In the last weeks of 2022 the Takeovers Panel released a consultation paper on proposed changes to its 2007 guidance note on lock-up devices. [1] Recognising that the Panel’s focus in the guidance is on the exclusivity arrangements sought by bidders to protect control transactions, going forward the note will be rebranded “deal protection”.
Why the change?
The updates have been largely prompted by the Panel’s decisions in two of the most noteworthy cases of the last few years arising from the contested takeovers for AusNet and Virtus Health. In both those cases, the Panel was called upon to adjudicate on an issue which, in the absence of express Panel guidance, had troubled dealmakers for years. How far could a target go in granting a bidder a period of ‘hard’ exclusivity to finalise due diligence and move to a binding transaction, during which time the target would be prevented from engaging with any competing proposals, even unsolicited proposals on superior terms which would ordinarily trigger a “fiduciary out” enabling the target board to respond?
In both cases, the Panel decided that the hard exclusivity arrangements unfairly protected the bidders at the expense of contestability. The Panel’s orders sought to unwind the arrangements and open up the targets to competing bidders. However, in practice, by the time the Panel proceedings were concluded both bidders had enjoyed the benefits of several weeks of clear air to progress their deals and were able to enter into binding implementation agreements with the targets shortly afterwards. In light of those outcomes, the Panel decisions may not have served as much of a deterrent to future bidders looking to push the boundaries of pre-bid deal protection.
Against this context, the new proposed guidance note provides timely clarity on what the Panel expects of targets when faced with bidder requests for exclusivity.
Key aspects of revised guidance
There are three aspects of the revised guidance worth focussing on:
1. Pre-bid ‘hard’ exclusivity will usually (but not always) be unacceptable
Following the Panel’s decisions in Ausnet and Virtus, the new guidance confirms that ‘hard’ no-talk and no-due diligence restrictions which are not subject to a fiduciary out in the non-binding stage are likely to be unacceptable unless there are extenuating circumstances for a target granting them. The Panel gives several examples of circumstances where a limited period (which the Panel sees as not more than 4 weeks) of hard exclusivity may potentially be justified:
- where a bidder is (or is supported by) a major target shareholder and the target considers that it is necessary to incentivise another bidder to compete;
- where the target has already conducted an auction process or otherwise fulsomely sounded out the market and is granting it to encourage a potential bidder to make an offer;
- where it is granted to secure a material price increase from an existing bidder (although the Panel expects that the target would make enquiries of any other existing bidders before prematurely locking them out of a process); or
- where there is a single bidder at a price the board considers to be full and the board considers it unlikely that any higher offer will emerge.
These should not be seen as safe harbours of themselves. The Panel will expect target boards to negotiate and test with bidders whether the requested protections are necessary and, overall, promote rather than adversely affect meaningful competition.
The new guidance acknowledges that target boards in Australia are not under a duty to undertake an auction when confronted with a potential control transaction (or required to provide equal diligence access to rival bidders) and recognises that directors have to turn their minds to what is appropriate in the specific circumstances of the transaction. However, the revised note does indicate that where a target has not run a sale process, the Panel will assess what processes and market testing the target undertook prior to entering into any exclusivity arrangements, especially where there are credible competing bidders (which is likely to be the case wherever a takeover has come before the Panel). As such, in entering into deal protection arrangements before a binding transaction, target boards will need to carefully consider whether they expect to lead to a better outcome for shareholders, particularly where favouring one bidder at the potential expense of others.
The new guidance also confirms that the Panel does not expect targets to agree to pay break fees in respect of non-binding proposals and that, if any are agreed, the quantum should be significantly less than that for a binding proposal (where the Panel’s limit is usually 1% of deal value).
2. Notification obligations need disclosure
Deal protection arrangements in the non-binding phase have often avoided disclosure on the basis that, in the absence of a binding agreement on transaction terms, targets have been able to form the view that the arrangements do not require announcement under their continuous disclosure obligations. Under the new guidance, the Panel will now require disclosure of the material teams of exclusivity arrangements in this phase if they contain notification obligations (which require a target to inform a bidder of other competing proposals) so that competing bidders have visibility over that risk. This means that bidders will have to carefully weigh up the advantage of securing notification rights against staying under the radar until they are ready to announce a binding transaction (or are outed by any earlier leak).
3. Panel signposts use of standstill remedy
The new guidance highlights that, when the Panel finds a bidder’s deal protection arrangements unacceptable, it can impose a standstill preventing the target from agreeing a binding transaction with the bidder for a period to give space for other counterbidders to enter the fray. While the Panel did impose a 2-week standstill on the target and bidder after making its decision in Virtus, that appeared to have little practical effect on slowing the bidder’s progress, especially given the bidder had already enjoyed 3 weeks of hard exclusivity by the time of the Panel’s decision. We expect future Panels may be emboldened by the revised guidance and willing to consider longer standstill periods and/or interim standstills to limit the progress a bidder can make during any Panel proceedings.
Updates to insider participation guidance
At the same time as the consultation paper on deal protection, the Panel also commenced a consultation on proposed changes to its 2007 guidance on insider participation in control transactions. That guidance was initially released by the Panel in response to a wave of private equity bids and sought to ensure that conflicts were appropriately addressed so that a target could independently respond to a bid without being unduly influenced by any ‘participating insiders’ within the target board or management team who were aligned with a particular bidder.
The proposed updates to this note reflect the fact that the guidance has practical application beyond just private equity bidders and accordingly the scope of the guidance has been expanded to cover a broader range of potential insiders, including major shareholders with board nominees looking to bid themselves or team with another bidder. As before, in circumstances where a bid or potential bid involves any insider participation, the Panel expects any conflicts to be identified to the target board and for the target to establish and comply with appropriate protocols to mitigate those conflicts (including, usually, forming an independent board committee to oversee the target’s response to the bid).
Next steps
The Panel is seeking feedback on the proposed changes to both guidance notes by 28 February 2023. Given the nature of the changes, and the fact that the main updates concerning deal protection are grounded in two recent Panel decisions, we do not anticipate further material changes to the guidance following the consultation period and expect to see the new guidance notes come into force in the first half of 2023.
For further insights into the revised guidance on deal protection, see the KWM article “Deal lock-ups: time to put a ring on it?”
