A market divided 4 min read
Last week the Takeovers Panel commenced a public consultation in relation to proposed revisions to its guidance note on deal protection arrangements in takeover situations.
A key focus of the consultation is on emerging practice of target boards agreeing to provide 'hard exclusivity' and other deal protections to a potential bidder in the context of a non-binding control proposal—that is during the very early stages of takeover negotiations before the potential bidder has made a binding offer to the target company.
How did we end up here?
There have been various examples of target companies, after having received non-binding control proposals from one or more potential bidders, entering into a 'process deed' with the highest bidder agreeing to grant it exclusive due diligence access for a specified period, together with a raft of other deal protections (eg notification obligations, matching rights, equal access to information provisions etc) to encourage that bidder to finalise a binding offer. The process deeds often also include an obligation on the target to pay a break fee to the bidder if the bidder puts forward a binding proposal at the indicative offer price and the target board does not accept the bidder's offer.
In the early days of 'process deeds' they were typically only given by a target to a potential bidder in return for a final increase in the indicative offer price, often after an informal auction process for the company. However, we then started to see some targets—in response to pressure from mostly financial buyers—agreeing to process deeds without there having been any testing of the market (ie instead of the standard default position of non-exclusive due diligence).
In most of these process deeds, the no-talk and no-due diligence provisions (the prohibitions on the target responding to a competing proposal, or granting due diligence access to a competing party) are subject to a fiduciary carve-out allowing the target to respond to, and grant due diligence where:
- the competing proposal could reasonably be expected to lead to a superior proposal; and
- if the target board fails to respond, it is likely to be in breach of its fiduciary or statutory duties.
Over time, examples emerged of target boards also agreeing to a short (say four-week) period of 'hard exclusivity' (a no-talk and no-due diligence restriction without any fiduciary carve-out).
As well as being given more frequently, the scope of these arrangements also continued to expand—with longer periods of exclusivity, and more extensive and complex deal protections. The issue ultimately came to a head in two recent transactions (Ausnet and Virtus) where hard exclusivity and various other protections were granted in the context of a non-binding indicative proposal, and the Panel intervened to wind back those protections.
An attempt to stave off new 'market practice'
And so we arrive at the trigger for the Panel's revised guidance note. It appears the Panel is wary of this particular practice becoming 'market practice' and feels the need to caution target directors that the granting of 'hard exclusivity' is likely to give rise to unacceptable circumstances. At the same time, however, the Panel's proposed guidance recognises there may be certain limited circumstances in which the target board considers it is in the best interests of the target company to grant a short period of hard exclusivity to a bidder in respect of a non-binding proposal. So, not much has really changed.
The reaction to the consultation paper, particularly amongst company directors, will be interesting. Some company directors will no doubt see the Panel's new guidance as the Panel interfering with their ability to do their job. They will argue that boards responding to takeover situations need flexibility above all other things and not more 'rules' to follow.
But other company directors may welcome the Panel's proposed new guidance. They may be grateful that the Panel has stepped in before hard exclusivity becomes 'market practice', and harder to resist.
Our view
We welcome the Panel's efforts to provide guidance in this area, but it should be just that. In our view the 'default position' should be that, if a target board does grant due diligence access, it should be on a non-exclusive basis. But we recognise that exceptional circumstances will arise that justify the granting of exclusivity arrangements for short periods to give a potential bidder comfort to expend time and costs on due diligence.
We hope this proposed guidance gives target-company boards the confidence to resist unreasonable requests from potential bidders at the outset of the process, no matter how forcefully those requests are made. But conversely, the guidance does need to recognise there may well be situations where a target board is justified in trading exclusivity (and these other bidder protections) to facilitate a bidder being put in a position to submit a binding proposal which may be in the best interests of shareholders.