In brief

  • Exclusivity arrangements must not unreasonably hinder competition for control.
  • Any fiduciary out to an exclusivity arrangement must not be subject to constraints which unreasonably restrict the target’s ability to rely on it.
  • A fiduciary out to a notification or matching right arrangement will assist in demonstrating that the arrangements do not unreasonably hinder competition.
  • A matching right period longer than five business days may be unacceptable.  

In the recent Ross Human Directions decision, the Takeovers Panel has gone some way in clarifying the line between acceptable and unacceptable exclusivity arrangements, such as no-talk, no-shop, no-due diligence, matching right and notification arrangements.

The decision concerned Peoplebank’s proposed acquisition of Ross Human by way of scheme of arrangement. Corom, a substantial shareholder who has expressed an interest in acquiring Ross Human, challenged the scheme’s exclusivity arrangements.

Exclusivity arrangements are an important feature of the public M&A landscape. The commercial reality is that bidders do not wish to devote considerable resources to a transaction only for the target to use the transaction as a ‘stalking horse’. Many bidders are unwilling to proceed without the protections afforded by exclusivity arrangements.

A bidder would argue that exclusivity arrangements are a small price for a target company to pay to ensure that its shareholders are given the opportunity to participate in the benefits of a proposed transaction.

Despite the above, the Panel reiterated the overriding policy objective that exclusivity arrangements must not unreasonably hinder competition for control of targets. That being said, it is encouraging that the Panel took what is, on balance, a sensible approach to the exclusivity arrangements that were negotiated between Ross Human and Peoplebank.

No talk and no due diligence arrangements

A no talk arrangement which prevents a target from talking to a third party in relation to a potential rival proposal, and generally also a no due diligence arrangement which prevents a target from providing non-public information to a potential rival bidder, must be subject to a fiduciary out.

A fiduciary out is an exception allowing target directors to be relieved of their particular contractual obligations under an exclusivity arrangement if their directors’ duties require it.

In comparison, a no-shop arrangement which prevents a target from soliciting (or shopping for) rival proposals does not need to be subject to a fiduciary out.

The Panel stated in the Ross Human decision that any fiduciary out must not be subject to constraints which unreasonably restrict the target’s ability to rely on it.

The Panel found that the fiduciary out to Ross Human’s no-talk and no-due diligence arrangements was unacceptable. The Panel required amendments to these arrangements to make it clear that:

  • the Ross Human directors did not have to definitively determine that a rival proposal was a superior proposal before taking action. It was enough if they concluded that a rival proposal ‘may reasonably be expected to lead to’ a superior proposal, and
  • although it was acceptable for Ross Human to be required to obtain financial advice before concluding that a rival proposal was superior and to obtain legal advice before concluding that the fiduciary out applied, the final decision in relation to these matters must be made by the directors (irrespective of the advice received). This is consistent with the court’s approach in the 2008 Perseverance Corporation/Northgate Minerals scheme.  

In addition, the no-due diligence arrangement prevented Ross Human from giving information to a rival bidder unless the rival bidder entered into a confidentiality deed containing substantially all of the material terms (including standstill obligations) in the Ross Human/Peoplebank confidentiality deed. That confidentiality deed was not released publicly, which made it impossible for a rival bidder to know what restrictions it would need to sign up to. The Panel concluded that this would deter rival bidders and, perhaps somewhat surprisingly, that it was not appropriate for Peoplebank to insist that rival bidders be subject to the same standstill as Peoplebank.

Notification and matching right arrangements

Under a notification arrangement, the target agrees to notify the original bidder if it receives a proposal from a rival bidder. The Panel stated that a notification arrangement cannot require a target to disclose information concerning a rival bidder where that obligation would make it unlikely that any rival proposal would be made.

The Panel concluded that Ross Human’s notification arrangement would have had this effect as it required Ross Human to provide Peoplebank with any information associated with a competing proposal that has not been disclosed previously to Peoplebank. The Panel was concerned that this broad obligation could even require Ross Human to provide Peoplebank with information concerning the pricing of the competing proposal.

The Panel ultimately required the notification obligation to be limited to providing Peoplebank with material confidential information relating to Ross Human’s operations. Importantly however, the Panel did not object to Ross Human being required, albeit subject to a fiduciary out in this case, to provide Peoplebank with details of the rival proposal (including price, conditions and identity of the rival bidder).

Under a matching right arrangement, the target agrees that its directors will not recommend a proposal from a rival bidder until it has given the original bidder a period to match the rival proposal. The Panel said that a matching right cannot be for a duration that removes any practical likelihood of a rival bidder emerging. In this case, the Panel was prepared to accept a five-business-day matching right period. However, it indicated that this was at the edge of acceptability.

Overall, the Panel’s decision indicates that—although not mandatory—the presence of a fiduciary out to a notification or matching right arrangement will assist in demonstrating that such arrangements do not unreasonably hinder competition for control of targets.

Independent expert exception

The Panel also found that Ross Human’s obligations to ensure its directors recommended the scheme, and to pay a break fee if its directors changed their recommendation, should have been subject to the independent expert concluding that the scheme was in shareholders’ best interest. This is consistent with market practice since the Panel’s 2003 National Can Industries decision.

No obligation for a public auction and duration of exclusivity

Finally, the Panel confirmed that:

  • a target is not required to undertake a public auction process before agreeing to exclusivity arrangements, and
  • exclusivity arrangements that operate for up to six or seven months are not unreasonably long in the context of a scheme.

Postscript

Corum filed an application to have the Panel’s decision reconsidered by the Review Panel. However, Corum later withdrew this application.