Australian Takeovers Panel Reaffirms Exclusivity Rules in Hot M&A Market
In Short
The Situation: Exclusivity provisions—which limit the ability of a target of an acquisition from engaging with competing bidders—are an accepted practice of M&A transactions in Australia. BGH Capital Pty Ltd ("BGH"), an Australian-based private equity fund manager and adviser, recently challenged before the Takeovers Panel ("Panel") the exclusivity arrangements agreed between its acquisition target, Virtus Health Limited, and a rival acquirer, CapVest Partners LLP ("CapVest"), on the basis that those arrangements had a "significant adverse impact on the competition for control of Virtus".
The Result: The Panel made a declaration of unacceptable circumstances and required that Virtus and CapVest amend and clarify the operation of the exclusivity arrangements between them and be prohibited from entering into a binding transaction document to effect the Virtus proposal for a period of 10 business days from the date of disclosure of the revised arrangements.
Looking Ahead: The decision—which had been keenly anticipated by potential acquirers and M&A practitioners alike—provides important clarity by reaffirming the rules around exclusivity, particularly the operation of fiduciary outs to 'no talk' provisions. While these rules had long been settled, in recent months two Panel applications show that some parties are pushing the boundaries of what's acceptable.
Despite the rules around exclusivity provisions in Australia having been relatively settled for many years (the Panel initially published its Guidance Note 7 on 'Lock-up devices' back in 2001), it's been surprising to see two applications before the Panel in the past six months challenging these arrangements—in particular, 'no talk' provisions entered into by parties at the nonbinding, indicative proposal stage. We mention AusNet Services Limited 01 briefly, before considering Virtus Health Limited in more detail.
'No Talk' Restrictions
A 'no talk' restriction prevents a target from engaging or negotiating with a potential competing bidder. The long-standing market position is that a 'no talk' provision should be subject to a 'fiduciary out', permitting the target's board to engage with rival bidders when it would otherwise be a breach of their fiduciary duties not to do so. Two recent Australian deals—where exclusivity arrangements were agreed at the nonbinding, indicative proposal stage—challenged this position.
Ausnet Services Limited 01
Ausnet Services Limited ("AusNet") was the subject of competing indicative offers. AusNet entered into a confidentiality agreement with the initial bidder, which contained an eight-week exclusivity period (terminable by AusNet after seven weeks) and a 'no talk' restriction which was not subject to a fiduciary out (known as 'hard' or 'absolute' exclusivity').
A day after AusNet announced the exclusivity arrangements, the rival bidder returned with a higher offer but was rebuffed by AusNet which said that it was unable to engage until completion of the exclusivity period. The rival bidder applied to the Panel, and the Panel decided that aspects of the exclusivity restrictions, when taken together, had an anticompetitive effect, and accordingly made a declaration of unacceptable circumstances. The Panel ordered that the 'no talk' provision would be of no force or effect unless it was amended to include a fiduciary out. Interestingly, AusNet chose not to amend the provision, and continued to engage with both bidders, with the end result that AusNet was acquired by the initial bidder in mid-February this year.
Virtus Health Limited
Hot on the heels of Ausnet, the Panel received another application in relation to exclusivity arrangements.
In mid-December 2021, BGH submitted an indicative offer to acquire Virtus at $7.10 cash per share which was followed by a meeting between the parties, with Virtus' response being that it would reconnect with BGH in mid-January 2022. Yet, on 20 January 2022, Virtus announced receipt of a rival offer at $7.60 cash per share (adopting an alternative transaction structure) from CapVest and that Virtus and CapVest signed a process deed dealing with matters including exclusivity.
CapVest and Virtus agreed to a 40-business day exclusivity period during which a suite of provisions would apply—a 'no shop', a 'no talk', 'no due diligence', a notification obligation, a matching right, a non-public information provision and two break fees (with different triggers). Crucially, the fiduciary out to the 'no talk' and 'no due diligence' would only apply after a 15-business day period had elapsed from the date when Virtus made a data room available. The date though was unclear—as it wasn't publicly disclosed.
BGH's Contentions
BGH put a raft of submissions to the Panel. Leaving aside its contentions with the break fees, BGH argued that the following elements of the exclusivity arrangements had a "significant adverse impact on competition for control of VRT":
- Virtus had prematurely entered into the Process Deed, after Virtus had indicated that it would revert to BGH and without Virtus attempting to meaningfully engage with BGH or otherwise facilitate an effective auction process for Virtus;
- CapVest was provided with "an effective 10-11 week exclusivity period", including a period of "absolute exclusivity" as the 'no talk' and 'no due diligence' restrictions do not contain a fiduciary out for Virtus to respond to any competing or superior proposal until 15 business days after CapVest is given access to a virtual data room; and
- The inclusion of other lock-up arrangements in the Process Deed (which require Virtus to provide CapVest with any non-public information that it has provided to another bidder and a "recurring right" given to CapVest to match any superior control proposal made for Virtus for the duration of the exclusivity period).
Again, leaving aside the break fee aspects, BGH request that the process deed be amended so the 'absolute exclusivity provisions' be removed, such that the 'no talk' and 'no due diligence' provisions be subject to a customary fiduciary out throughout their duration, and certain other lock-up arrangements be removed.
The Panel's Declaration of Unacceptable Circumstances and Orders
While the Panel has not yet released its detailed reasons for its decision, in its media release, the Panel said that it considered various aspects of the exclusivity arrangements between Virtus and CapVest, which when taken together, and having regard to the factual matrix of the matter, had an anticompetitive effect that would inhibit or is likely to inhibit the acquisition of control over shares in Virtus taking place in an efficient, competitive and informed market. The provisions singled out by the Panel included:
- The fiduciary out did not apply for a period of approximately one month;
- The effectiveness of the fiduciary out is unclear in certain circumstances and is limited by the notification obligation;
- The non-public information provision (which required Virtus to provide to CapVest any non-public information which Virtus provided to any other person in connection a competing proposal) is not subject to any exception; and
- The length of the exclusivity arrangements and the fact that they were granted at the indicative proposal stage—where there is no guarantee that Virtus shareholders would receive a binding bid.
The Panel ordered the process deed be amended so that the fiduciary out was effective and applied to the 'no talk' and 'no due diligence' restrictions and that Virtus and CapVest be prohibited from signing a binding document to give effect to the CapVest transaction until 10 business days after the amended process deed was publicly released.
At the time of writing, Virtus has fielded further offers from each of BGH and CapVest.
Three Key Takeaways
- Whilst the Panel will weigh a suite of exclusivity measures as a whole in determining whether they are unacceptable, consistent with the Panel's long-standing guidance, a 'no talk' restriction (and a 'no due diligence' restriction) should be subject to an effective fiduciary out.
- A target should be wary of entering into onerous exclusivity provisions at too early a stage—unless the offer is an absolute 'knock out' and they are confident they have tested the market.
- In a hot M&A market, where there is strong competition for assets, parties can expect the fine detail of exclusivity provisions will be heavily scrutinised and accordingly, where there is uncertainty as to how the arrangements work in the event of a competing proposal, there is a risk of an aggrieved party taking it to the Panel.
