Early on in deals involving North American clients, we often encourage the moderation of expectations around the benefits of deal protection in Australia.
And so it proved in the recent contest for control of Pacific Energy between QIC Private Capital and a consortium comprising OPTrust Private Markets Group and Infrastructure Capital Group, with the competing bidders putting forward scheme of arrangement proposals.
Following the announcement of their success by Pacific Energy, QIC enjoyed the modest benefits of a fulsome exclusivity regime which included "high water mark" matching rights in the event of a competing offer.
Prior to the first Court hearing for the QIC scheme, the OPTrust / ICG Consortium presented a competing proposal that was conditional on Pacific Energy agreeing to pay a $2.5 million break fee if the accompanying scheme implementation deed (executed by the Consortium) was not executed by Pacific Energy following the expiration of the QIC matching right period.
The target board had an interesting decision to make. It had been presented with a fully-formed, executable proposal that would deliver a significant 11% premium over the QIC proposal without any material increase in conditionality. However, access to the proposal was conditional on agreeing to pay a break fee in circumstances where it knew QIC would argue that committing to the break fee would be a breach of the QIC scheme implementation deed.
By accepting the Consortium's proposal, Pacific Energy would be required to pay either the QIC break fee or the Consortium break fee (and never both unless a subsequent superior third party competing proposal was pursued). But in any event, the Pacific Energy board would always have a deal on the table (and one that was at a considerable premium to that presently on offer), either by QIC exercising its matching right, or by Pacific Energy's entry into the Consortium's scheme proposal.
Potentially encouraged by the limitation of liability in the QIC scheme implementation deed (QIC's $4.1 million break fee was the sole remedy - effectively liquidated damages - in connection with termination of the QIC implementation deed), the Pacific Energy board overcame its "bird in the hand" dilemma and contractually committed to the Consortium break fee as the price of accessing the Consortium's superior proposal.
QIC subsequently exercised its matching right and at the same time applied to the Takeovers Panel for a declaration of unacceptable circumstances arising from Pacific Energy's commitment to pay a break fee to the Consortium. Ultimately the Panel declined to make such a declaration, for the reasons outlined here. Fundamentally the Panel could not see the alleged anti-competitiveness or coercion in the circumstances surrounding the Consortium break fee in the context of a substantially better financial outcome for target shareholders.
So, is this a roadmap for a competing bidder to unpick a lock-up?
It's certainly further support for the proposition that there is a limit to the comfort taken from being the first-mover in Australian competitive bid scenarios, even with a "high water mark" exclusivity regime:
- A commercially focussed Panel will be slow to second guess a target board that seeks to attain additional value for its shareholders
- The decision confirms the Panel's attitude as one of tolerance rather than advancement or enforcement of lock-ups – and that the Panel sees its role as keeping a lid on the inherent anti-competitiveness of exclusivity regimes
But a couple of notes of caution:
- The Panel's decision (and the willingness of the Pacific Energy board to proceed with a competing proposal that was conditional on a break fee) may have been different had a robust and structured auction process been conducted to identify the successful bidder. There may be less tolerance for a second "bite at the cherry" if a second-placed bidder fails to put their best foot forward in full contemplation of the exclusivity benefit to be conferred on the preferred bidder.
- In the Pacific Energy circumstances, the Consortium had the benefit of having already conducted due diligence, giving it good flexibility to take an approach that the Pacific Energy board would find compelling. Contrast, for example, the attempts by the Pacific Consortium in 2016 / 2017 to "get under the hood" of Tatts Group following Tatts' merger agreement with Tabcorp. On that occasion, the Tatts board's assessment, taking into account the conditionality of the Pacific Consortium proposal around due diligence, foreign investment approval and regulatory approvals, drove it to favour the "bird in the hand" notwithstanding the greater value potentially available from "2 birds in the bush".
King & Wood Mallesons acted for the OPTrust / ICG consortium (in respect of Pacific Energy) and the Pacific Consortium (in respect of Tatts Group) in the matters described above.