In appropriate contexts, the conversion of outstanding conditions precedent in respect of regulatory approvals to ‘conditions subsequent’ may offer a practical way for a Scheme to proceed on a more accelerated timeline.
Obtaining necessary regulatory approvals within commercially driven transaction timelines is often a key pressure on parties seeking to execute a company scheme of arrangement.
In many cases, bidders and targets will want regulatory approvals to have been received before proceeding to a scheme meeting to offer certainty to shareholders. However, in appropriate circumstances a bidder and target may decide to proceed to a meeting of members to approve a scheme while regulatory approvals remain outstanding.
There have been some recent examples where Courts have been willing to allow parties to also proceed to the final Court hearing and obtain Court approval of a scheme while regulatory approvals remain outstanding. This is typically where there is high certainty of receipt of the approvals, only a short period is expected for the approvals to come through and there is a binary outcome on the approval. This path involves the conversion of regulatory approvals from conditions precedent (required to be satisfied before the Court approves the scheme) to conditions subsequent (which are to be satisfied following Court approval).
Whether this will be a feasible and appropriate approach will depend on the specifics of the scenario – including the nature of the relevant regulatory approval, type of consideration offered and the situations of the target and the bidder.
WHAT DOES THE ‘CONDITION SUBSEQUENT’ APPROACH LOOK LIKE?
The Afterpay and Redflex schemes of arrangement, which were implemented in February 2022 and June 2021 respectively, are examples of how parties seeking to execute a scheme of arrangement can convert regulatory conditions precedent to conditions subsequent.
In this scheme, a scheme meeting had originally been convened for 6 December 2021 but was immediately adjourned to 14 December 2021 due to an outstanding regulatory approval from the Bank of Spain.
On 7 December 2021, with approval from the Supreme Court of New South Wales, Afterpay announced on ASX amendments to the scheme implementation deed and proposed scheme of arrangement converting the Bank of Spain approval from a condition precedent to a condition subsequent.
The new condition subsequent was ‘self-executing’ so that the scheme would either implement if the Bank of Spain approval was granted on or before 14 April 2022, or otherwise lapse and not proceed.
Shareholders voted to approve the scheme with this condition subsequent, and Court approval was granted at a hearing in mid-December 2021. The Bank of Spain approval was subsequently received on 12 January 2022.
In this scheme, on 7 May 2021 (three days before the scheduled scheme meeting), Redflex announced that a regulatory condition requiring approval of the transaction by the General Authority for Competition in the Kingdom of Saudi Arabia (GAC) remained outstanding and was unlikely to be obtained before the scheduled final Court hearing on 14 May 2021.
Redflex also confirmed that the scheme meeting would proceed as planned on 10 May 2021, and that following the meeting and assuming the scheme resolutions passed, Redflex would seek approval from the Federal Court to amend the scheme of arrangement to effectively convert the GAC approval condition from a condition precedent to a condition subsequent.
At the final Court hearing held on 14 May 2021, Yates J made orders approving an amended scheme of arrangement which provided that the scheme would either be implemented if the GAC approval was obtained by 13 August 2021, or otherwise lapse and not proceed.
Redflex announced on 8 June 2021 that that the GAC approval had been granted.
WHEN MIGHT A REGULATORY CONDITION SUBSEQUENT BE APPROPRIATE?
What factors will a Court consider in determining to approve a scheme which is subject to a regulatory condition subsequent?
In his consideration of the Afterpay scheme, Black J indicated two key factors were relevant to a Court’s consideration of whether to approve a scheme under s 411(6) which is proposed to be subject to a condition subsequent:
- whether the condition subsequent causes the scheme to become unclear or uncertain; and
- whether the condition subsequent introduces a new decision making process after a Court approves the scheme.
