23 Dec 2021

Exclusivity – Takeover Panel's reasons in AusNet Services

By Rory Moriarty, Rod Halstead

The Takeover Panel's ruling in AusNet Services indicates the importance of including a "fiduciary out" provision when imposing a no-talk restriction or exclusivity arrangements.

The Takeovers Panel has now published its reasons for the decision in the matter of Ausnet Services Limited 01 following its declaration on 15 October 2021 that the exclusivity arrangements will have an unacceptable effect on competition for control of AusNet. This article will canvass the findings of the Panel and flesh out the key takeaways that should be drawn from this decision.

Summary of the Takeover Panel's orders

When assessing this matter, the Panel did not seek to question the commercial reasons of the AusNet board in pursuing the Brookfield proposal. Rather, it assessed in totality the surrounding circumstances of the Exclusivity Arrangements, the context in which it was granted and the issues with disclosure of the arrangements. This yielded the conclusion that the combination of these circumstances (discussed below) are likely to have an anti-competitive effect and are unacceptable in the context of sections 602 and 657A of the Corporations Act.

On reaching this determination the Panel made the following orders:

  • The no-talk provision in the Confidentiality Deed is of no force and effect on the date that is 2 business days after the date of the Panel's orders (15 October 2021) unless it is amended to include a "fiduciary out" provision.
  • AusNet must:
    • in the event that the Confidentiality Deed is amended in accordance with Order 1(above), release an ASX announcement disclosing details of all material terms of the Amended Confidentiality Deed including the amended exclusivity arrangement and the cost reimbursement arrangements; or
    • if the no-talk provisions becomes of no effect under Order 1 (above), release an ASX announcement which explains that the no-talk provision is of no effect and disclose the details of the cost reimbursement arrangements.

These orders are intended to address the unacceptable circumstances by:

  • permitting AusNet to engage with competing proposals, including APA's proposal, if they are considered superior,
  • ensuring that the market, and potential competing bidders, are aware of all material terms of the Exclusivity Arrangements and,
  • resolving the no-talk restriction which prevents AusNet from responding to any competing proposals.

Though the Panel appreciates that the order in relation to the no-talk restriction may cause prejudice to Brookfield, it does not unfairly prejudice Brookfield given it had the benefit of the Exclusivity Arrangements (without a fiduciary out) and is in a more advantageous position than it would have been if the unacceptable circumstances had not occurred. The Panel also does not consider the orders to unfairly prejudice AusNet shareholders.

Issues with the effect of the Exclusivity Arrangements

Exclusivity arrangements must be "subject to certain basic structural requirements to ensure that they do not unreasonably hinder competition for control of the target company" (Ross Human Directions Ltd [2010] ATP 8). The Panel found issue with certain elements of the Exclusivity Arrangements including that:

  • the no-talk restriction is in its most restrictive form as it does not allow AusNet to participate in negotiations or discussions with any person in relation to a competing proposal even where such a proposal was unsolicited or has been announced publicly and regardless of whether the competing proposal is superior to the initial proposal,
  • the no-talk restriction is not subject to a "fiduciary out" at any stage during the Exclusivity period or at all,
  • the no-talk restriction is coupled with a notification obligation which requires AusNet to disclose details of a competing proposal and its material terms, which may further increase its anti-competitive effect,
  • the Exclusivity Arrangements applies for a minimum of 8 weeks and the Exclusivity Period may only be terminated by AusNet after providing seven days' notice upon deciding to cease negotiations with Brookfield.

The Panel recognises that the safeguards for a no-talk restriction must be more stringent given that the anti-competitive effect of such a restriction may be greater than any other form of restriction, and that the inclusion of an effective fiduciary out is normal practice for safeguarding such a restriction. The absence of a "fiduciary out" was particularly concerning in this matter as it had the effect of preventing AusNet from discussing any proposal received which could inhibit competition for control of AusNet and reduce the likelihood of a competing proposal emerging. Ultimately, the Panel did not consider that the proposed inclusion of a "fiduciary out" in a subsequent implementation agreement would cure the anti-competitive effect already caused by the absence of a "fiduciary out" in the pre-binding Exclusivity Arrangements.

In the event there had been the inclusion of a "fiduciary out", the period of restraint of a no-talk restriction must be "limited and reasonable". In this regard, the Panel was concerned that the no-talk restriction had applied without any "fiduciary out" for the entire Exclusivity Period, and that the duration of the Exclusivity Period has been at the longer end of market practice. This is further exacerbated by the fact that the manner in which the Exclusivity Period could be ended by AusNet effectively operated to provide Brookfield with a seven-day period to negotiate exclusively for a revised proposal in response to any competing proposal. Brookfield attempted to remedy the situation by offering to change the Exclusivity Period from a "rolling" period to a simple 8-week period, however the Panel ruled this was not sufficient to address the overarching concerns regarding the Exclusivity Arrangements.

