On 8 August 2023, the Takeovers Panel (Panel) issued its updated Guidance Note 7 (Deal Protection), following a public consultation process that began in late 2022. This process focused on proposed amendments to the Panel’s approach to deal protection arrangements and was significantly influenced by its decisions in the AusNet and Virtus cases.
AusNet and Vitus Cases
In September 2021, AusNet Services Limited (AusNet) accepted a tentative cash proposal from Brookfield Asset Management (Brookfield) at $2.50 per share. The parties signed a confidentiality deed which granted Brookfield an eight-week ‘hard’ exclusivity period, including a ‘no-talk’ restriction and a ‘notification’ obligation, without a fiduciary carve-out. During the exclusivity period, AusNet received a more attractive proposal from Australian Pipeline Limited as the responsible entity of the Australian Pipeline Trust and APT Investment Trust (APL) at $2.60 per share. However, bound by the exclusivity arrangement, AusNet was unable to engage with APL. This prompted APL to make an application with the Panel, challenging the exclusivity arrangement under Guidance Note 7. The Panel found that the no-talk restriction, lacking a fiduciary out, was unenforceable and resulted in unacceptable circumstances. The Panel identified the following elements of the exclusivity arrangement as anti-competitive:
- A no-talk restriction that prevented AusNet from considering any competing proposals, unsolicited or otherwise.
- The absence of a fiduciary out clause in the no-talk restriction.
- The exclusivity period lasting a minimum of eight weeks, terminable only with seven days’ prior notice.
- A requirement for AusNet to notify Brookfield about the material terms and conditions of any competing offers.
In the same vein as the AusNet case, the Panel in the Virtus case determined that a month-long hard exclusivity period during the non-binding stage – without a fiduciary carve-out, combined with notification, equal information, and matching rights, along with a break fee – constituted unacceptable circumstances.
Panel’s Stance on Deal Protection Arrangements
Broadly, the Panel’s updated guidance addresses six types of deal protection mechanisms:
- No Shop Arrangements – A standard no shop arrangement, where the target is restricted from soliciting rival bids, is not required to be subject to a fiduciary out at both the binding and non-binding offer stages.
- No Talk Arrangements – At the binding offer stage, restrictions on the target from negotiating with competing bidders must include a fiduciary out. At the non-binding stage, hard exclusivity, such as a ‘no talk’ without a fiduciary out, is unacceptable. Exceptions exist, for instance, when the target has conducted an auction process or a comprehensive market sounding and believes that granting hard exclusivity at the non-binding stage will encourage the bidder to make a binding offer.
- No Due Diligence – Similar considerations to no-talk arrangements apply at both the binding and non-binding stages when it comes to restricting the provision of material non-public information to third parties. The Panel’s default position is that due diligence access at the non-binding stage should be granted on a non-exclusive basis, subject to the types of exceptions considered for no-talk arrangements.
- Notification Obligations and Equal Information Rights – Notification obligations, where the target must disclose details of any potential competing bids, and equal information rights, which require the provision of any information made available to a competing bidder that was not previously provided to the original bidder, naturally diminish the likelihood of competing bids. It is essential to balance the anticompetitive aspects of such arrangements by limiting the type of information that must be disclosed to mitigate their restrictive impact, particularly when combined with other deal protection mechanisms. While a fiduciary carve-out is not mandatory during the binding stage, the Panel requires public disclosure of the material terms of the exclusivity arrangement if a notification obligation arises during the non-binding stage.
- Matching Rights – At the binding stage, the duration of a matching rights arrangement should not exceed 5 business days. Particular attention should be given to any significant extension of a matching rights period, which may be found unacceptable. A fiduciary carve-out is not required for a matching rights arrangement. The same principles are generally applicable for the non-binding stage.
- Break Fees – Break fees should not exceed 1% of the target’s equity value at the binding offer stage. Break fees that are triggered by circumstances outside of the target’s control may be deemed unreasonable, even if they are within the 1% range. The same principles apply during the non-binding stage.
This recent update from the Panel provides clear guidelines on the acceptable parameters for deal protection mechanisms in control transactions. Parties involved in the early stages of such a transaction should consider the updated Guidance Note 7 in its entirety.
