No talks: the new battleground in takeovers

No talk provisions have become standard fare in public M&A transactions in Australia. In fact, they have become so ubiquitous that it is easy to forget that they are effectively prohibited in some jurisdictions (e.g. the UK).  

Under a no talk provision, a takeover target agrees to not engage with any potential counter bidder for a defined period. This leaves the original bidder with a period of exclusivity in which to progress its bid. The no talk applies even if the competing bid is unsolicited. To that extent, a no talk is more likely to impact the chance of the target engaging with an alternative offer than a ‘no shop’, which merely prevents the target from actively seeking out alternate bidders.

No talk provisions first appeared in Australia in the context of announced deals. In other words, the target’s obligation not to talk to a rival bidder only kicked in when the transaction was mature enough to be publicly announced, and when target directors had some comfort that a deal was available for shareholders to consider.

However, in recent times bidders have sought to extract no talks at an earlier stage of the process, including as a condition to commencing due diligence. This is more controversial and leaves the target board with a difficult decision as to whether the potentially anti-competitive effect of the no-talk is a fair ‘price’ to pay to put the company in play. It also potentially accelerates disclosure of the potential bid to the market, as the mere fact that exclusivity has been given will often be material information which is required to be disclosed under Listing Rule 3.1, even before a binding offer has emerged.    

The Takeovers Panel recognises in GN 7: Lock-up devices (GN 7) that no talk provisions have the potential to be anti-competitive, and may constitute unacceptable circumstances. Equally however, GN 7 signals to the market that a no talk will not usually be unacceptable where it is subject to a ‘fiduciary out’. This means the target directors reserve the right to talk to a competing bidder if their directors’ duties require them to do so. Of course, this will often be the case if the competing bidder is credible and offering a higher price. In those circumstances, the no talk provides less protection than might be assumed on first read.  

Nevertheless, until recently, the market had settled into a comfortable pattern whereby a no talk, accompanied by a fiduciary out, has become a common feature of public markets deals.

Three recent bids have tested the regulatory boundaries by including a no talk restriction that is not subject to a fiduciary out.

AusNet bid

In Brookfield’s bid for AusNet in late 2021, the target granted Brookfield a no talk that was not subject to a fiduciary out. This period of ‘absolute exclusivity’ lasted for a minimum of eight weeks and could only be terminated by AusNet on seven days’ notice and having decided not to continue with the Brookfield bid.  

The Takeovers Panel on application from a rival bidder APN, made a declaration of unacceptable circumstances noting the absence of a ‘fiduciary out’ in these circumstances could unduly inhibit competition for control of AusNet and reduce the likelihood a competing proposal emerging. The remedying orders required Brookfield to allow AusNet a fiduciary out.

The Takeovers Panel also took issue with AusNet’s approach to disclosure of the exclusivity terms it had agreed with Brookfield. GN 7 states the ‘existence and nature’ of any exclusivity provisions should normally be disclosed to the market. This includes disclosing all relevant terms, even if they are in separate document.[1]  

AusNet’s original announcement stated no more than that AusNet had entered into a confidentiality agreement “which provides for Brookfield to conduct due diligence and for the parties to negotiate a scheme implementation deed on an exclusive basis”. The announcement did not make clear that the exclusivity was not subject to a fiduciary out. The Panel found this was inadequate and that the anti-competitive effect of the exclusivity arrangements was increased by the fact that the market was not made fully aware of the extent of the restrictions to which AusNet had agreed.  

However bidders have not been chastened by the Panel’s decision in AusNet.   

Smart Group bid

In TPG’s bid for Smart Group, the target gave the bidder a period of absolute exclusivity for up to four weeks. The no talk only became subject to a fiduciary out after that period. While the transaction was withdrawn for commercial reasons, the exclusivity arrangements were not challenged. ASIC’s position in that case is not known.

Virtus Health bid

The issue will be considered by the Takeovers Panel if it decides to conduct proceedings in relation to BGH Capital’s recent application for a declaration of unacceptable circumstances regarding a process deed which CapVest Partners has entered into with its target, Virtus Health. The process deed adopts a similar structure to the Smart Group offer, in that the bidder is afforded a four week period of absolute exclusivity.  A fiduciary out only applies after that time.

BGH’s application discloses that BGH had made a previous non-binding indicative offer for Virtus. They complain that the absolute exclusivity given to CapVest is now preventing them from working on a possibly higher competing offer. Virtus will no doubt make the point that the absolute exclusivity only applies of a short period of time, and that it would be open to BGH to make an approach after that period, at which time Virtus directors will have the benefit of a fiduciary out. The question for the Panel will be whether keeping BGH in a four week holding pattern really does operate as a disincentive to a competing bid and if so, whether that constitutes unacceptable circumstances.

Balancing exclusivity with shareholder advantage

The practical reality is that it is likely to take the Panel a good part, if not all, of the disputed period to determine the issue. As an example, the time between the original application on APN and the Panel’s declaration of unacceptable circumstances was just over 3 weeks. Put simply the Panel’s decision will come too late to materially impact the outcome of this process. It is an interesting question as to whether a Panel might, in the right circumstances, be prepared to make interim orders preventing a bidder proceeding with due diligence while the matter is resolved. That would be an unprecedented intervention.

The Panel will continue to balance the clearly uncompetitive effect of exclusivity arrangements against the advantage to target shareholders of securing an offer or the improvement of the terms of an indicative proposal (as was the case in the AusNet bid). In general terms, the Panel is likely to continue to prefer a pro-competition perspective (that includes a strong preference towards meaningful fiduciary outs) except where there has been an effective auction process undertaken prior to exclusivity being granted.

It is clear that bidders see value in securing even a short period of absolute exclusivity. Whether you see this as an unreasonable restraint on competition or as fair reward for being the first mover depends on your market philosophy. However, there can be no doubt that absolute exclusivity gives rise to a significant shift in deal dynamics. The first mover is granted the time to advance their bid and ideally, to put forward a binding or more certain proposal. A competing bidder is playing catch up. For that reason, bidders are likely to continue to chance their arm.