Can we stop spilling ink on exclusivity yet - a summary of the Takeovers Panel Guidance Note 7

In the last two years, more ink has been spilled on exclusivity in the non-binding stage than anything else in takeovers law and practice. The key question has been whether hard exclusivity (i.e. exclusive due diligence without a fiduciary out) is permitted, and if so, for what period. 

This had led to two Panel applications (Ausnet and Virtus Health), a Takeovers Panel consultation paper, submissions by every person and their dog and now, finally, a revised Takeovers Panel Guidance Note 7 (GN7).

We discussed the consultation process on GN7 initiated by the Takeovers Panel in our February edition.

As expected, the finalised GN7 confirms that the maximum period of ‘hard exclusivity’ is four weeks.  The four-week cap includes extensions and is irrespective of whether the target has established a populated data room (i.e. it’s not four weeks plus however long it takes to get a data room up and running).

Under the consultation draft, target Boards would have been required to disclose the material terms of deal protection arrangements entered at the non-binding stage where the exclusivity package included a notification obligation.  In GN7, the Panel changed course and no longer expects disclosure of pre-deal exclusivity arrangements unless there is a notification obligation that requires the target to provide to the bidder (i) the identity of a competing bidder or (ii) the terms of a competing proposal.  A basic right to be notified of the mere fact of a competing proposal will not in and of itself trigger a disclosure obligation.

Disclosure of pre-deal exclusivity arrangements will also be required where the target board has agreed (under a ‘process deed’ or similar document) 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.

So, after GN7 and the contested takeovers with applications to the Takeovers Panel – is the law on exclusivity at the non-binding stage now settled? Probably – we doubt many target Boards will grant ‘hard exclusivity’ for a period of more than four weeks and we’re seeing a number of deals default to the four week timeline.

The more interesting question is whether target Boards feel pressured to grant four weeks ‘hard exclusivity as a rule?  In GN7, the Panel reiterated that the ‘default position’ would be for due diligence access at the non-binding stage to be granted on a non-exclusive basis.  However, we expect that most bidders from now on will at least start with a request for four weeks.

More generally, we expect that bidders will likely sharpen their focus on other deal protection devices that can be sought at the non-binding stage, including stake building strategies and 'most favoured nation' clauses where a bidder agrees to a standstill (to even the playing field in a competitive auction).