In brief

  • In an important new development in Australian takeovers, the Takeovers Panel imposed a materiality requirement on a bid condition.
  • The Panel prevented a bidder from relying on MAC and force majeure conditions.
  • The decision demonstrates the difficulties faced by bidders in proving that MAC and force majeure conditions have been triggered.  

In the recent NGM Resources decision, the Takeovers Panel refused to allow the bidder to rely on its material adverse change (MAC) and force majeure conditions to walk away from its takeover bid as a result of terrorist activities.

Furthermore, in an significant new development in Australian takeovers, the Takeovers Panel imposed a materiality trigger on a bid condition, in circumstances where the clear words of the condition itself did not require any level of materiality.

Background

The decision related to the recommended scrip takeover bid by Paladin Energy Limited for NGM Resources Limited (the holder of number of uranium exploration concessions in Niger).

On 24 September 2010, Paladin announced that its MAC and force majeure bid conditions had been triggered and that, as a result, it would walk away from the bid. At the time, Paladin Energy had a relevant interest in 60% of the NGM shares.

The event causing Paladin’s decision was the abduction of seven people from one of the most heavily guarded mining towns in Niger’s uranium mining region by gunmen associated with al-Qaida. Paladin stated that this event would seriously compromise its ability to safely access, explore and develop the resource base of NGM’s exploration tenements.

NGM successfully challenged Paladin’s decision. The Panel concluded that Paladin was not entitled to rely on the bid conditions and ordered it to proceed with its bid.

The force majeure condition

The force majeure condition—the form of which was agreed to by NGM during negotiations—was that ‘no outbreak of hostilities … or terrorism [or] mobilisation of armed forces … occurs which affects or is likely to affect the assets, liabilities, financial position, performance, profitability or prospects of NGM’.

Importantly, the condition contained no express requirement that the relevant circumstances have a ‘material’ effect.

The Panel said it was concerned that even relatively minor events could allow Paladin to withdraw its bid. Despite the clear words used in the condition, the Panel found that, ‘properly understood’, the condition required an event having a materially adverse effect on NGM to trigger it. In doing so, the Panel indicated that it had relied on a policy objective not found in the Eggleston Principles—‘certainty’.

The Panel’s approach represents a significant new development in Australian takeovers, for a number of reasons.

First, before this decision, it was generally accepted amongst M&A practitioners that conditions in takeover contracts were subject to the same interpretative rules as apply to any other contract. From this, it followed that a ‘hair trigger’ could theoretically be relied on by a bidder. Evidence of this acceptance can be seen in the seriousness with which the words of conditions are negotiated in friendly deals and also through the statutory provisions themselves (eg the ‘prescribed occurrence’ condition allows a bidder to walk away if the target issues a single share).

Secondly, the approach of the Panel could be construed as suggesting that the Panel has embraced the approach under the UK City Code. That approach provides that a bidder cannot rely on a condition unless the circumstances that allow the condition to be invoked are of material significance to the bidder in the context of the takeover. (This restriction was famously invoked to prevent WPP from relying on its MAC condition in its bid for Tempus as a result of the ‘September 11’ terrorist acts).

Thirdly, it is unclear just how far the Panel’s decision stretches. For example, is it now the case that it will be unacceptable for a bidder to walk away unless the relevant circumstances are material in the context of the bid? If this materiality is to be a new feature of Australian takeovers, this should be the subject of a public consultation process.

Fourthly, the Panel has previously indicated that, subject to the prohibition on conditions which are within the bidder’s control or which depend on the bidder’s subjective judgment, bidders are free to impose any conditions that they want on their takeover bids. The Panel’s decision in NGM Resources cuts across this doctrine.

The MAC condition

The MAC condition provided that ‘no change occurs … which has or could reasonably be expected to have a materially adverse effect on the assets, liabilities, financial position, performance, profitability or prospects of NGM’. The Panel concluded that Paladin had not proved the requisite ‘material adverse effect’.

MAC conditions are relatively common in takeovers. In FY10, 56% of bids had a MAC condition (69% in FY09).

The Panel’s decision insofar as the MAC condition is concerned is noteworthy for a number of reasons.

First, this was the first time since 1982 that a bidder’s purported reliance on a MAC condition has been challenged in Australia. On the last occasion, a court agreed that Woolworths was entitled to rely on its MAC condition in its bid for Grace Bros as a result of a significant downturn in Grace Bros’s financial results. Since then, there have been instances where bidders have either:

  • been reported to be considering relying on MAC conditions (eg in the 2004 Woolworths/Mathieson bid for hotelier ALH, when the Queensland Government introduced a smoking ban in pubs and hotels); or
  • relied on a MAC condition, but not been challenged (eg in 2001 when Simon Gilbert Wines withdrew its bid for Vincorp, following the release of Vincorp’s disappointing half-year results).  

Secondly, the Panel’s decision serves as a reminder of the practical difficulties bidders face in discharging the evidentiary burden of actually proving that a bid condition has been triggered (something which Paladin failed to do). The adverse consequences for a bidder in wrongly ‘calling’ a MAC can be significant.

Thirdly, when negotiating MAC conditions, there can be a temptation to go down the path of least resistance and avoid potentially difficult discussion in seeking to agree objective triggers. However, the Panel’s decision demonstrates that objectivity can be vitally important. Although potentially more time consuming to negotiate, prescribing hard numerical tests and/or specific events as triggers will make it much easier for a bidder to prove that a MAC condition has been breached.

Postscript

Subsequent to this decision, Paladin further extended its offer period beyond the period required by the Panel’s orders and, as at the time of writing, had acquired a relevant interest in more than 90% of the NGM shares and freed the offer from all outstanding conditions.