panel will apply the non-exhaustive list of factors cited where the break fee is less than the 1% guide (at either the binding or non-binding stages). It is clear that market practice in Australia at the binding stage is, in the majority of cases, for a break fee of around 1%.