‘GO SHOP’ PROVISIONS: THE EXCEPTION OR THE NEW MAINSTREAM?

A ‘go shop’ provision has recently been used to secure a superior proposal for a target company. That in turn led to another bidder emerging. We examine the use of ‘go shops’ in our market and whether they will become more common in the future.

IN BRIEF

• In a recent scheme implementation deed, Mainstream Group Holdings included a one month ‘go shop’ provision. This was used to attract a superior proposal from a rival bidder (at a 67% premium to the first bid), which itself was followed by further bids from a third party, which the second bidder then bettered.
• While ‘go shop’ provisions have been common in the United States and certain other foreign jurisdictions, they are rare in the Australian market. We expect that to remain the case.

BACKGROUND

One of the key issues for target boards faced with a seemingly attractive proposal is whether to commit to a bidder or to test the market further.

Given the standard practice is to include exclusivity provisions in any binding implementation deed (including ‘no shop’ and ‘no talk’ provisions, notification obligations, matching rights and break fees), target boards are naturally wary about committing too early, lest they forestall an auction developing.

A ‘go shop’ provision may enable a board to sign up with a bidder in the knowledge that the board can still work to find a rival bidder.

‘GO SHOP’ PROVISIONS

What are they?

At its core, a ‘go shop’ is a provision that allows the target a set period after entry into the implementation deed in which it can ‘shop’ the market for rival proposals. Typically, the usual exclusivity provisions would not apply to anything done during that period (though a reduced break fee for the first bidder may be appropriate given they have kicked off the process).

Once the ‘go shop’ period expires, the standard ‘no shop’ and ‘no talk’ arrangements would commence.

Are they commonly used?

‘Go shop’ provisions have been reasonably common in certain foreign jurisdictions, such as the United States, where target boards are subject to ‘Revlon duties’ – described in the famous Delaware case involving Revlon as requiring target boards (where a sale becomes inevitable) to shift from “defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders”. Using a ‘go shop’ provision gives the board comfort that it can continue its efforts on behalf of shareholders, despite having signed up one bidder.

However, in the Australian market, ‘go shops’ are very rarely seen. There are two main reasons for this.

First, target boards cannot sign up to an unconditional ‘no talk’ clause preventing them from entertaining approaches from rival bidders. Target directors will have a ‘fiduciary out’ that allows them to entertain rival proposals where their duties require them to do so. That means the need for a ‘go shop’ period is less critical.

Second, break fees in Australia are effectively capped via Takeovers Panel guidance at 1% of the deal value to ensure that they do not discourage a contest. This can be contrasted to other jurisdictions, like in the United States, where significant break fees (say 5 or 6%) are more common and act as a greater deterrence for rival bidders to make a play for the target. Again, that means paying a break fee ought not deter a rival bidder.

The effect of this is that, while there are first-mover advantages for a bidder, including in relation to time and certainty, rival bidders know that there is a clear path to compete after a deal has been announced. In fact, competing bids have been on the rise in Australia in recent times.[1]

While ‘go shop’ provisions are uncommon in Australia, there have been some recent market examples where they have been used, including in the KKR-MYOB scheme, Adamantem Capital-Zenitas scheme and, most recently, the proposed acquisition of Mainstream Group.

MAINSTREAM SCHEME

Vistra proposal

On 9 March 2021, Mainstream entered into an implementation deed with Vistra, under which Vistra would acquire 100% of the shares in Mainstream at $1.20 per share under a scheme of arrangement.

Vistra’s offer represented a 12% premium to the Mainstream share price on the day prior to announcement.

Three of Mainstream’s directors were also major shareholders. They held approximately 38% of Mainstream and agreed that they would vote their shares in favour of the scheme, in the absence of a superior proposal.

The implementation deed included a ‘go shop’ provision, which gave Mainstream one month to solicit competing proposals. Vistra had matching rights during that time and options over a 19.9% stake, but gave a commitment that it would not stand in the way of a superior proposal were it to come. In fact, the implementation deed obliged it to support a higher unmatched rival bid.

The implementation deed provided for standard exclusivity provisions (including ‘no shop’ and ‘no talk’ restrictions) that would commence immediately following the expiry of the ‘go shop’ period. A break fee would also be payable by Mainstream to Vistra in certain limited circumstances.

SS&C proposal

On 11 April 2021, Mainstream announced that the ‘go shop’ period had concluded and a superior proposal had emerged from SS&C Technologies for $2.00 cash per share under a scheme of arrangement, representing a 67% premium to the price per share offered by Vistra.

Vistra did not exercise its matching right and, following Mainstream’s payment of the break fee to Vistra, Mainstream then entered into a new implementation deed with SS&C.

Mainstream has since announced that SS&C had agreed to increase the scheme consideration to $2.25 cash per share and then $2.35 cash per share following indicative proposals from another third party.

The current proposal represents a 96% premium to the initial recommended deal with Vistra.

COMMENTARY

The Mainstream case study is interesting because the target managed to secure a superior proposal during the ‘go shop’ period.

In the Australian context, we are not aware of any other examples where this has occurred. Similarly, in the United States, the emergence of superior proposals during a ‘go shop’ period are uncommon, with a survey published in the Harvard Law Review last year suggesting that this had occurred in only 7% of ‘go shop’ deals over the previous decade.[2]

Notwithstanding the ‘go shop’ provision enabling a superior offer in Mainstream, we expect that they will continue to be seen only in exceptional circumstances. For example:

• In the KKR-MYOB scheme, a ‘go shop’ provision was included in circumstances where the agreed consideration was considerably lower than the earlier indicative approaches from KKR and was described by MYOB as being required to ensure full and fair market testing of KKR’s proposal.
• In the Adamantem Capital-Zenitas scheme, a ‘go shop’ was included as one of the directors had an interest in one of the joint bidders and this was seen to be important to allow a fuller testing of the market.

From a bidder perspective, bidders will be reluctant to be used as a stalking horse. Once a deal is signed, the bidder would be seeking to ensure the target is focused on completing the deal without delay rather than being out in the market seeking to source a better deal.

From a target perspective, the typical exclusivity provisions it will be willing to commit to should continue to help ensure that there is an opportunity for bidders to put their best foot forward in the interests of target shareholders.

However, the Mainstream scheme does show that ‘go shop’ provisions are not just window dressing, and can in certain circumstances help to properly test the market.