Takeovers Panel 2021 Key Decisions

2022 is already shaping up to be an interesting year from a takeovers point of view with the battle between BHG and CapVest for Virtus Health. The parties are already in Takeovers Panel proceedings over exclusivity granted by Virtus Health to CapVest with no fiduciary out to allow Virtus Health to respond to competing proposals.

In 2021, the Takeovers Panel made declarations of unacceptable circumstances in 4 cases, and these key takeaways may well be relevant for the year ahead.

 

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Key Takeaways

 

Issue

Key takeaways

A fiduciary out always needed in exclusivity restrictions.

AusNet Services

  • A “no talk / no due diligence” exclusivity restriction for a potential control transaction always needs a fiduciary out. This applies even at preliminary Confidentiality Agreement or Process Deed stages, and even if the exclusivity is only for a short time.
  • Insistence by the bidder on firm exclusivity in return for its proposal is not an excuse.
  • If a listed entity announces an approach that has led to due diligence or other Board engagement, any exclusivity or cost reimbursement should also be included in the announcement as that will affect how other potential bidders approach the entity’s Board.
Protocols dealing with conflicts of interest need to be entered into early.

PM Capital Asian Opportunities Fund

  • Governance protocols to address conflicts of interest in a control transaction need to be implemented before significant decisions are made in respect of that transaction.
Rights issues are a frustrating action if shareholders’ approval not sought.

Nex Metals

  • A rights issue announced by a target shortly after it receives a conditional takeover bid will need to be subject to shareholders approval in order to not be an unacceptable “frustrating action”.
Intra-group funding arrangements for a cash bid need to be documented and binding.

The Agency Group 

  • If funding is by or through the bidder’s corporate group, it should be fully documented and binding before the bidder’s statement is lodged.
  • Details of the bidder’s funding arrangements may have to be disclosed before the bidder’s statement is lodged where the target has a shareholder meeting coming up to consider a competing proposal.

Case Summaries

AusNet Services Limited 01 [2021] ATP 9

Key takeaways

  • A “no talk / no due diligence” exclusivity restriction for a potential control transaction always needs a fiduciary out. This applies even at preliminary Confidentiality Agreement or Process Deed stages, and even if the exclusivity is only for a short time.
  • Insistence by the bidder on firm exclusivity in return for its proposal is not an excuse.
  • If a listed entity announces an approach that has led to due diligence or other Board engagement, any exclusivity or cost reimbursement should also be included in the announcement as that will affect how other potential bidders approach the entity’s Board.

Background

AusNet Services Limited (AusNet) operates electricity and gas distribution assets. In August and September 2021 AusNet received unsolicited approaches from Brookfield Infrastructure Group (Brookfield) and from Australian Pipeline Group (APA) for a control transaction. AusNet negotiated with Brookfield for a non-binding indicative price of $2.50 per share in return for AusNet granting Brookfield due diligence access, plus exclusivity arrangements. Although APA had put forward a lower proposal (without knowing the Brookfield proposal), APA had expressed interest in continuing discussions as to what an acceptable bid price would be for the AusNet Board.

Brookfield’s exclusivity arrangements were contained in a Confidentiality Deed. The key terms were:

  • the usual no-shop restriction on AusNet soliciting competing proposals,
  • a no-talk restriction preventing AusNet from participating in negotiations or discussions in relation to a competing proposal. This was not subject to a fiduciary out,
  • an obligation on AusNet to notify Brookfield of any approaches received, including full details of the proposal and the other party. Again, this was not subject to a fiduciary out, and
  • a cost reimbursement obligation on AusNet to pay Brookfield up to $5 million of its costs if AusNet terminates negotiations or allows a third party to have due diligence access.

The exclusivity period could be terminated on 7 days’ notice by either party, but not during the first 7 weeks, meaning a minimum exclusivity period of 8 weeks.

AusNet announced to ASX that it had received the Brookfield proposal and had granted due diligence access while the parties negotiated a scheme implementation deed “on an exclusive basis”. No other details were included of the terms of the exclusivity or cost reimbursement provisions.

Following the announcement, APA approached AusNet with a proposal at $2.60 per share and assumed that standard fiduciary out terms would apply. However, AusNet could not engage due to the firm no-talk restriction, even though the proposal was higher than Brookfield’s. APA applied to the Panel to set aside exclusivity, or to make it subject to a fiduciary out.

Summary of the Panel’s decision

AusNet and Brookfield argued that the exclusivity arrangement was in AusNet shareholders’ interests because it had secured a higher indicative bid price from Brookfield. They also argued that the Panel’s guidance on the need for a fiduciary out (in Panel Guidance Note 7) did not apply to a non-binding proposal such as this, or for a short period of 8 weeks.

