When the hunter becomes the hunted: should a bidder have a termination right to deal with superior proposals?

In recommended Australian public takeovers and schemes of arrangement, it is customary for the target company to offer the bidder a degree of deal protection, such as entering into ‘‘no shop’’, ‘no talk’, ‘no due diligence’, ‘notification’ and/or ‘matching rights’ obligations.

In negotiating these arrangements, Takeovers Panel Guidance Note 7: Deal Protection has for some time assisted in determining where the line is drawn in providing such protections by the target company, noting that if they go too far, they can stifle the market for corporate control of the target and be seen as unacceptable. As a result, target deal protection arrangements have become much more mainstream, and much less controversial.[1]

Like bidders, target boards are keen to reduce the risk of a transaction they have recommended to target shareholders being subsequently derailed. This means they are motivated to seek to hold a bidder to the offer it has put forward for the target – irrespective of whether a different deal for the bidder only (on a stand-alone basis) comes along.

Indeed from a target’s perspective, the ideal position is that a bidder has no right to terminate if a superior proposal (for the bidder) emerges. A bidder may prefer this outcome, particularly where the transaction is partially motivated as a defensive tactic to deter opportunistic acquirers.

However, outside of a ‘reverse takeover’[2] scenario, there has been little guidance on if and when a bidder, that is itself subject to Australia’s takeover regime, must preserve its own ability to consider alternative proposals and potentially terminate any proposed transaction with the target company in order to be able to pursue a superior proposal were one to emerge.[3]

Background

In Gascoyne Resources Limited[4], the Australian Takeovers Panel (Panel) noted that it may have concerns with the absence of termination rights for the bidder in response to a superior proposal (made for the bidder) in appropriate circumstances.

In that case, Gascoyne proposed to acquire Firefly Resources by way of a court-approved scheme of arrangement, offering Gascoyne scrip as consideration. If the transaction was successful, Gascoyne shareholders would own approximately 67.5% of the combined entity with Firefly shareholders holding the residual 32.5%. Whilst the scheme implementation deed contained reciprocal ‘no-shop’, ‘no-talk’ type provisions that were subject to a fiduciary out, only the target (Firefly) had the ability to terminate the transaction if a superior proposal emerged in relation to the bidder (Gascoyne).

Westgold Resources, who had put several competing proposals to Gascoyne, complained to the Panel that Gascoyne’s ‘fiduciary out’ was illusory as it did not allow the Gascoyne board the ability to ‘support a superior offer to the Scheme which requires the Scheme to not proceed’.

The Panel considered the bidder fiduciary out arrangements to be ‘unusual’ and was concerned that they had the potential to impact competition for control of Gascoyne. In particular, the Panel noted that it was conceivable that a company that is ‘in play’ may decide to make a bid for another company, thereby locking itself up in an unacceptable manner. However, it ultimately found that there was insufficient evidence to suggest that the Firefly transaction itself had some defensive purpose. Further, as the Gascoyne board had not determined the Westgold proposal to be superior, any fiduciary out rights (to the extent they exist to permit due diligence etc) were not enlivened. The Panel decided not to conduct proceedings in relation to the matter.

As a result, an opportunity was missed for the Panel to provide greater guidance as to when a bidder should have a termination right to pursue alternative proposals. However, whilst the requirement to have a bidder fiduciary out is always likely to turn on the facts of each case, we expect that the following factors will be relevant to any such assessment:

• the commercial reason for the transaction;
  
  
• the size or strategic value of the target to the bidder;
  
  
• the extent to which the target’s assets are likely to form a substantial part of the combined entity such that the proposed combination may significantly impact the market for control of the bidder – a transaction whereby target shareholders will hold a significant proportion of the equity in the combined group is more likely to give rise to concerns compared to a transaction where target shareholders will hold a relatively low percentage of equity in the combined group (ie below 20%);
  
  
• the context in which the arrangements are agreed, including whether the bidder itself may be considered to be ‘in play’; and
  
  
• whether the agreement was negotiated at arms’ length.

Recently, in another transaction involving Westgold[5], the Panel was again called upon to consider the bidder’s ability to terminate an agreed transaction were a superior proposal to emerge (for the bidder). Whilst Westgold (as the bidder) had negotiated a fiduciary out right were a superior proposal to emerge, issues were raised regarding the fetters that were imposed on Westgold’s ability to exercise such rights.

In the circumstances of that case, fellow ASX-listed gold miner Ramelius Resources had submitted a non-binding indicative proposal to acquire Westgold through a scrip based transaction. As a precursor to commencing discussions on that proposal, the parties entered into a confidentiality agreement that contained a mutual 12-month standstill. Under its terms, the standstill fell away in the event of a recommended transaction between the parties, or if (i) a takeover bid is made for at least 50% of the company’s shares; (ii) the relevant company recommends a change-of-control proposal whereby a third party will acquire at least 50% of its shares; or (iii) the relevant recipient of the standstill otherwise waives the standstill requirements. Westgold subsequently rejected Ramelius’ proposal and terminated discussions with Ramelius in late 2023.

