Deal protection devices are a common feature of ‘friendly’ control transactions in Australia. The Australian Takeovers Panel (Panel or Australian Panel), provides guidance as to the acceptable use of deal protection devices in control transactions.
In 2023, the Panel updated its guidance on deal protection devices (previously referred to as lock-up devices) to provide specific guidance for directors of target companies, as well as other participants in such transactions, at the non-binding bid phase.
In this two-part series, we’ll explore:
- common forms of deal protection devices in control transactions in Australia, and how such devices are regulated by the Panel (Part 1); and
- how this differs from the position taken in the United Kingdom and the United States (Part 2).
What is a deal protection device?
The Panel defines a deal protection device as any arrangement that has the effect of fettering the actions of a target and potentially hindering another actual or potential control transaction.[1] In other words, deal protection devices are contractual provisions designed to ensure that a deal closes.[2]
In control transactions, prior to entering into a binding implementation agreement, a prospective bidder will typically undertake a due diligence program. As the bidder may incur substantial costs in conducting due diligence bidders may seek deal protection devices to shield the target from potential third-party bidders.[3] On the other hand, targets can leverage deal protection devices to encourage a bid and negotiate a potentially higher purchase price, resulting in a greater premium for the target’s shareholders.[4] Therefore, the target and bidder may enter into an agreement which includes exclusivity arrangements and break fees.
Exclusivity arrangements restrict a target from engaging with competing bidders for a defined period. Commonly in Australia, exclusivity arrangements take the form of:
- ‘no-shop’ restrictions which prevent a target soliciting a competing transaction from a third-party;
- ‘no-talk’ restrictions which prevent a target engaging or negotiating with a third-party making or seeking to make a competing proposal; and
- ‘no-due diligence’ restrictions which prevent a target providing information to a potential competing bidder as part of a due diligence process.
These restrictions are often coupled with:
- ‘notification obligations’ which require the target to disclose details of any potential competing proposal to the original bidder;
- ‘information rights’ which require the target to disclose to the original bidder any information about the target that is made available to a competing bidder, which has not been previously provided to the original bidder; and
- ‘matching rights’ which give the bidder a right to match or better a superior competing proposal before the target board changes its recommendation or enters into a separate agreement in relation to that superior competing proposal.
Break fees provide value to the bidder in the event that the transaction is not completed due to specified conditions. Similar to exclusivity arrangements, break fees act as a potential deterrent to third-party bidders because target companies would likely only accept an alternative offer in excess of the consideration under the pre-existing implementation agreement plus the break fee.[5] Together, exclusivity arrangements and break fees are common deal protection devices used at both the non-binding and binding bid phases of control transactions in Australia.
How does the panel regulate deal protection devices in Australia?
While deal protection devices can encourage or secure a bid from the bidder, they can also discourage or deter other potential bidders from bidding. If there are concerns that deal protection devices may inhibit a control transaction from taking place in an efficient, competitive and informed market certain parties can apply to the Panel for a declaration of unacceptable circumstances and orders.
In considering such an application, the Panel will have regard to the principles underlying the takeover provisions in Chapter 6 of the Corporations Act 2001 (Cth) (Corporations Act) which focus on ensuring that:
- acquisitions of control of voting shares or interests ‘take place in an efficient, competitive and informed market’; and
- the target shareholders each have sufficient information and time to assess the bid and ‘a reasonable and equal opportunity to participate in any benefits’ under the bid.
If the Panel declares circumstances unacceptable, it may make an order such as a standstill order which prevents a target and a potential bidder from entering into (in effect) an implementation agreement for a limited period,[6] or an order that a deal protection device is of no force and effect unless the agreement is amended to include appropriate safeguards.[7]
How has the Panel’s guidance changed?
Following public consultation after the cases of Virtus Health[8] and AusNet,[9] the Panel published a revised Guidance Note 7 to clarify its position on exclusivity arrangements at the non-binding bid stage. These revisions reflect a view that market practice had drifted too far down the ‘bidder friendly’ path where prospective bidders were securing favourable deal protection mechanisms at the non-binding bid phase, at the potential expense of facilitating a competitive market for control of the target. While the use of certain deal protection devices may be acceptable at the binding transaction phase (and the Panel’s long-standing guidance on the permissible limits of deal protection mechanisms in this regard remain unchanged), the Panel indicated that further consideration is required by target boards before deciding to grant exclusivity where the target has not yet received a binding proposal and may not receive a binding proposal from that bidder.
To facilitate target boards, the Panel provides guidance in relation to a range of common deal protection mechanisms at the different stages of a control transaction. The table below summarises the Panel’s revised guidance as to whether certain deal protection devices require a ‘fiduciary out’ or other considerations to not amount to unacceptable circumstances.
The Panel also clarifies in its revised guidance that, while a bidder or target may form the view that deal protection arrangements entered into in respect of a non-binding proposal may not require disclosure under the continuous disclosure provisions because, for example, it concerns an incomplete proposal or negotiation,[10] the failure or delay in disclosing deal protection mechanisms may have an anti-competitive effect and result in an uninformed market for control of the target.
Overall, the Panel’s revised guidance has been welcomed to clarify the use of deal protection mechanisms at the non-binding indicative proposal stage of control transactions of widely held Australian target companies.
Click here to read Part 2 of this series: Deal protection – an international comparison.
[1] Australian Takeover Panel, Guidance Note 7: Deal Protection (8 August 2023) [2].
[2] Saulsbury, Chip, ‘The Availability of Takeover Defenses and Deal Protection Devices for Anglo-American Target Companies’ (2012) 37 Delaware Journal of Corporate Law 115, 146.
[3] Saulsbury, n 2 at 147.
[4] Saulsbury, n 2.
[5] Saulsbury, n 32 at 149.
[6] See Virtus Health Limited [2022] ATP 5.
[7] See AusNet Services Limited 01 [2021] ATP 9; See also Virtus Health Limited [2022] ATP 5.
[8] Virtus Health Limited [2022] ATP 5.
[9] AusNet Services Limited 01 [2021] ATP 9.
[10] Australian Securities Exchange, Guidance Note 8 (5 June 2021) footnote 156.