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Focus: Takeovers Panel releases updated guidance notes

12 February 2010

In brief: The Takeovers Panel has released the final revised versions of its guidance notes on lock-up devices, frustrating action, funding arrangements and rights issues. While most of the changes involve simplification and updating, there are more substantive changes to the Panel's guidance on certain issues. Partner Cameron Price (view CV) and Senior Associate Emin Altiparmak identify those changes.

• Guidance Note 7 – Lock-up Devices
• Guidance Note 12 – Frustrating Actions
• Guidance Note 14 – Funding Arrangements

Guidance Note 7 – Lock-up Devices

Of the four guidance notes, GN 7 (which deals with the Panel's approach to break fees and no-shop and no-talk agreements, among others) has changed the most. The substantive changes are as follows:

Break fees

• One per cent guideline: The Panel now more clearly confirms that a break fee not exceeding 1 per cent of the equity value of the target by itself is generally not unacceptable.
• Payment triggers: Previously, GN 7 did not focus on the types of fee triggers that might be acceptable or unacceptable. The Panel has now given more guidance on this. The triggers that are expressed to be reasonable include:
  • a change in the directors' recommendation (although there may be exceptions, such as a change in recommendation due to a breach of the implementation agreement by the bidder, a failure to satisfy a condition precedent outside the target's control, or an expert opining that the transaction is not fair and reasonable);
  • a competing transaction that successfully completes (in this case, the break fee would be effectively payable by the successful rival bidder);
  • a material condition precedent within the target's control not being satisfied;
  • a material breach within the target's control; or
  • other events affecting the control transaction (such as a major asset of the target being destroyed).

It is not unusual to have break fee payments triggered by a failure of bid conditions that are outside the target's control. The new guidance suggests that the Panel will look more closely at these triggers. The Panel has not gone so far as to say that a trigger for a change of recommendation to recommend a superior proposal is unacceptable if that superior proposal itself does not complete.

Also, despite being consistent with market practice, the Panel has not expressed any general principle that a break fee be the sole liability in respect of a triggering event.

• 'Naked no vote' fees: These are break fees that trigger on the rejection of the control transaction by target shareholders alone (such as a failure to pass a requisite resolution in a shareholder meeting or receipt of insufficient acceptances during an offer period). The updated guidance note states that this type of break fee may be unacceptable given its coercive effect (even if within the 1 per cent guideline), whereas the superseded guidance note expressed that this type of break fee was not necessarily unacceptable. The Panel's position on these fees appears to have moved slightly, and is now more in line with ASIC's position on these fees. Also relevant here is the court's position in relation to naked no vote fees in schemes. In 2007, in Re Bolnisi ¹ and Re Rural Press², Justice Lindgren made orders convening scheme meetings, despite the parties agreeing naked no vote fees. In Re Bolnisi, Justice Lindgren looked at whether the naked no vote fee was 'so large as to be likely to coerce shareholders into agreeing to the scheme' but did not find it objectionable, given the fee was reciprocal and for actual costs only.
• Term: The reasonableness of the term of a break fee is included as one of the factors that will guide the Panel's consideration of whether the break fee is unacceptable. However, no guidance is given as to what is a reasonable term. A reasonable term may be the term of the implementation agreement, provided that the term of the implementation agreement is no longer than is reasonably required to implement the proposed transaction. However, application beyond the term of the implementation agreement may be appropriate where, for example, the trigger depends on whether a competing proposal, which is launched before termination of the implementation agreement, successfully completes in the future (say, in the following six to 12 months).