Some four months later, Westgold announced that it had entered into an arrangement agreement with Canadian company Karora Resources Inc, pursuant to which Westgold would acquire 100% of Karora via a Canadian plan of arrangement. If completed, the transaction would see Westgold shareholders holding 50.1% of the merged entity, with Karora shareholders holding 49.9% - ie a true merger of equals. As such, the standstill entered into by Ramelius would only fall away if waived by Westgold.

Relevantly for Ramelius, the amalgamation agreement entered into with Karora to govern the proposed transaction contained:

• a mutual obligation not to waive any standstill arrangements entered into with third parties without the other’s prior consent, thereby catching the Ramelius standstill arrangements; and
  
  
• a ‘no-shop’, ‘no-talk’ and notification requirements with a fiduciary out regime that was subject to certain pre-conditions including (amongst other things):
  
  
  • the person making the competing proposal not having breached any standstill restrictions, and the relevant recipient of the proposal not having breached its undertaking not to waive any such standstill restrictions; and
    
    
  • the recipient of the proposal having provided certain information to the other party before engaging or participating in any discussions or negotiations regarding the competing proposal.
    
    
• a requirement that any competing proposal be fully funded, and only subject to conditions substantially similar to the existing Westgold/Karora proposal, before it could be considered to be a ‘superior proposal’ enlivening the fiduciary out.

Subsequent to the announcement of the Karora transaction, Ramelius submitted further ‘change of control’ proposals to Westgold, all of which were rejected on the basis that they were not considered by Westgold to be superior proposals under the terms of the Karora arrangement agreement.

Ramelius then took its grievances to the Panel alleging (amongst other things) that the Westgold / Karora deal protection provisions were not subject to an ‘effective’ fiduciary out, noting in particular that the restrictions on waiving the standstill prevented Ramelius from making an offer for Westgold without the consent of Karora.

The Panel applied Guidance Note 7 to the Westgold / Karora deal protection provisions (notwithstanding that Westgold was the bidder in that transaction), noting that there should not be unacceptable fetters or constraints that makes reliance on a fiduciary out overly restrictive.[6] Westgold and Karora ultimately agreed to undertakings so as to remove or water down the fetters referred to above on each party’s ability to exercise the fiduciary out. Whilst Ramelius pushed the Panel to release it from the terms of the standstill arrangements altogether, the Panel considered that the standstill arrangements had been entered into by sophisticated parties, and that the Westgold board is best placed to determine whether to release Ramelius from such arrangements (having regard to whether the information disclosed to Ramelius was still considered to be price sensitive or commercially sensitive information and their fiduciary duties). Accordingly, the Panel did not consider Westgold’s continued reliance on the standstill restrictions to be inappropriate, noting that they did not impede Ramelius making revised proposals for Westgold.

Conclusions

The absence of a termination right for a bidder where a superior proposal (for the bidder) emerges, or the existence of fetters or constraints on the exercise of a bidder termination right (should one exist), are a form of deal protection. Whilst Guidance Note 7 is focussed on deal protection devices entered into by a target, similar principles should apply in determining whether the proposed bidder lock-up arrangements have an unacceptable impact on the market for corporate control of the bidder.

However, unlike the target company where target shareholders get to decide whether the transaction ultimately proceeds, bidder shareholders do not generally get an opportunity (absent a reverse takeover scenario) to consider competing proposals unless they first get through the existing deal protection arrangements that the bidder has committed to (to obtain bidder board support).

This itself makes the bidder board the gatekeepers in determining whether competing proposals are able to progress. As we have seen time and time again, the Panel remains unlikely to second guess the decisions of a bidder board in considering such matters on the basis that the bidder board, properly informed, should be in a better position to understand and assess all of the relevant facts and circumstances and determine what is in the best interests of the bidder and its shareholders.

For these reasons, it is crucial that any competing proponent (for the bidder) treads extremely carefully in order to maximise its prospects of stepping through the bidder board’s requirements so as to be able to ultimately progress to the point of potentially tabling a superior proposal and successfully interrupting an existing transaction.

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^{[1] Takeovers Panel, Guidance Note 7 ‘Deal Protection’, [1].}

^{[2] A reverse takeover occurs where the aggregate number of equity securities issued by the bidder (either under the takeover or scheme, or to fund the cash consideration payable under a takeover or scheme) is equal to, or greater than, the number of fully paid ordinary shares on issue in the bidder as at the date of the announcement of the takeover or scheme. Where a ‘reverse takeover’ situation arises and the bidder group is listed on ASX, the bidder is unable to commit the company to the proposed transaction without receiving the prior approval (by ordinary resolution) of its shareholders under ASX Listing Rule 7.1. As a result, similar deal protection considerations typically arise as if the bidder was the target entity given that it is bidder shareholders (and not the bidder’s board) that is able to determine whether the transaction is to proceed.}

^{[3] Takeovers Panel Guidance Note 7: Deal Protection notes that there may also be arrangements which have the effect of fettering the actions of a bidder or a substantial shareholder that may be unacceptable.}

^{[4] [2021] ATP 10; See also Gascoyne Resources Limited 02R [2021] ATP 11.}

^{[5] Westgold Resources Limited [2024] ATP 15.}

^{[6] In this regard, the Panel noted the requirement for a superior proposal to be fully financed as an example of where a fiduciary out regime may be overly restrictive.}