Australia – “Our land abounds in nature’s gifts”.
From the recent levels of foreign interest in Australian assets, with:
- the three-way takeover battle between Bega Cheese (represented by Addisons), Saputo and Murray Goulburn Co-operative for Victoria-based dairy giant, Warrnambool Cheese and Butter;
- Archer Daniels Midland’s $3.4 billion bid for GrainCorp (albeit unsuccessful); and
- Chinese food giant, Bright Food Group, reported to be looking for more vertical integration opportunities in Australia, with $2 billion to spend on international acquisitions,1
there is no doubt that global investors have recognised the value and potential that Australian businesses have to offer.
With this - and the recent uptick in mergers & acquisition activity2 - in mind, it is appropriate to examine approaches to the regulation of deal protection measures.
In the UK, significant changes were introduced to the UK City Code on Takeovers and Mergers (UK Takeover Code) following US-based Kraft Food’s controversial takeover of UK chocolate manufacturer Cadbury, in 2009-2010. The four month long ‘hostile turned friendly’ takeover bid sparked public concern and political debate that the UK Takeover Code offered too much tactical advantage to the bidder such that target companies could find themselves "under siege" by unwanted bidders for too long. Amongst other things, there were concerns that deal protection measures were being presented as standard “packages” to target companies, placing them under considerable pressure to accept those measures with essentially no room for negotiation, and that this was having an unreasonable deterrent effect on potential competing offers.
In September 2011, after a year-long consultation process, the UK Panel on Takeovers & Mergers (UK Takeover Panel) introduced several major changes to the UK Takeover Code designed to give more power to the target company as against the bidder in takeover situations and to preserve competition in the market for control of companies.
Amongst other things, the changes to the UK Takeover Code implemented a blanket-ban on deal protection measures in favour of bidders and potential bidders (except in very limited circumstances), including prohibitions on:
- break fees or inducement fees;
- ‘no talk’ and ‘no shop’ exclusivity restrictions; and
- information and matching rights,
whether as part of an implementation agreement or a stand-alone exclusivity/break fee agreement.
The UK Takeover Panel’s approach leaves little or no discretion to the board of a target company to determine whether to agree to deal protection measures. This carries risks of potentially:
- diminishing the appeal of UK companies as acquisition or investment targets; and
- killing deals entirely where the commitment by a prospective bidder to a transaction would give rise to risks, uncertainties and costs that cannot be adequately addressed prior to the bid being made public and significant resources being invested in seeking regulatory approvals.
In contrast, the Australian Takeovers Panel recognises that:
- deal protection measures can have a role to play in enabling a target to secure a proposal by protecting against costs (opportunity and expended) that would not be recoverable if the transaction did not complete, and therefore, are not unacceptable per se; and
- the question of whether deal protection measures give rise to unacceptable circumstances should be assessed on a case-by-case basis having regard to the anti-competitive and coercive effect or likely effect of the measure in question in the context of the relevant transaction.3
Consequently, whilst providing fairly detailed guidance,3 the Australian Takeovers Panel leaves it to the directors to decide whether to agree to deal protection measures (and, if so, what kind). This approach seeks to balance:
- on the one hand, the policy consideration that a company should not be ‘locked up’ in a way that deters potentially superior competing offers or coerces shareholders into accepting or approving the deal at hand; and
- on the other, the commercial consideration that unwillingness (or inability) to negotiate any deal protection measure may jeopardise the company’s ability to secure the counterparty’s commitment to the deal.
The Australian Takeovers Panel’s less prescriptive approach affords transaction parties greater flexibility in structuring a deal that meets the needs of stakeholders having regard to their disparate objectives and needs.
This was illustrated in 2012 where the board of ASX-listed company Industrea agreed to recommend General Electric’s $470 million offer to acquire all of the shares in Industrea (in the absence of a superior offer and subject to the independent expert concluding that the offer was fair and reasonable) along with a package of both deal protection and deal facilitation measures. The scheme implementation agreement contained a ‘go shop’ clause that enabled Industrea to conduct a public auction of one of its two businesses as well as deal protection measures that applied to the company as a whole (subject to the ‘go shop’ period), including ‘no talk’ and ‘no shop’ restrictions, a break fee and the grant of a matching right to General Electric in respect of any superior offer for Industrea.
By adopting this combination of deal protection measures and deal facilitation measures, the Industrea board was both able to secure a potential buyer for the company (which operated both a mining equipment business and mining services business) and maximise shareholder value by placing its mining services business up for public auction.4
Although it remains to be seen whether such ‘pro-competition’ measures will be adopted more widely, the Industrea/General Electric scheme implementation agreement highlights how the Australian Takeovers Panel’s policy on deal protection measures preserves discretion for the boards of Australian target companies, allowing them to negotiate having regard to the best interests and specific circumstances of the particular company. The case also offers food for thought in the way that directors may approach deal protection arrangements in future bid situations.