The above factors suggest that any condition subsequent requiring a regulatory approval will need to be formulated so that there is a defined period in which the condition subsequent must be satisfied, and so that the condition is ‘self-executing’ (that is, the scheme either must be implemented if the condition is satisfied, or automatically lapses and does not proceed if the condition is not satisfied).
Targets and bidders alike will need to perform a risk assessment before seeking to convert outstanding regulatory approvals from conditions precedent to conditions subsequent. Circumstances in which this approach may be considered are detailed below, and associated risks, are set out below:
- High degree of confidence in receipt of approval: Conversion of regulatory conditions precedent to conditions subsequent will generally only be appropriate where the target and bidder have a very high degree of confidence that the outstanding regulatory approval will be obtained. This may be the case where delay in the approval is not due to any specific regulator concerns in respect of the proposed transaction, but rather external factors impacting the ability of the regulator to process applications (for example, closure periods or statutory waiting periods).
In the Afterpay scheme, announcements released by Afterpay confirmed that Block and Afterpay were confident that the Bank of Spain approval would be received.
Similarly, in the Redflex scheme, Redflex confirmed by way of ASX announcement that it was not aware of any reason why the GAC approval would not be obtained.
- Regulatory approval decision is binary: The condition subsequent approach is likely to be more appropriate where the approval requested from the relevant regulator is a binary assessment – i.e. where the regulator will make a ‘yes or no’ decision. If, for example, the relevant regulator has the power or is considered likely to impose conditions as part of an approval which could have a material effect on the business of the target (or, in a scrip deal, the combined group), then making that approval a condition subsequent is less likely to be appropriate – and not likely to be agreed to by the Court. More generally, where the regulator’s decision is binary this will assist the parties to definitively set out for shareholders and the Court all possible outcomes of the regulator’s consideration of the proposed transaction.
- Changes in the period before implementation: The parties will need to be able to demonstrate to the Court that the shareholder vote, and Court’s own approval, will not ‘go stale’ during the period prior to the regulator’s decision being received. That risk could, as outlined above, arise from the regulatory approval itself. The risk that a change in circumstances while awaiting the relevant regulator’s decision could vitiate the approval of target shareholders or the Court may also be greater in a scrip deal – where both the bidder and the target, their respective businesses and share prices, and the value of the scrip consideration, are exposed to changes and volatility in financial markets and economic circumstances. The bidder is also on risk over this period (and it will lose the protection of any material adverse change clause which only operates up to the final Court hearing) and accordingly, will need to take this in account in deciding whether to agree to conditions precedent being converted into conditions subsequent. These issues may be less of a concern in certain transactions, for example, incorporate restructures or demergers by way of scheme of arrangement.
- Outcome where regulatory approval not obtained must be manageable: Bidders and targets considering the condition subsequent approach will need to plan for a scenario in which the expected regulatory approval is not obtained.
For example, Afterpay had on issue ‘SGX Notes’ with terms that provided their holders with the option to elect for the notes to be redeemed upon a change of control of Afterpay, with an aggregate redemption cost of AU$1.5b. The change of control trigger under the terms of the notes was receipt of Afterpay shareholder approval at the scheme meeting – rather than upon implementation of the scheme. There was therefore a possible scenario where Afterpay would have been required to pay out redemption of all the notes in circumstances where the Bank of Spain Approval was not received and the scheme did not proceed.
Afterpay was able to satisfy the Court that, if this scenario eventuated, Afterpay would have sufficient funds to satisfy redemption of all the notes on their face value.
When considering taking the ‘condition subsequent approach’, targets and bidders will need to be mindful of other circumstances in which certain events may trigger change of control provisions in contracts or arrangements prior to satisfaction of a condition subsequent (for example, material contracts and employee incentive arrangements) – and even if the relevant condition is never satisfied and the scheme is never implemented.
Whether it is feasible (and desirable) to convert regulatory conditions precedent into conditions subsequent will depend on the circumstances of the transaction, including having regard to the practical considerations above. Bidders and targets may also have different perspectives on the approach.