Restriction arrangements

• Restriction arrangements include 'no shop', 'no due diligence' and 'no talk' obligations. The main change in the updated guidance note is the focus on how these restrictions, when combined with other features such as notification obligations and matching rights, etc, may be unacceptable.
• Notification obligations: These are obligations on a target to notify a bidder where a competing proposal is received or a third party approach is otherwise made. The Panel recognises that this type of obligation may be by itself a lock-up device, which, depending on its features, is unacceptable. GN 7 makes the obvious point that less information required to be notified means that the obligation will have less of an anti-competitive effect. However, the Panel does not expressly confirm whether an obligation to notify the fact of a third party approach alone would not be unacceptable (which we expect generally would be the case) or, on the other hand, what other information requiring notification (such as the identity of the third party or indicative competing price) might be unacceptable.
• Matching rights: These are rights in favour of a bidder to match a superior competing proposal, and are typically coupled with a notification obligation. The updated guidance note states that a matching right will be more anti-competitive if it includes an obligation to provide details of negotiations between the target and the third party. However, it does not go on to confirm whether such an obligation is likely to be unacceptable.

Guidance Note 12 – Frustrating Actions

The substantive developments to GN 12 are as follows:

• No need to necessarily breach bid condition: The Panel has confirmed in its public consultation response statement that an action by the target may still constitute a frustrating action even if there is no breach of a bid condition. An example of this was the Babcock & Brown Communities Group³ matter in 2008, where a proposed novation of management rights would have thwarted a stated objective of the bid, but would not technically have triggered a bid condition.
• Moving past proposals requiring a board recommendation: Significantly, the updated GN 12 states that an 'action that triggers a 'condition' in a potential bid may not give rise to unacceptable circumstances if the bidder indicated that it would proceed only if the bid was recommended and the directors have rejected the approach'. The Panel appears to have accepted that, in these circumstances, it is the target board's refusal to provide a recommendation that frustrates the bid (rather than any subsequent action of the target). On this basis, the Panel recognises that these circumstances may not be unacceptable. This represents an important change in the Panel's approach. These circumstances arose in the MacarthurCook⁴ matter in 2008. Based on the Panel's reasons for its decision in that matter, it does not appear that the Panel expressly considered whether the proposed placement of new shares by MacarthurCook was, in fact, a frustrating action, given MacarthurCook's earlier rejection of the proposal by AMP Capital Investors conditional on a board recommendation. Given the common practice of bidders submitting initial proposals at the lower end of the valuation spectrum, in some circumstances, the Panel may consider that a target board should allow a reasonable period after its rejection of an initial proposal for the bidder to return with a revised proposal, before embarking on the alternative transaction.
• Shareholder approval is not the only cure: Where shareholders are given a choice between a frustrating action and the bid it would frustrate, the frustrating action will not generally be unacceptable. Other than shareholder approval, one way of giving shareholders this choice is where the target announces that it will undertake the frustrating action only after a specified, reasonable period, unless control has passed to the bidder by end of that period. GN 12 now states that the extent to which such a period is reasonable may be affected by the length of the bid period or the status of any bid conditions. However, having regard to its public consultation response statement, it is unclear whether the Panel would require that a reasonable period (for control to pass) commence after the bid has become unconditional (except for possibly prescribed occurrences).

Guidance Note 14 – Funding Arrangements

The substantive update to GN 14 is as follows.

• Disclosure of funding from non-financial institutions: To the extent that a bidder plans to source any part of its cash consideration from a non-financial institution, the Panel is likely to require more disclosure on the lender and its capacity to fund (compared with what is ordinarily disclosed where funding is sourced from a financial institution). The required disclosure may include full accounts of the lender or, in most cases, an accountant's certificate as to the lender's ability to meet the funding obligation.

Footnotes

1. Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510.
2. Re Rural Press Ltd (2007) 61 ACSR 373.
3. Babcock & Brown Communities Group [2008] ATP 25.
4. MacarthurCook Limited [2008] ATP 20.

For further information, please contact:

• Cameron PricePartner, Melbourne
  Ph: +61 3 9613 8923
  Cameron.Price@aar.com.au
• Guy AlexanderPartner, Sydney
  Ph: +61 2 9230 4874
  Guy.Alexander@aar.com.au
• Andrew KnoxPartner, Brisbane
  Ph: +61 7 3334 3356
  Andrew.Knox@aar.com.au
• Andrew PascoePartner, Perth
  Ph: +61 8 9488 3741
  Andrew.Pascoe@aar.com.au