No talk provisions: has the battle been won?

In our recent article 'No talks - the new battleground in takeovers' we identified three recent takeover bids where bidders had tested the boundaries of market practice by having their target sign up to a ‘no talk’ restriction that is not subject to a fiduciary out.  

We noted the views of the Takeovers Panel on these (more aggressive) deal protections would be tested in the application brought by BGH in relation to the process deed entered into between CapVest Ventures (CapVest) and its target, Virtus Health (Virtus).

At issue in that application was the clause in the process deed under which the board of Virtus agreed they would not talk to any alternate bidder during an agreed exclusivity period. These ‘no talk’ provisions are common practice in takeovers in Australia. However, the no talk is usually subject to a ‘fiduciary out’, which allows the target to progress a competing unsolicited offer if the target board considers that they are required to do so as a result of the application of their directors’ duties. This operates as a very significant carve out to the protection afforded by the no talk.   

The no talk entered into between CapVest and Virtus was not subject to a fiduciary out for the first 15 business days after the data room was opened to CapVest. That gave CapVest absolute exclusivity for that period. BGH complained this constituted unacceptable circumstances, as they were effectively locked out from engaging with Virtus on any potential rival bid during that period, even if their proposed bid was superior to that put forward by CapVest.

The Takeovers Panel agreed. The Panel found the no talk constituted unacceptable circumstances and ordered the parties to re-write the provision to introduce a fiduciary out that applied from the outset.  

That finding ought come as no surprise, given that the Panel has provided long standing guidance in GN 7: Lock-up devices, that no talk provisions have the potential to be anti-competitive and may constitute unacceptable circumstances where they are not subject to a fiduciary out. The architects of the process deed between CapVest and Virtus were presumably willing to test where the Panel’s inflexion point might lie in this regard and, in particular, whether a short period of absolute exclusivity might be tolerated.

The Panel’s response is clear, and it would be a brave bidder who chooses to further test the Panel’s resolve on this point in similar circumstances. However, it is notable the Panel’s conclusions were influenced by the fact that absolute exclusivity was given in the context of early stage negotiations and before a binding offer had been provided. It would be interesting to see whether there might be greater tolerance shown in a situation where the absolute exclusivity is given in exchange for extracting a binding bid or for a substantially increased price.

As we predicted in our earlier article, the fact that three weeks elapsed between BGH’s original application and the Panel’s decision being handed down meant BGH were kept at bay during the period of absolute exclusivity notwithstanding their victory. In an effort to level the playing field, the Panel made orders preventing CapVest and Virtus from concluding a deal and from CapVest announcing a takeover bid for Virtus for 10 business days after the date on which the process deed was amended and announced to ASX. 

Subsequently BGH provided an improved offer to Virtus which was matched and exceeded by CapVest the next day. On 14 March 2022, Virtus announced it had entered into a binding implementation deed with CapVest.  Perhaps that experience shows the real benefit of first mover advantage.

In light of the Panel’s decision in Virtus, the battle for strategic advantage in takeovers is likely to move on from the no talk provisions. However, and for so long as there remains extreme competition for quality assets, we expect that bidders will continue to press the regulatory boundaries.  

The next battleground is not far away.