Issues with the context in which Exclusivity Arrangements were entered

Unlike the UK City Code on Takeovers and Mergers, there is no general requirement in the Australia jurisdiction that a target company must provide equal access to information about the target company to rival bidders. There is also no requirement for a target company to undertake a public auction process prior to entering into any exclusivity arrangements. However, the Panel highlights that the assessment of whether a deal protection measure is unacceptable hinges on the context in which the measure is entered into, including the sale process that has been conducted prior to entry into such an arrangement.

The Panel found issue with certain elements of the context in which the Exclusivity Arrangement was entered into, including that:

  • AusNet did not undergo an effective auction process when there was a contemporaneous and credible rival bidder (APA) before entering the Confidentiality Deed and granting the Exclusivity Arrangements which effectively locked out the rival bidder for 8 weeks. The lack of any effective auction process before granting the Exclusivity Arrangements exacerbated the anti-competitive effects of the Arrangements. AusNet's failed to stimulate a competitive auction as it did not indicate to APA there was other interest in the business, nor did it provide any material to the Panel to establish that it had meaningfully engaged APA on any terms of its proposal or otherwise sought a final price from APA before entering into the Confidentiality Deed.
  • Though AusNet had agreed to the Exclusivity Arrangements in return for an increase in the indicative consideration under Brookfield's proposal from $2.45 per share to $2.50 per share, the Panel was not provided with any material to establish that Brookfield's proposal would not have proceeded without the Exclusivity Arrangements being granted in the form that they were in. Further, there was no guarantee that AusNet shareholders would receive a binding bid at the indicative price under Brookfield's proposal or at all.

Issues with the disclosure of Exclusivity Arrangements

The disclosure of the Exclusivity Arrangements by AusNet were found to be inconsistent with Panel's guidance because:

  • AusNet's announcement of 20 September 2021 did not disclose the nature of the Exclusivity Arrangements, including the lack of a "fiduciary out" to the no-talk restriction, nor did it disclose "all relevant terms" of the Exclusivity Arrangements as required by Guidance Note 7
  • material terms of the Exclusivity Arrangements were not disclosed until 21 September 2021, which was after both the announcement of Brookfield's control proposal and the public announcement of APA's competing proposal and
  • the Cost Reimbursement Provision should have been disclosed as it operates as Brookfield's sole remedy against AusNet for the matter contemplated by the Confidentiality Deed.

The anti-competitive effect of the Exclusivity Arrangements is further exacerbated by the lack of effective and timely disclosure of the Exclusivity Arrangements. This delay disadvantaged APA as it put forward its revised proposal without knowing that AusNet would be restricted from engaging with the proposal for a minimum of 8 weeks and that the material terms and conditions of its proposal would be provided to Brookfield. Ultimately the Panel considered it would be sufficient for all material terms of the Exclusivity Arrangements, including the Cost Reimbursement Provision to be disclosed.

Overall Effect

To conclude, the Panel found that the combination of the following circumstances of the Exclusivity Arrangement are likely to have an anti-competitive effect and give rise to unacceptable circumstances:

  • the no-talk provision prevents the AusNet board from responding to any competing proposal,
  • there is no "fiduciary out" to the no-talk restriction,
  • the exclusivity period operates for a minimum of eight weeks and may only be terminated by AusNet on seven days' notice,
  • the no-talk restriction is coupled with a notification obligation that requires AusNet to provide Brookfield with all material terms and conditions of the actual, proposed or potential competing proposal,
  • AusNet did not conduct an effective auction process before entering the Confidentiality Deed and
  • AusNet delayed disclosing the full terms of the Exclusivity arrangements, and also did not disclose the Cost Reimbursement Provision.

Key takeaways from the Takeover Panel's reasons

  • The Panel's ruling indicates the importance of including a "fiduciary out" provision when imposing a no-talk restriction or exclusivity arrangements. While the Panel's guidance in regards to the inclusion of a "fiduciary out" (as stipulated by Guidance Note 7) is normally considered in the context of implementation agreements, the Panel has extended it for consideration in the context of an exclusive due diligence process. The Panel's ruling seems to be influenced by the fact that AusNet granted an extended exclusivity period of 8 weeks without a fiduciary out.

    The Panel highlights that Guidance Note 7 should be particularly applicable in this context as the anti-competitive impact of deal protection measures can be more significant in the context of non-binding proposals.

  • Notwithstanding the Panel's findings, Brookfield did get a significant time advantage and subsequently entered into an Implementation Deed with AusNet and its consortium at a higher price. It seems that the all cash consideration was considered by the major shareholders to be more attractive than the APA offer which included a significant scrip component.
  • The conventional view previously held was that an exclusivity period in a confidentiality agreement of 4-5 weeks without a fiduciary out was acceptable. That probably has to be tested having regard to the applicable circumstances such as those influenced the Takeovers Panel in this case.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.