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26 May 2023
Insight
Australia
The Takeovers Panel has begun consultation to revise its guidance on deal protection granted at the non-binding bid stage, and companies have already started following pre-deal exclusivity and deal protection arrangements since the Panel's consultation paper was released.
As discussed in a previous article, at the end of 2022, the Takeovers Panel commenced consultation on changes to its guidance on deal protection granted at the non-binding bid stage. Submissions in response to the consultation paper have now closed, and we anticipate that revised guidance will be released in the coming months. In the meantime, we take a look at how companies have approached pre-deal exclusivity and deal protection arrangements in 2023 (where such arrangements have been publicly announced) since the Panel’s consultation paper was released.
IN BRIEF
- The Takeovers Panel’s proposed changes to its guidance on pre-deal exclusivity and deal protection arrangements were prompted by the Panel’s decisions in AusNet1 and Virtus,3 where the Panel found that the pre-deal exclusivity arrangements and certain other deal protection arrangements, when taken as a whole, had an anti-competitive effect (and were therefore unacceptable). With consultation on the proposed changes now closed, we expect the Panel’s revised guidance to be finalised in the coming months.
- In the meantime, we take stock of how companies have approached pre-deal exclusivity and deal protection arrangements in 2023 since the Panel’s consultation paper was released (where those arrangements have been publicly announced).
- In summary, there have been only 5 instances where deal protection arrangements at the non-binding bid stage have been publicly announced in 2023 since the Panel’s consultation paper (although there are likely others that have remained confidential). Of those, a 4 week period of ‘hard’ exclusivity (consistent with the Panel’s proposed revised guidance) has been agreed on two occasions, although in one instance it was not announced whether or not the “no talk” and “no due diligence” obligations were subject to a fiduciary out. The remaining deals did not contain a period of ‘hard’ exclusivity. We also discuss some other interesting observations in relation to these examples below.
- The examples surveyed show that, although the proposed revisions to the Panel’s guidance have not been finalised, as might be expected, bidders and targets are proceeding on the basis that the proposed guidance announced at the end of 2022 will largely be reflective of the Panel’s final views on the issue.
A BRIEF RECAP: THE PANEL’S PROPOSED CHANGES TO ITS GUIDANCE ON DEAL PROTECTION AT THE NON-BINDING BID STAGE
Please see the article ‘How hard is it? The Takeovers Panel consults on guidance for exclusivity granted at the non-binding bid stage’ by Nicole Pedler and Katerina Jovanovska for a discussion on the Panel’s proposed changes to its guidance on deal protection at the non-binding proposal stage.
In summary, under the Panel’s proposed changes to its guidance:
- General position: The Panel expects that target boards will consider the impact of any proposed deal protection devices on competition for the company and have regard to the principles that the acquisition of control of the company should take place in an efficient, competitive and informed market. In relation to deal protection at the non-binding stage, the Panel expects that target boards will, where possible, ‘test’ those arrangements by negotiating with bidders (rather than simply accepting them as a matter of course). For example, by granting limited non-public information on a non-exclusive basis in the first instance.
- ‘Hard’ exclusivity at the non-binding stage: The Panel considers that ‘hard’ exclusivity (being exclusivity without a ‘fiduciary out’ for target directors) granted by the target board in connection with a non-binding proposal is likely to have an anti-competitive effect. Accordingly, ‘hard’ exclusivity is likely to be unacceptable unless there are circumstances which warrant it. Any period in which exclusive access to non-public due diligence is provided should be short and a maximum of 4 weeks.
- Disclosure of notification obligations: A bidder or target may form the view that deal protection arrangements entered into in respect of a non-binding proposal during the non-binding bid stage do not require disclosure under the continuous disclosure provisions. However, where such arrangements include a notification obligation, the Panel expects there to be disclosure of the material terms of the deal protection arrangements once those arrangements are entered into.
- Break fees: Generally, the Panel does not expect that a target board would agree to a break fee in respect of a non-binding proposal. However, to the extent one is agreed, the Panel expects that the quantum would be substantially lower than for an equivalent binding proposal.
TRENDS IN DEAL PROTECTION ARRANGEMENTS AT THE NON-BINDING STAGE IN 2023
As noted above, consultation on the Panel’s proposed changes to its guidance is now closed, and we expect the Panel’s revised guidance to be finalised in the coming months.
In the meantime, we have examined how companies have approached pre-deal exclusivity and deal protection arrangements in 2023 (where those arrangements have been publicly announced) since the Panel’s consultation paper was released. The table below sets out the key features of the instances where deal protection arrangements have been entered into at the pre-bid stage in 2023 and disclosed to the ASX.
