How hard is it? The Takeover’s Panel consults on guidance for exclusivity granted at the non-binding bid stage

Following two Takeovers Panel decisions that found pre-deal exclusivity and other deal protection arrangements to be unacceptable, the Takeovers Panel has now commenced consultation on proposed new guidance on deal protection granted in respect of non-binding proposals. Most importantly, the revised guidance rebalances the discussion following those decisions by recognising that the decision about the level of deal protection to be granted is a decision for a target board to make based on all the circumstances, but also outlines that certain arrangements can carry with them disclosure and other implications.

IN BRIEF

• The Panel’s proposed revised guidance helpfully steers the decision about whether to grant pre-deal exclusivity and/or other deal protection (and to what extent) back to its rightful place – for target boards to determine based on all the circumstances of the relevant situation.
• Following on from the trajectory of the Panel’s decisions in Virtus Health Limited [2022] ATP 5 and AusNet Services Limited 01 [2021] ATP 9, the revised guidance also seeks to rebalance the assessment about whether to grant deal protection at the non-binding proposal stage towards viewing ‘hard exclusivity’, break fees and the like as an exceptional rather than standard approach.
• Whilst the decision is back in the hands of the target board, the revised guidance spells out some weighty implications, including disclosure requirements for certain packages of pre-deal exclusivity rights, such as where rights to be notified of other competing proposals are agreed.

DEAL PROTECTION AT THE NON-BINDING PROPOSAL STAGE

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.

The Panel also expects that target boards will, where possible, negotiate and ‘test’ (and not accept as a matter of course) the proposed deal protection devices sought by the bidder.

Neither of these expectations are controversial.

‘Hard’ exclusivity

In the proposed revised guidance, the Panel clarifies that a period of ‘hard’ exclusivity, being exclusivity without an exemption for directors to comply with their fiduciary duties, granted by the target board to a bidder in connection with a non-binding proposal is likely to have an anti-competitive effect.  Accordingly, hard exclusivity is likely to give rise to unacceptable circumstances unless there are circumstances that warrant it.

The revised guidance goes on to recognise that there may be circumstances in which the target board considers that it is in the best interests of the target company to grant a short period of hard exclusivity to a bidder in respect of a non-binding proposal.  Examples provided of such circumstances are:

• A major shareholder has made a bid for the target (or a bidder has the support of a major shareholder) and the target board considers that granting hard exclusivity would incentivise another bidder to enter the process and stimulate competition for the target company.
• The target board having conducted an auction process or fulsome market sounding already considers that a period of hard exclusivity will encourage an offer to be made.
• Where hard exclusivity is granted in return for a material price increase.
• There is a single bidder, the target considers it unlikely that there will be a competing bid at a higher price, the target considers the price offered fairly values the company and the board considers granting hard exclusivity to that bidder will potentially enable the proposal to progress to a binding deal.

The revised guidance also sets out the Panel’s views on the acceptable length of any hard exclusivity. The Panel expects that the period in which exclusive access to non-public due diligence is provided should be short and limited to no more than 4 weeks (and that any obligation not to communicate with other potential bidders (ie a ‘no-talk’ obligation) would be consistent with this period).

The Panel emphasises that it will look at the circumstances as a whole and the context in which the arrangement was entered into in considering whether or not a hard exclusivity arrangement is unacceptable.

Disclosure

The proposed revised guidance clarifies the Panel’s position that, at a minimum, the existence and nature of all material terms of any deal protection arrangement should normally be disclosed by no later than when the relevant control proposal is announced, although it may be necessary to announce it earlier under continuous disclosure provisions applicable to the bidder or target.

The failure or delay in disclosing the deal protection mechanism may have an anti-competitive effect and also result in an uninformed market for control of the target.

In relation to the non-binding bid stage, the Panel outlines that 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 does not require disclosure under the continuous disclosure provisions, but that 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.  This is on the basis that the Panel considers that a competing bidder should be aware that information in respect of their competing proposal (which may include confidential information) may be disclosed by the target under a notification obligation.

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.

What is not required

The revised guidance also restates the general law position in Australia that there are no general requirements for a target to:

• undertake an auction process prior to entry into any deal protection arrangements. However, it does note that where there has not been any auction process prior to entry into such deal protection arrangements, the Panel will consider what processes and analyses have been undertaken and what advice has been obtained by the target, particularly where there are credible competing bidders; or
• provide equal access to information about the target company to rival bidders.

COMMENTARY

Some of the examples given in the new guidance for where hard exclusivity and other deal protection mechanisms may be acceptable at the non-binding bid stage apply to the situations that were the subject of the Panel’s decisions in Virtus Health Limited [2022] ATP 5 and AusNet Services Limited 01 [2021] ATP 9. However, taking together the ‘kitchen sink’-esque deal protection arrangements agreed, the length of them and the lack of fulsome disclosure in those cases, we do not consider that either decision would ultimately have been decided differently based on the new guidance.

The revised guidance is helpful in that it clarifies that the Panel does not consider deal protection at the non-binding bid stage to be unacceptable in all cases and that the decision around deal protection at this stage is for the target board to determine and is not subject to black and white rules by the Panel.  This should mean that the discussion around deal protection devices between bidders and targets at the non-binding proposal stage is rebalanced such that there will be increased focus on whether the circumstances of the relevant proposal warrant deal protection and, if so, what level.

However, the revised guidance is written in fairly broad terms such that interpretations of what constitutes unacceptable arrangements might differ considerably.  This is perhaps hard to avoid in the context of general guidance. Time will tell if the market and subsequent Panel decisions support the primacy of the target board’s decisions in these circumstances.