No out-clause when a scheme bidder becomes a target

What happened?

Pendal Group was the subject of an agreed bid from bidder Perpetual Group, which was to be implemented by a scheme of arrangement. Pendal and Perpetual entered into a Scheme Implementation Deed (SID) with the usual exclusivity and break fee clauses, and a $23 million reverse break fee from Perpetual. There was an “exclusive remedy” clause regarding the break fees.

After the SID was signed, Perpetual was approached by a potential bidder. However, the bid for Perpetual would be conditional on the Pendal scheme failing. Perpetual took the unusual step of going to the NSW Supreme Court for a ruling on its right to get out of the Pendal SID.

What did the Court rule?

The Court did not accept Perpetual’s argument that it had a “fiduciary out” as a bidder once it signed the SID, or that the “exclusive remedy” clause in the SID would allow Perpetual to just pay the reverse break fee to Pendal and walk away with no further exposure. In particular, the Court said that the exclusive remedy clause only caps a target’s monetary remedy at the reverse break fee amount – it does not prevent a target using other remedies such as injunction and specific performance to force a bidder to go through with an agreed bid, unless the SID is very clear that such other remedies are also excluded.

What does this mean for M&A advisors?

The Court settled a long-standing question on the effect of “exclusive remedy” and reverse break fee clauses, namely are they like an option fee for a bidder, where it can simply pay the 1% fee and walk away from its obligations in a scheme? This ruling makes it clear that a Court will not allow a bidder to do so, and will enforce a SID against a bidder if the target and its shareholders want the scheme to go ahead. Targets should be wary of bidders trying to further limit their exposure in future SIDs now that the parameters of the usual exclusive remedy clause are clear.

A final note on reverse takeovers:

There is one situation where a bidder does have an opportunity to take advantage of a control proposal after it has signed an SID with a target, and that is where the original bid was a reverse takeover (the target is larger than the bidder). If the bidder is listed on ASX, then the ASX Listing Rules require it to obtain approval from its own shareholders as a condition of the reverse takeover completing. The arrival of a control proposal for the bidder in that situation will allow the bidder to make a recommendation to its own shareholders whether or not to approve the original bid, and the fiduciary duties of the bidder’s directors will come into play in making that voting recommendation.