The Panel did not agree, and noted that it is perhaps even more important that non-binding proposals should not be restricted, as it may be too late once there is a binding implementation agreement. The Panel also found that the unacceptable nature of the no-talk restriction was exacerbated by:

  • the fact that AusNet had not run an auction process with APA before agreeing to it,
  • the notification obligation, which would give Brookfield full details of other approaches, and
  • AusNet’s failure to announce the exclusivity and cost reimbursement terms.

The Panel ordered that the no-talk clause become ineffective unless amended to include a fiduciary out that would allow AusNet to engage with an unsolicited superior proposal. The Panel also ordered AusNet to disclose the terms of the exclusivity and cost reimbursement provisions.

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PM Capital Asian Opportunities Fund Limited 01 [2021] ATP 17

Key takeaways

  • Governance protocols to address conflicts of interest in a control transaction need to be implemented before significant decisions are made in respect of that transaction.
  • In determining association between parties (in the context of Chapter 6), the Panel will have regard to structural and contractual links between the parties, prior collaborative conduct, common investments, common knowledge of relevant facts, shared goals or purposes, and the history of the parties’ respective disclosures to the market regarding any shared voting power and association.

Background

PM Capital Asian Opportunities Fund Limited (PAF) and PM Capital Global Opportunities Fund Limited (PGF) were each listed investment companies with common board members and management.

Each company had a separate Investment Management Agreement (IMA) with PM Capital Limited (PMC) providing for PMC to manage the company’s portfolio and investments in accordance with the IMA, without the approval of the directors. PMC was responsible for the implementation of the investment strategy of each company, and for the day-to-day administration of each company’s affairs.

Paul Moore was the Chair and Chief Investment Officer of PMC. He and his family (Moore Group) controlled 89% of the shares in PMC. The Moore Group controlled approximately 19% of the shares in PGF. The Moore Group together with PGF controlled approximately 27% of the shares in PAF.

In mid-2021, the executive director of PGF considered various commercial aspects of a potential merger between PGF and PAF and provided discussion papers on the topic to PGF. At this stage, the same three individuals (including the CEO of PMC) comprised the boards of both PGF and PAF. PGF and PAF also shared the same company secretary (who was an alternate director in both cases). The same investment manager (PMC), and the CEO and COO of the manager, would be acting for both PGF and PAF on both sides of the potential control transaction.

Governance protocols were drafted by PGF to address the potential conflicts of interest (Governance Protocol). Under the Governance Protocol, certain independent board members would be appointed to both entities, while certain existing board members would take leave of absence, abstain from decisions relating to the transaction or otherwise act in limited capacities in the context of the transaction.

Additionally, the Governance Protocols provided that the voting power of PGF (and PMC and the Moore Group) above 20% in PAF would be divided into two distinct holdings of less than 20% (by moving PGF’s shares in PAF out of custody of PMC and registering them in PGF’s name) (Direction). The purpose of the Direction was to end the associations between PMC, PGF and PAF, and revoke PMC’s ability to control the voting and disposal of PGF’s shares in PAF.

The draft Governance Protocol was considered by the PGF board on 26 August 2021 and subsequently adopted by both PGF and PAF on 6 September 2021. Notably, the decision of the PGF board to develop the proposed control transaction and present it to PAF was made before the Governance Protocol was adopted and implemented.

On 15 September 2021, PGF and PAF agreed and disclosed a scheme implementation deed (SID) including a mutual break fee of $500,000. On the same day, PMC and the Moore Group gave a notice of change of interests of substantial holder to PAF stating its voting power had decreased from 27.48% to 8.51%. No associates or changes in association were disclosed. The Direction was not disclosed until 1 October 2021 (and was accompanied by a relevant extract from the IMA, which did not include all provisions relevant to determining whether the Direction was effective to achieve its intended purpose of ending the associations between relevant entities).

On 28 September 2021, WAM Capital Limited announced its intention to make a scrip bid for PAF subject to various conditions, including a condition that the PGF-PAF merger does not progress. The next day, PMC and the Moore Group gave a notice of change of interests of substantial holder to PAF stating its voting power had increased from 8.51% to 9.90%. No associates or changes in association were disclosed. PMC and the Moore Group gave another notice to PAF on 13 October 2021, stating a further increase in voting power from 9.90% to 13.09%.

