The Takeovers Panel has begun consultation to revise its guidance on deal protection granted at the non-binding bid stage, and companies have already started following pre-deal exclusivity and deal protection arrangements since the Panel's consultation paper was released.

As discussed in a previous article, at the end of 2022, the Takeovers Panel commenced consultation on changes to its guidance on deal protection granted at the non-binding bid stage. Submissions in response to the consultation paper have now closed, and we anticipate that revised guidance will be released in the coming months. In the meantime, we take a look at how companies have approached pre-deal exclusivity and deal protection arrangements in 2023 (where such arrangements have been publicly announced) since the Panel’s consultation paper was released.

IN BRIEF

  • The Takeovers Panel’s proposed changes to its guidance on pre-deal exclusivity and deal protection arrangements were prompted by the Panel’s decisions in AusNet1 and Virtus,3 where the Panel found that the pre-deal exclusivity arrangements and certain other deal protection arrangements, when taken as a whole, had an anti-competitive effect (and were therefore unacceptable). With consultation on the proposed changes now closed, we expect the Panel’s revised guidance to be finalised in the coming months.
  • In the meantime, we take stock of how companies have approached pre-deal exclusivity and deal protection arrangements in 2023 since the Panel’s consultation paper was released (where those arrangements have been publicly announced).
  • In summary, there have been only 5 instances where deal protection arrangements at the non-binding bid stage have been publicly announced in 2023 since the Panel’s consultation paper (although there are likely others that have remained confidential). Of those, a 4 week period of ‘hard’ exclusivity (consistent with the Panel’s proposed revised guidance) has been agreed on two occasions, although in one instance it was not announced whether or not the “no talk” and “no due diligence” obligations were subject to a fiduciary out. The remaining deals did not contain a period of ‘hard’ exclusivity. We also discuss some other interesting observations in relation to these examples below.
  • The examples surveyed show that, although the proposed revisions to the Panel’s guidance have not been finalised, as might be expected, bidders and targets are proceeding on the basis that the proposed guidance announced at the end of 2022 will largely be reflective of the Panel’s final views on the issue.

A BRIEF RECAP: THE PANEL’S PROPOSED CHANGES TO ITS GUIDANCE ON DEAL PROTECTION AT THE NON-BINDING BID STAGE

Please see the article ‘How hard is it? The Takeovers Panel consults on guidance for exclusivity granted at the non-binding bid stage’ by Nicole Pedler and Katerina Jovanovska for a discussion on the Panel’s proposed changes to its guidance on deal protection at the non-binding proposal stage.

In summary, under the Panel’s proposed changes to its guidance:

  • General position: The Panel expects that target boards will consider the impact of any proposed deal protection devices on competition for the company and have regard to the principles that the acquisition of control of the company should take place in an efficient, competitive and informed market. In relation to deal protection at the non-binding stage, the Panel expects that target boards will, where possible, ‘test’ those arrangements by negotiating with bidders (rather than simply accepting them as a matter of course). For example, by granting limited non-public information on a non-exclusive basis in the first instance.
  • ‘Hard’ exclusivity at the non-binding stage: The Panel considers that ‘hard’ exclusivity (being exclusivity without a ‘fiduciary out’ for target directors) granted by the target board in connection with a non-binding proposal is likely to have an anti-competitive effect. Accordingly, ‘hard’ exclusivity is likely to be unacceptable unless there are circumstances which warrant it. Any period in which exclusive access to non-public due diligence is provided should be short and a maximum of 4 weeks.
  • Disclosure of notification obligations: A bidder or target may form the view that deal protection arrangements entered into in respect of a non-binding proposal during the non-binding bid stage do not require disclosure under the continuous disclosure provisions. However, where such arrangements include a notification obligation, the Panel expects there to be disclosure of the material terms of the deal protection arrangements once those arrangements are entered into.
  • Break fees: Generally, the Panel does not expect that a target board would agree to a break fee in respect of a non-binding proposal. However, to the extent one is agreed, the Panel expects that the quantum would be substantially lower than for an equivalent binding proposal.

COMMENTARY

In summary, the examples above show that, although the proposed revisions to the Panel’s guidance have not been finalised, as might be expected, bidders and targets are proceeding on the basis that the proposed guidance announced at the end of 2022 will largely be reflective of the Panel’s final views on the issue.

In particular, our survey above showed that:

  • there have been only 5 instances where deal protection arrangements at the non-binding bid stage have been publicly announced in 2023 since the Panel’s consultation on its revised guidance was announced – however, the true number of instances where pre-deal exclusivity and deal protection arrangements have been agreed (but which have remained confidential) is likely to be higher;
  • of those, a 4 week period of ‘hard’ exclusivity (consistent with the Panel’s proposed revised guidance) was agreed on two occasions, although in one instance it was not announced whether or not the “no talk” and “no due diligence” obligations were subject to a fiduciary out;
  • there have been 4 instances where a notification obligation has been agreed (and subsequently disclosed, consistent with the Panel’s revised guidance). Perhaps not surprisingly in light of the Panel’s proposed revisions to its guidance, a break fee which effectively operated as a cost recovery provision was agreed in only one instance; and
  • in 3 instances where pre-deal deal protection arrangements were announced in 2023, the target boards agreed to grant access to limited, non-public information on a non-exclusive basis prior to granting exclusivity to a bidder at a later stage. This appears to indicate that target boards are not simply agreeing to exclusivity arrangements as a matter of course, consistent with the Panel’s proposed guidance in its consultation paper.