Deal protection update – Panel reviews (and amends) North American deal protection provisions

In brief

• In Westgold Resources Ltd, the Takeovers Panel accepted undertakings from Westgold Resources Ltd (Westgold) and Karora Resources Inc (Karora) to address the Panel’s concerns in relation to deal protection mechanisms (and in particular, the effectiveness of the ‘fiduciary out’) contained in an Arrangement Agreement between Westgold and Karora to implement a Plan of Arrangement under the Canada Business Corporations Act (a scrip consideration transaction under which Westgold would acquire 100% of the shares in Karora) (Karora Transaction).
• The Karora Transaction was a ‘merger of equals’, with Westgold shareholders to hold 50.1% of the shares in the Merged Group.
• The application to the Panel was made by Ramelius Resources Limited (Ramelius), which had previously approached both Westgold and Karora (separately) in relation to a potential control transaction.
• The Panel’s decision is an important reminder of ensuring deal protection mechanisms in cross-border public M&A transactions involving Australian companies satisfy the relevant regulatory requirements under Australia’s takeovers law (which may require departures in some respects from market practice or norms in the relevant overseas jurisdictions).
• Given the commentary included the Panel’s media release (8 July 2024), the Panel’s reasons (when provided) may provide guidance on when a reverse break fee has the potential to constitute unacceptable circumstances.

Timeline

Westgold entered into the Karora Transaction following an earlier approach from Ramelius. A timeline of the key events is below:

• November 2023: Ramelius approaches Westgold regarding a potential ‘merger of equals’ transaction. Ramelius entered into a confidentiality agreement with Westgold which included a 12 month standstill (Ramelius Confidentiality Deed).
• 22 January 2024: Westgold and Karora entered into a confidentiality agreement.
• 8 March 2024: Ramelius disclosed that it was in exclusive discussions with Karora regarding a potential corporate transaction.
• 28 March 2024: Ramelius announced that discussions with Karora had ceased.
• 8 April 2024: Westgold and Karora announced the Karora Transaction and execution of the Arrangement Agreement.
• 29 May 2024: Ramelius applied to the Takeovers Panel seeking a declaration of unacceptable circumstances in relation to the Arrangement Agreement.

Relief sought by Ramelius

Ramelius sought various forms of relief in the Takeovers Panel application. This relevantly included:¹

• amending the scope of the deal protection mechanisms and modifying or removing fetters on the ‘fiduciary out’ provision in the Arrangement Agreement;
• removing the requirement for Westgold to seek Karora’s consent to vary or waive any existing confidentiality or standstill arrangements (which relevantly included the standstill contained in the Ramelius Confidentiality Deed);
• that the reverse break (payable by Westgold to Karora) of C$40 million (being approximately 4% of Westgold’s market capitalisation), which could be triggered due to (amongst other reasons) Westgold terminating the Arrangement Agreement and entering into a binding agreement with respect to a superior proposal, was unacceptable (on the basis it exceeded the 1% of equity value guideline in the Panel’s Guidance Note 7).

Amendments to deal protection mechanisms

Given the Karora Transaction was a ‘merger of equals’, the Arrangement Agreement included reciprocal deal-protection mechanisms, with each party having a ‘fiduciary out’.

In deciding to accept undertakings and declining to make a declaration, the Panel stated it had concerns in relation to the non-solicitation provisions in the Arrangement Agreement, in particular the effectiveness of the ‘fiduciary out’. The Panel’s concerns were addressed by the following amendments to the Arrangement Agreement:

• deleting the limb of the ‘Superior Proposal’ definition which had required the party making a competing proposal to have adequate cash on hand or fully committed debt financing to fund the competing proposal (with such funding unconditional, other than for the conditions precedent contained in the Arrangement Agreement);
• removing the requirement for Westgold to seek Karora’s consent to release any third party (i.e. including Ramelius) from any confidentiality agreement or standstill and the positive obligation for the parties to enforce any such confidentiality agreement or standstill;
• removing the requirement that any confidentiality agreement in relation to a competing proposal must be on substantially the same terms (or on terms no more favourable to the third-party bidder) as the Westgold / Karora confidentiality agreement (including any standstill) and removing the related requirement to provide a copy of any confidentiality agreement entered into with a third party bidder to the other party;
• qualifying the right for the other party to receive an equivalent level of due diligence access provided to a third party bidder to exclude the notification (and disclosure) of any information which may disclose information relating to the third party bidder that is commercially sensitive;
• replacing the requirement to provide a copy of the definitive agreement for any ‘Superior Proposal’ with a requirement to disclose a summary of all material terms and conditions; and
• removing the requirement that any notification of a ‘Superior Proposal’ must include the relevant board’s valuation of any non-cash consideration offered under the ‘Superior Proposal’.

The Panel did not consider Westgold’s continued reliance on the standstill in the Ramelius Confidentiality Deed was inappropriate (and made no orders in respect of this matter).

Therefore, the consequence of the Panel’s decision is that Westgold’s board retained the discretion (but not the obligation) to vary or waive the standstill in the Ramelius Confidentiality Deed, without needing to consult with Karora or obtain its consent.

Reverse break fee

The Panel considered that, in the circumstances, the termination fee payable by Westgold to Karora “is not currently having an anti-competitive effect” – presumably this was based on the fact that Ramelius had not made a competing proposal for Westgold.

However, this statement appears to leave it open for the Panel to consider whether a reverse break-fee exceeding the 1% of equity value guideline in the Panel’s Guidance Note 7 could constitute unacceptable circumstances, in the event a competing proposal was made in relation to Westgold and that competing proposal had the potential to trigger the reverse break-fee payable to Karora under the Arrangement Agreement (noting that Ramelius has not made a competing proposal for Westgold).

The Panel’s reasons (once provided) may provide further guidance on this point.

Post-script

Following the conclusion of the Panel proceedings, Ramelius disclosed that it had ceased discussions with both Karora and Westgold in relation to a potential corporate transaction.

The Karora Transaction was approved by the requisite majority of Karora shareholders on 22 July 2024, with completion to occur on or around 1 August 2024 (following receipt of final Canadian court orders). As a result, the reverse break-fee payable by Westgold to Karora in the Arrangement Agreement will not be enlivened.

As at the date of this article, the Panel has not provided its reasons for decision.