WAM subsequently sought a declaration of unacceptable circumstances and various orders including that the break fee be removed from the SID (because it created an unequal opportunity for PGF to participate in benefits under the WAM bid: PGF would effectively receive a unique premium on its PAF shares if the WAM bid proceeded, and it was unclear why PAF had agreed to the break fee), and that PMC, PGF and their associates be prevented from acquiring further interests in PAF shares, and that all PAF shares acquired by PMC since 29 September 2021 be vested in ASIC.

Summary of the Panel’s decision

The Panel declared the circumstances unacceptable on the basis that:

  • the Governance Protocol was not implemented soon enough. The decision of a listed company to propose a control transaction to another, and the decision of the other company as to how to respond, pose potential for conflict between the interests of each company.  This included potential conflicts regarding timing of the approach (given its potential to put the target into play); the terms of the proposal and relevant considerations in assessing it; the target’s decision to engage and the manner of engagement; and the timing of disclosure of the approach.
  • The measures under the Governance Protocol (including material changes to board compositions) needed to be implemented before significant decisions in respect of these matters were taken, including PGF’s decision to develop a control transaction and present it to PAF, PAF’s decision to engage in discussions with PGF concerning the transaction, and the parties’ negotiation of the SID (including break fee). PAF’s board meeting to accept and implement the Governance Protocol (prepared by PGF) and engage in discussions with PGF was little more than a formality, reflecting the common board representation at the time and lasting only 14 minutes;
  • the Direction was not effective to divide the voting power in PAF and end the associations between PMC, PGF and PAF. Any association between them had to have been ongoing given the contractual interpretation of the IMA and the relationships between the entities over several years (which involved structural links, collaborative conduct, common management and directors and a shared goal); and
  • as a result, the voting power of PGF, PMC and the Moore Group in PAF had increased from above 20% to a point below 90% in late September and mid-October 2021, in contravention of s606(1), while substantial holder notices given by PMC, PGF and the Moore Group to PAF around that time omitted information required under s671(B) and contravened that section. These circumstances were not consistent with an efficient, competitive and informed market.

Orders made

The Panel ordered that the relevant shares in PAF acquired in breach of s606(1) not be voted on to approve or reject the PGF-PAF scheme and, if the PGF-PAF scheme did not become effective, the shares be vested in ASIC for sale. The Panel also ordered that relevant substantial holder notices be corrected and that a copy of the IMA (redacted to some extent) be disclosed. The Panel subsequently varied its orders by deleting the order to disclose corrected substantial holder notices. The variation was made on the basis that the relevant parties that had been required to make the further disclosure had accepted, or were in the process of accepting, into WAM’s takeover bid for PAF. Given that the break fee constituted less than 1% of the equity value of the target, and had been reduced by PAF after discussion with its legal advisers, the Panel was not satisfied that the break fee, of itself, gave rise to unacceptable circumstances.

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Nex Metals Explorations Limited [2021] ATP 12

Key takeaways

  • The rights issue announced by Nex Metals Exploration Limited shortly after it received a conditional takeover bid from Metalicity Ltd was a “frustrating action” for the purposes of Guidance Note 12 that gave rise to unacceptable circumstances.
  • The rights issue should have been made subject to shareholder approval (notwithstanding that shareholders’ approval may not be required under ASX Listing Rule 7.2 Exception 1).

Background

In September 2021, Nex Metals received a conditional takeover bid from Metalicity Ltd. One of the defeating conditions of the offer was that Nex Metals must not issue shares or agree to issue shares. Less than a week after the lodgement of the bidder’s statement, Nex Metals announced that it was undertaking a rights issue which would not be subject to shareholders approval.  Metalicity sought a declaration of unacceptable circumstances on the basis that the rights issue was a frustrating action under Guidance Note 12 as it would trigger a defeating condition of the bid which would result in Metalicity being entitled to not proceed with its bid, and that it would fundamentally change the commerciality of the bid from what was anticipated when the bid was lodged.

Summary of the Panel’s decision

Guidance Note 12: Frustrating Action defines “frustrating action” as an action by a target, whether taken or proposed, by reason of which a bid may be withdrawn or lapse or a potential bid is not proceeded with. The “significant issuing or repurchasing of shares” is an example in the Guidance Note of a potential frustrating action (assuming it breaches a bid condition).

The Panel held that the rights issue announced by Nex Metals was an unacceptable frustrating action in relation to Metalicity’s bid. By failing to make the rights issue subject to shareholder approval, Nex Metals had failed to give its shareholders a reasonable and equal opportunity to participate in the benefits of Metalicity’s bid. The Panel ordered that Nex Metals must not proceed with the rights issue without obtaining shareholders’ approval.

The Panel considered a number of balancing factors, including the length of time the bid has been open and its likelihood of success, whether the triggered condition is commercially critical to the bid, whether the frustrating action was undertaken in the ordinary course of the target’s business and how advanced the frustrating action was when the bid was made or communicated.