|
Target (deal value) |
Bidder |
Exclusivity period |
Was there a fiduciary out? |
Other interesting features of deal protection arrangements |
Exclusivity granted in the first instance? |
|---|---|---|---|---|---|
|
Newcrest Mining Limited (A$26.2 billion) |
Newmont Corporation |
4 weeks plus a 1 week extension |
Yes, in respect of both the “no talk” and “no due diligence” restrictions. |
The initial exclusivity period was 4 weeks, and subsequently extended by 1 week. Included a “no shop” restriction, notification obligations (without an obligation to disclose the identity of the competing bidder), and equal access to information rights. |
No – access was granted to limited, non-public information on a non-exclusive basis in the first instance. |
|
InvoCare Limited (A$1.9 billion) |
TPG Capital Global |
5 weeks from the date of the agreement (Initial Exclusivity Period), with TPG having an option to extend the exclusivity period for a further 2 weeks if, on the last day of the Initial Exclusivity Period, TPG: (i) reconfirms its proposal for $13 cash per share; and (ii) is continuing to engage with InvoCare in good faith towards entering into a scheme implementation deed. |
Yes, in respect of both the “no talk” and “no due diligence” restrictions. |
Included a “no shop” restriction and notification obligations (including an obligation to disclose the identity of the competing bidder). TPG must provide a weekly notice to InvoCare confirming that it elects to either: (i) progress its due diligence, and that its share valuation of InvoCare remains at $13 per share, and it is not seeking terms less favourable to InvoCare shareholders than those set out in the NBIO; or (ii) no longer progress the transaction. |
No – access was granted to limited, non-public information on a non-exclusive basis in the first instance. |
|
United Malt Group Limited (A$1.5 billion) |
Malteries Soufflet |
From the date of the process deed to 10 weeks after the later of: (i) 48 hours after substantially all of the due diligence materials in the agreed data room index are provided (Data Room Open Date); and (ii) the date of the process deed. |
Yes, in respect of the “no talk” and “no due diligence” restrictions, but only from 4 weeks after the later of: (i) the Data Room Open Date; and (ii) the date of the process deed (ie effectively a period of 4 weeks ‘hard’ exclusivity). |
Included a notification obligation and a matching right – the matching right prevents UMG from entering into a competing proposal or recommending a competing proposal unless it is a Superior Proposal, and it has provided Malteries Soufflet an opportunity to provide an equivalent or superior proposal. UMG must pay a break fee in certain circumstances (capped at A$5 million). The circumstances include where: (i) UMG commits a material breach which is unremedied; (ii) Malteries Soufflet provides a fully documented, financed binding offer (in the form of an executed scheme implementation deed which reflects the terms of the indicative proposal) within 10 business days after the end of the exclusivity period and UMG elects not to proceed with the transaction; or (iii) UMG enters into an agreement to give effect to a competing proposal, or the UMG board recommends a competing takeover bid, during the exclusivity period. |
No – access was granted to limited, non-public information on a non-exclusive basis in the first instance. |
|
SILK Laser Australia Limited (A$167 million) |
Australian Pharmaceutical Industries Pty Ltd |
30 business days after the date of the deed (with a right to extend for a further 10 business days). |
Yes, in respect of the “no talk” and “no due diligence” restrictions, but only from 4 weeks after the date of the deed. |
Included a “no shop” restriction, notification obligations (including an obligation to disclose the identity of the competing bidder), equal access to information rights and a matching right. The matching right prevents SILK Laser from entering into an agreement in respect of that Competing Proposal unless: (i) the Board determines that it is a Superior Proposal; (ii) SILK Laser has provided API with all material terms of the proposal; (iii) a period of 5 business days has expired; and (iv) either API has not announced or proposed a counterproposal within 5 business days of provision of the information or if it has done so, the board has determined, in good faith, that the counterproposal would not provide an equivalent or superior outcome for shareholders. |
Yes. |
|
Mithril Resources Limited (A$11.8 million)
|
Newrange Gold Corp. |
The earlier of 28 April 2023 (ie approximately 7 weeks) and the date that binding transaction documents are signed. The ASX announcement notes that this is “subject to conditions”. |
Not specified. |
The parties agreed to a period of 20 business days to conduct due diligence investigations under the terms of the non-binding term sheet. No further details were released to the market. |
Not disclosed. |
COMMENTARY
In summary, the examples above show that, although the proposed revisions to the Panel’s guidance have not been finalised, as might be expected, bidders and targets are proceeding on the basis that the proposed guidance announced at the end of 2022 will largely be reflective of the Panel’s final views on the issue.
In particular, our survey above showed that:
- there have been only 5 instances where deal protection arrangements at the non-binding bid stage have been publicly announced in 2023 since the Panel’s consultation on its revised guidance was announced – however, the true number of instances where pre-deal exclusivity and deal protection arrangements have been agreed (but which have remained confidential) is likely to be higher;
- of those, a 4 week period of ‘hard’ exclusivity (consistent with the Panel’s proposed revised guidance) was agreed on two occasions, although in one instance it was not announced whether or not the “no talk” and “no due diligence” obligations were subject to a fiduciary out;
- there have been 4 instances where a notification obligation has been agreed (and subsequently disclosed, consistent with the Panel’s revised guidance). Perhaps not surprisingly in light of the Panel’s proposed revisions to its guidance, a break fee which effectively operated as a cost recovery provision was agreed in only one instance; and
- in 3 instances where pre-deal deal protection arrangements were announced in 2023, the target boards agreed to grant access to limited, non-public information on a non-exclusive basis prior to granting exclusivity to a bidder at a later stage. This appears to indicate that target boards are not simply agreeing to exclusivity arrangements as a matter of course, consistent with the Panel’s proposed guidance in its consultation paper.
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