In Brief

  • In Mission NewEnergy Limited [2012] ATP 19, the Takeovers Panel (Panel) declined to conduct proceedings as to the acceptability of a lock-up device given the perilous financial situation of the company in question. The Panel subsequently declined to conduct proceedings on an application for a review of the initial Panel’s decision.
  • The decision provides further confirmation that, while it takes the anti-competitiveness of lock-up devices very seriously, the Panel is prepared to adopt a pragmatic approach in assessing their acceptability in distressed situations. 

Background

In August 2012, Mission NewEnergy Limited (Mission) entered into a financial term sheet with SLW International LLC (SLW) under which SLW agreed to provide a 24-month, US$5 million line of credit. Mission’s entry into the term sheet was predicated on its precarious financial position, which included debt of over A$32 million (against a market capitalisation of less than A$1 million, total assets of approximately A$21.5 million and cash of A$1.46 million). Mission had also suffered a 96% reduction in its share price from its January 2012 level of  A$2.05 per share.

  • Exclusivity - an exclusivity provision that required SLW’s prior consent to Mission considering, discussing or negotiating any form of unsolicited, third party competing proposal through purchase, merger, loan transaction or otherwise. This commitment was coupled together with a notification obligation that required Mission to immediately notify SLW of any contact between Mission and a third party regarding such a proposal. The exclusivity provision was not subject to any form of fiduciary out; and
  • Restructure of Notes - a provision requiring the restructure of Mission’s existing convertible note debt. This involved the exchange of each existing convertible note for a new convertible note.  The new convertible notes were to be issued (subject to shareholder approval) on significantly different terms to the existing notes. These new terms included a conversion ratio of 1 note to 433 ordinary shares (against a previous ratio of 1 to 4) and no interest payment obligation (against an interest rate of 4% per annum, with interest paid semi-annually). If the new notes were converted into equity, Mission would be required to issue shares equal to approximately 96% of the issued share capital of the company. At the same time Mission would be relieved from its repayment obligations under the notes, which currently stands at more than A$32 million.

The term sheet, including the exclusivity provision, was to terminate if Mission shareholders did not provide their approval to the convertible note restructure, such approval being required to permit the issue of the convertible notes and to enable convertible note holders to obtain voting power exceeding the 20% takeover threshold upon conversion of the convertible notes. In those circumstances however, SLW would retain a 3 month first refusal right on any third party company financing.

Application

In September 2012, McDermott Industries Limited (McDermott) – a substantial shareholder in Mission - sought a declaration from the Panel of unacceptable circumstances submitting that the exclusivity provision and the conditions of the proposed facility amounted to lock-up devices that were anti-competitive and coercive. McDermott also sought:

  • an interim order that Mission not proceed with the finalisation of definitive facility document and security documentation pending determination of its application; and
  • final orders that the term sheet be cancelled, or cancelled to the extent that it required Mission to deal exclusively with SLW exclusively for funding and restricted Mission from dealing with its assets.    

In its submissions to the initial Panel, Mission argued that:

  • its current financial distress necessitated that funds needed to be raised as soon as possible;
  • its board had given thorough consideration to alternative funding sources and, having exhausted all potential avenues, the SLW proposal was the “last resort” in relation to the continuation of Mission as a going concern; and
  • in respect to the exclusivity provision, Mission had sought to negotiate the terms of the exclusivity provision but, given its dire financial situation, it was not able to resist its inclusion. Mission further submitted that the absence of a fiduciary out was justified on the grounds that the exclusivity provision would expire at the time of the shareholder vote and that the shareholder vote requirement created a fiduciary out equivalent as Mission would be required to disclose the existence of alternative proposals to shareholders.  

Lock Up Devices

Takeovers Panel Guidance Note 7 makes it clear that lock up devices are not unacceptable “per se”, as they may assist to secure a proposal by protecting against costs that would not be recoverable if the transaction did not complete. Lock-up devices need to be appropriately tailored however to ensure that they do not unreasonably hinder competition for control1.

The Guidance Note also stresses that where no-talk / no-due-diligence restrictions are coupled together with a notification obligation this may increase the anti-competitive effect, necessitating the need for safeguards, including a fiduciary out. In Mission’s case, the no-talk, no-due-diligence restrictions were coupled with a requirement that Mission inform SLW if it received a competing proposal, and that SLW had the right to match that proposal. In these circumstances the Panel felt that this was more of a reason to have a fiduciary out.

Initial Panel’s decision

Notwithstanding its concerns with a number of elements of the exclusivity provision, the initial Panel stressed in its decision that the acceptability of a lock-up device is dependent on context. In this situation, Mission:

  • was in a perilous financial position;
  • had made reasonable efforts to seek alternative sources of funding (without success); and
  • believed that, at the time it entered into the term sheet with SLW, there was no reasonable prospect of a competing proposal emerging during the exclusivity period.   

The question for the Panel therefore was whether Mission’s need for funds was so compelling that it should prevail over the application of policy in Guidance Note 7.  The initial Panel concluded that, consistent with the Panel's decisions in Perilya Limited [2009] and Pasminco [2002], the financial position of the company was in such an extreme state that the application of the policy would need to be a secondary consideration.

In reaching this conclusion, the initial Panel highlighted that, in its view, the anti-competitive effects of the exclusivity provision were mitigated to an extent because the issue of convertible notes required shareholder approval and Mission had provided an undertaking to the Panel that if a competing proposal was submitted to the Board and, but for the exclusivity provision, it would be prepared to further consider the proposal, then it would notify Mission shareholders of the existence of that proposal in advance of the shareholder vote. That is, Mission’s shareholders would be aware of, and have the opportunity to consider any credible competing proposal, before the shareholder vote.

Review application

By application dated 2 October 2012, McDermott sought a review of the initial Panel’s decision. In dispensing with the review application, the review Panel agreed with the initial Panel that the exclusivity provision did not give rise to unacceptable circumstances, but for slightly different reasons.  In this regard, the review Panel took less comfort than the initial Panel from the mitigating effects of the shareholder vote and the undertaking given by Mission – noting that, in its view, those devices are materially different to a “fiduciary out”, because they do not free directors to deal with a competing proposal which they view as superior to the interests of shareholders, which is the purpose of a “fiduciary out”.

Notwithstanding the matters outlined above, the review Panel recognised that the commercial reality of the situation was that Mission had to deal with SLW in relation to any financing approval as it already held 50% of Mission’s convertible notes and, in the absence of dealing with the convertible notes, Mission was unlikely to be able to service the notes let alone repay them when they become repayable. The existence of the exclusivity provision was, in the review Panel’s view, therefore commercially irrelevant in the circumstances.

Comments

While still expressing its concern that lock up devices are not to be used as an anti-competitive or coercive tool, the Panel (both initial and review) ultimately adopted a pragmatic approach in dealing with the circumstances which effectively recognised the challenging financial circumstances that Mission found itself in. The position taken by the Panel should not be interpreted however as an indication that it will refuse to undertake proceedings where a company is experiencing difficult financial conditions. Instead, the decision confirms that the Panel will have regard to the impact of its decisions on the company and its stakeholders, particularly in situations involving a company in financial distress.