The Panel also called out its concerns about the appropriateness of shareholder intention statements obtained by Nex Metals to support its submission that the Metalicity bid would not be successful.  While it did not consider the question of association, it noted the significant risk that such a process could result in the formation of a relevant agreement, giving the soliciting entity a relevant interest in the shareholder’s shares.

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The Agency Group Australia Limited 01 & 02 – 23/02/2021 [2021] ATP 2

Key takeaways

  • If funding for a cash bid is by or through the bidder’s corporate group, it should be fully documented and binding before the bidder’s statement is lodged with ASIC.
  • Details of the bidder’s funding arrangements may be required to be disclosed before the bidder’s statement is lodged in circumstances whether the target has a shareholder meeting coming up to consider a competing proposal.

Background

On 24 November 2020, the Agency Group Australia Limited (Agency), an integrated real estate services group of companies, dispatched its Annual General Meeting notice to its shareholders seeking the approval of the issue of convertible notes and options to Peters Investments Pty Ltd in exchange for $5 million investment to Agency (Peters Proposal). The AGM notice included an Independent Expert Report (IER) prepared by Nexia regarding the Peters Proposal.

On 4 December 2020, Magnolia Equities III Pty Limited (Magnolia) informed Agency that it intended to make an off-market takeover bid (Bid) to acquire 100% of the shares of Agency. The Bid was subject to a defeating condition that the Peters Proposal not to be approved at the AGM.

Magnolia was associated with Mitchell Atkins, who was previously a director of Agency. Magnolia, its associated entities and Mr Atkins together held 16.6% in Agency.

To assess the Peters Proposal in light of the Magnolia Bid, Agency asked Magnolia to disclose its financial resources and arrangements to fund the Bid. Magnolia responded that it did not have to do so until its bidder’s statement was lodged, and that sufficient assurance was provided in its 4 December 2020 letter which said that it was satisfied on reasonable grounds that it would be able to comply with its Bid obligations.

On 8 December 2020, Agency made an application to the Takeovers Panel seeking a declaration of unacceptable circumstances on the basis that Magnolia had not provided sufficient evidence of its financial capability to perform the obligations under the Bid. Magnolia also made an application to the Panel seeking a declaration of unacceptable circumstances on the basis that the independent expert’s report was deficient and sought interim orders that the AGM be adjourned until the Panel considered the proceedings. The Panel made interim orders and the AGM was postponed to 4 January 2021.

On 4 January 2021, Magnolia released its Bidder’s Statement, providing details of the following arrangements to fund the maximum cash consideration of $10 million for the Bid:

  • bank deposits of Mr Atkins (Magnolia’s sole director) of $7.5 million which he undertakes to make available, and $3.5 million in liquid listed equities which could be readily sold if required;
  • Mr Atkins and his spouse’s net assets (which had been verified by a qualified accountant), including net assets in Magnolia and its related body corporate, of no less than $20 million;
  • the net assets of Magnolia and its related body corporate of $40 million (which had been verified by a qualified accounted); and
  • no less than $18 million in commitments from various wholesale investors known to Magnolia.

On the same day, Agency announced that the Peters Proposal had been approved at the AGM.

Summary of Panel’s decision

The Panel declared unacceptable circumstances in relation to the Bid and made orders preventing Magnolia dispatching its Bidder’s Statement without the Panel’s consent. The Panel held that Magnolia had failed to indicate clearly which sources of funding were to be used to pay the Bid consideration, and had failed to ensure that persons providing cash consideration were appropriately bound to do so or had otherwise accepted responsibility for statements regarding their intention to provide funding (and were aware of their potential liability resulting from misstatements).

The Panel disagreed with Magnolia’s argument that there was no need to have binding documentation between Magnolia and the wider Magnolia group or disclosure of those intra-group funding arrangements where the same individual is the party or the only controlling mind and will of all other relevant parties.

The Panel agreed with ASIC’s view that despite there being commonality of directorships or ownership, a bidder proposing a takeover bid should take appropriate steps to provide it with a reasonable basis for bid funding – “this would generally include the bidder entity entering into documentation with binding and enforceable commitments.

An interesting point of consideration for takeovers going forward is whether details of the bidder’s funding arrangements will be required to be disclosed before the bidder’s statement is lodged.  In making that finding in the Agency Panel Application, it appears that the Panel took into account a number of factors including the fact that the target had a shareholder meeting coming up to consider a competing proposal.

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For more information, please contact Jo Ruitenberg, Guy Sanderson and Stephen Vrettos.

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