In the last six months resource asset sales have become increasingly prevalent and as most have been competitive the possibility of a superior proposal arising after execution has correspondingly increased.
An asset sale agreement will often contain a number of conditions precedent. One such condition may be the requirement for the vendor to obtain shareholder approval under ASX Listing Rule 11, if the sale constitutes a significant change in the nature or scale of the vendor’s activities or a disposal of the vendor’s main undertaking. This might help provide a path forward for directors faced with a superior proposal (see below). However, such agreements are unlikely to contain detailed “lock-up” provisions which expressly address the possibility of a superior proposal for the asset emerging after execution. Perhaps it’s time they did...
If a vendor enters into an asset sale agreement and then receives a superior proposal for that asset, they have a number of options, including to:
- proceed with the initial transaction and ignore the superior proposal. The directors will have to consider whether proceeding with the initial transaction is consistent with their directors’ duties;
- accept the superior proposal and repudiate the initial asset sale agreement. This will put the vendor at risk of liability for damages. In this case, the thwarted purchaser’s loss would be measured by the position it would have been in if the initial agreement had been performed; or
- if the asset sale agreement has a shareholder approval condition precedent, take both proposals to shareholders and recommend that shareholders vote in favour of the superior proposal. In this case the purchaser’s claim will usually be based on whether sufficient efforts (that is, often described as “best endeavours”, or “reasonable endeavours”) have been made by the vendor to satisfy that condition precedent. A breach of that obligation will still give rise to a right to damages, likely to be a lesser measure of damages than that in (b).
Is there a way to achieve a better outcome?
In agreed control transactions (say a takeover bid, for example), provisions that protect or attempt to secure an existing transaction going forward, while allowing target directors to act consistently with their directors’ duties, are referred to by the Takeovers Panel as “lock-up” devices. Some of the lock up devices which you typically see in control transactions, such as exclusivity, fiduciary carve outs and/or agreed damages, could achieve certainty regarding the ultimate outcome in scenarios where a superior offer is made for an asset, if they are negotiated and included in the initial asset sale agreement.
Lock-up devices in control transactions are heavily regulated; greater freedom of contract in asset sale agreements might mean lock-up provisions could be adapted to asset transactions without some of the restrictions.
If an asset sale agreement addressed in detail what would happen if a superior offer was made… what might that look like?
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What can we take away from all of this?
Before you execute your next asset sale agreement, ask yourself how that sale agreement and your Board will respond if a better deal comes along before completion; if you don’t like the answer, consider whether or not negotiating detailed lock-up provisions could lead to a more appropriate outcome.