- A termination of a scheme implementation agreement on the basis of undisclosed termination rights was found to constitute unacceptable circumstances.
- All participants in change in control transactions must be mindful of the necessity for ensuring that the market is fully informed about all material terms of the proposed transaction.
BC Iron Matter
The Takeovers Panel has recently confirmed that that if a bidder wishes to terminate its participation in a proposed scheme on the basis of contractually agreed termination rights, then the relevant termination rights must be disclosed in sufficient detail to the market at the time the transaction is announced.
As we reported last month in our article ‘Walking away from schemes’,1 in early January 2011, BC Iron Limited (BC Iron) and Regent Pacific Group Limited (Regent Pacific) announced a proposed scheme of arrangement under which Regent Pacific would acquire all shares in BC Iron for cash. On announcement, a very short summary of the implementation agreement was released to the market. On 15 March 2011 Regent Pacific sought to unilaterally terminate the implementation agreement on the basis that its board had withdrawn its recommendation of the transaction because of reported opposition to the deal by a major BC Iron shareholder. The implementation agreement expressly permitted Regent Pacific as bidder to terminate the agreement if the Regent Pacific board changed its recommendation, which in effect meant that Regent Pacific had an option for the deal. The presence of this right was presumably because there was the need for Regent Pacific shareholder approval.
BC Iron subsequently challenged Regent Pacific’s termination of the implementation agreement.
Decision and implications
On 5 April 2011, the Panel found that Regent Pacific’s termination of the scheme implementation agreement on the basis of a changed board recommendation was unacceptable because the relevant termination rights had not been disclosed to the market before the termination took place. The remedy in this case was that Regent Pacific was prohibited from terminating the implementation agreement on the basis of the changed board recommendation.
The Panel’s decision is an important reminder of the importance of full disclosure of all material terms for public M&A deals. As mentioned last month, we expect that a practical effect of this decision will be that all implementation agreements, whether for schemes of arrangement or takeover bids, will be released to the market in full on announcement.
In our view, it would have been very difficult for the Panel to have reached any other conclusion as to do so would have fundamentally cut across the key principle of an informed and efficient market. That was so even though BC Iron was a party to the inadequate disclosure in the first place. It was also the case even though Regent Pacific argued that proper disclosure was the responsibility of BC Iron, and not itself. In response to that argument, the Panel noted:
In our view, the proponents of a scheme, both the acquirer and the target, have a responsibility for ensuring that those provisions, the disclosure of which is necessary to ensure an efficient, competitive and informed market for target shares, are in fact disclosed.
Following the Panel’s declaration of unacceptable circumstances, an announcement was made that the funding for the proposal has been terminated following the purported termination of the implementation agreement. At that point in time it appeared that the victory for BC Iron’s shareholders may have been academic as it appeared that the scheme was set to fail. However, on 15 April it was announced that the funding had been reinstated and that the board of Regent Pacific would again recommend to its shareholders that they vote in favour of the transaction.
Another interesting issue raised by this matter (but one which the Panel did not need to consider here), is whether, even if the termination right had been fully disclosed at the time of the announcement, the Panel would have allowed Regent Pacific to rely on its ‘changed board recommendation’ termination right in circumstances where it had said that the changed recommendation was as a result of an unverified online blog report that the major shareholder may not support the deal. Shortly after publication of the blog report, BC Iron publicly disputed the contents of the report and the major shareholder indicated in writing to Regent Pacific that it had not decided how it would vote. It remains to be seen in circumstances such as these whether the Panel would require that the reason for the change in the recommendation be rather more substantial than an unverified and disputed report published on an online blog. In view of the approach of the Panel in the NGM Resources decision (see our article2 from November 2010 for further information), we think it is more likely than not that the Panel would be looking to ascertain that the changed board recommendation was made on the basis of legitimate and significant evidence.