In reverse – The Takeovers Panel’s assessment of reverse exclusivity arrangements in Westgold Resources Limited

Although the Plan of Arrangement and the Arrangement Agreement were governed by Canadian law, the Panel was satisfied that it had jurisdiction to conduct proceedings, as the application related to the control or potential control of an Australian company (Westgold) that was regulated by Chapter 6 of the Corporations Act, notwithstanding that the underlying transaction would be implemented under (and regulated by) the laws of a foreign country.

The Panel (and ASIC) closely reviewed the exclusivity arrangements that Westgold agreed with Karora and expressed a number of concerns regarding those arrangements and whether there were unacceptable fetters on the fiduciary exception to those provisions. Ultimately, the Panel accepted undertakings from Westgold and Karora to amend the Arrangement Agreement to address those concerns by:

• 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; and
• qualifying the right for the each merger 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.

The Arrangement Agreement included a termination fee of C$40 million, which would be payable by Westgold to Karora (the Westgold Break-Fee) if certain termination events occurred, which in relation to Westgold, relevantly included where Westgold terminated the Arrangement Agreement following receipt of a Westgold ‘Superior Proposal’.

The break-fee that would have been payable in these circumstances was approximately 3.6% of the equity value of Karora and 4% of the equity value of Westgold (and well in excess of the Panel’s 1% guideline for break-fees). Both Westgold and Karora pointed to the fact that the quantum of the Westgold Break-Fee was in line with market precedent for comparable Canadian transactions and characterised it as a reverse break-fee in a Canadian transaction (rather than a break-fee in respect of Westgold in a potential Australian transaction).

Karora also submitted that it would not have been prepared to accept Westgold having a termination right for a Westgold ‘Superior Proposal’ if the Westgold Break-Fee was limited to 1% of equity value, as this would be viewed (in Karora’s opinion) as effectively providing Westgold with an option on whether to proceed.

The Panel was satisfied that in the specific circumstances of the matter, the Westgold Break-Fee was not currently having an anti-competitive effect on the market for control of Westgold. Here the Panel noted that (despite the Westgold Break-Fee) Ramelius provided successive competing proposal on two separate occasions following execution of the Arrangement Agreement, but also acknowledged that the Westgold Break-Fee could dilute the value that a rival bidder was prepared to offer Westgold shareholders.¹

The Panel also noted that whilst the quantum of a break-fee is one factor in the context of the overall arrangements that may influence the Panel to find that unacceptable circumstances had arisen, the Panel was satisfied, having regard to the circumstances in aggregate and the undertakings provided, that the Westgold Break-Fee did not give rise to unacceptable circumstances in this matter.

Ultimately therefore, the Panel did not need to resolve the issue of whether the Westgold Break-Fee should be properly characterised as a reverse-break fee or a break-fee and whether it should be subject to the Panel’s 1% guideline and, if so, how that requirement should be reconciled with the market practice for higher break-fees in North American transactions.

Ramelius had submitted that the estimated $490m of synergies included in the Westgold announcement of the transaction and the investor presentation were forward-looking statements that were not based upon reasonable grounds. The Panel noted that whilst the estimated synergies related to a Canadian target (and distinguished the present circumstances from the disclosure of estimated synergies in a bidder’s statement to acquire an Australian target), Ramelius’ complaint regarding the synergies was in effect that the estimated synergies could cloud the Westgold board’s judgement in relation to whether the Ramelius proposals were superior and therefore the question was relevant to the proceedings.

On the issue of synergies, the Panel was content to request and receive from the Westgold and Karora boards confirmation that they had reasonable grounds for the synergies without further inquiry. Nor did the Panel re-open the issue when Ramelius submitted after the board confirmations were provided that the shareholder information circular for the Karora Transaction did not contain any references to the estimated synergies, which Ramelius submitted would suggest that there were, or are no longer, any reasonable grounds for the statements regarding synergies (with the Panel merely noting it did not consider this to be necessarily the case).

The key order sought by Ramelius was to require Westgold to release Ramelius from the standstill.

Ramelius submitted that the standstill should be waived (amongst other things) on the basis that certain confidential information Ramelius initially received from Westgold had ceased to be market sensitive (particularly following the release of detailed information regarding Westgold in the Karora shareholder circular), however the Panel did not make make this finding. The Panel considered that the Westgold board was best placed to assess whether the confidential information provided (which included a 10-year corporate financial model with quarterly production forecasts) was price sensitive or commercially sensitive. 

Whilst the Panel required Westgold and Karora to amend the Arrangement Agreement to remove Karora’s right to consent to any waiver of the Ramelius standstill by Westgold, the Panel did not go so far as to require Westgold to waive the standstill. The Panel stressed that in reaching its decision the Panel considered the arrangements and surrounding circumstances in totality, including having regard to the undertakings to amend the exclusivity provisions contained in the Arrangement Agreement and acknowledging that the standstill did not prevent Ramelius presenting a rival control proposal to the Westgold board, which occurred on two occasions.

As a result, any decision by Westgold to waive the Ramelius standstill remained a matter for the Westgold board to determine – and the Westgold board determined not to waive the standstill, given it did not consider the Ramelius proposal to be superior.

It is well accepted that deal protections affecting a target must be subject to a fiduciary out and in line with this, the Panel’s guidance on deal protections applies on its terms to deal protections affecting targets rather than acquirers.²

However, in the Westgold decision, the Panel strictly applied its guidance to deal protections applying to an acquirer to ensure that the mechanics of the agreed deal protection mechanisms were not unacceptable having regard to their effect on competition for control – in particular that there was an “effective” fiduciary out that was not subject to unreasonable fetters or constraints that would mean the fiduciary out was not available in practice.

Whilst the Panel’s focus on the effectiveness of the fiduciary out may suggest that its expectation is that an acquirer in analogous circumstances should secure a fiduciary out, the Panel did not make any express statement to that effect i.e. whether it may be unacceptable if the party playing the role of acquirer in a merger of equals transaction did not have the ability to exercise a fiduciary out and termination right if a superior proposal for it arose during the course of the transaction.

Although guidance from the Panel on whether and in what circumstances an acquirer fiduciary out is required would perhaps be helpful for clarity, it is already clear that parties to merger of equals transactions in the market are regularly agreeing to mutual deal protections and fiduciary outs. In practice, in merger of equals transactions (where either party could potentially be the acquirer and there are typically a multitude of factors determining which party plays the role of acquirer) reciprocity is a key feature – acquirer parties are seeking, and target parties are agreeing to, a fiduciary out and termination right for the acquiring party.

The Panel’s reasons also demonstrate that, consistent with the earlier key decision on standstills, International All Sports Limited [2009] ATP 4, the Panel will not lightly interfere or adjust the terms of a standstill that has been agreed at arm’s length between two sophisticated parties. The party seeking to have the standstill lifted would need to show that maintaining the standstill is inappropriate and ultimately unacceptable, and that will be a high bar. In considering the issues, it would appear that a Panel would be unlikely to forensically examine the information provided to consider whether it is materially price sensitive or to second guess the board’s view on that matter and whether to continue to enforce the standstill.

Similarly, the Panel’s reasons also show that provided the required mechanics are in place to preserve the deal space for a rival proposal to emerge (i.e. an effective fiduciary out) the Panel will be unlikely to examine in detail or substitute its commercial judgement for that of the target board on matters relevant to the assessment of rival proposals and whether they are superior (such as value, and in this case, synergies).

Therefore, there remains a primary role for the board as gatekeeper of proposals for control and determining what is in shareholders’ interests in that context – from negotiating the terms on which the company provides access to confidential information, to determining whether a proposal is superior (and therefore whether to exercise its fiduciary out and lift any agreed standstill).

The Panel in Westgold did not resolve the question of whether the Westgold Break-Fee should be characterised as a ‘reverse break-fee’ in a foreign transaction or a break-fee in an Australian transaction – with the implication being that a reverse break-fee in a foreign transaction may potentially be less likely to be unacceptable if it exceeds the Panel’s 1% equity value guidance.

Whilst in a ‘merger of equals’ context where the parties have reciprocal termination rights (and fiduciary outs) it would appear difficult to justify a differential regulatory treatment of a bidder break-fee and a target break-fee, the Panel’s decision appears to leave open (for now) the scope for targets to seek from bidders a ‘reverse break-fee’ for a quantum exceeding the 1% break-fee rule. It is of course, a separate question whether the 1% guideline remains fit for purpose and reflective of the current costs of conducting public M&A (particularly internationally).³