PRINT THIS PAGE Australia: Revised guidance note on lock-up devices24/05/2005. Source: Baker & McKenzie.
The Takeovers Panel in Australia has issued a final version of Guidance Note 7 on lock-up devices, says Baker & McKenzie. Essentially, GN7 states that while lock-up devices are not inappropriate per se, the panel is concerned to ensure that transactions take place in an efficient, competitive and informed market. The Takeovers Panel has issued a final version of Guidance Note 7 (GN7) on lock-up devices.
Under GN7, lock-up devices include break fees, asset lock-ups, no-talk agreements, and no-shop agreements. In addition to takeover bids, GN7 also applies to lock-up devices in other control transactions such as schemes of arrangement and shareholder approved transactions. Essentially, the GN7 states that while lock-up devices are not inappropriate per se, the panel is concerned to ensure that transactions take place in an efficient, competitive and informed market. GN7 states that the panel will determine whether or not a lock-up device is acceptable on a case by case basis and will be guided by basic criteria. These criteria will apply both to first bidders and to subsequent bidders and are:
i. The lock-up device must not have a substantial anti-competitive effect (the principle of ‘Competitive Neutrality’); and
ii. The lock-up device must not have a substantial coercive effect on target shareholders (the principle of ‘Non-Coercion’). Depending on the type of device, GN7 also refers to various other criteria, particularly in relation to break-fees, no-talk agreements, no-shop agreements, and asset lock-up agreements, as described below.
Break Fees
The basic criteria apply: that is, a break fee must neither be anti-competitive nor coercive. Additionally, a break fee should not be greater than 1% of the equity value of the target.The Panel has indicated that in some cases, it may be appropriate for the 1% guideline to apply to a companys enterprise value. Such situations however, will be limited and may arise where, for example, a target is highly geared. Factors the Panel may consider in making an assessment include whether another current bidder has increased its bid, whether the fee was agreed after a public and transparent process, or whether there were exceptional costs in mounting the bid. In Ausdoc Group Ltd [2002] ATP 9, a break free of 1.87% of equity value was found not to be unacceptable given that a public tender process had taken place, there was a high cost in mounting the bid, and that the premium on offer to shareholders was many times the break fee.
No-Talk Agreements
In relation to no-talk agreements, GN7 suggests the period of restraint must be limited and reasonable and should cease once a public announcement of the bid has been made. Furthermore, all features of the agreement should be considered in terms of the likely effect on competition and on shareholders. The Panel’s view is that no-talk agreements are inherently more anti-competitive than no-shop agreements, and so will be examined more stringently.
This means the benefits to target shareholders needs to be greater and/or more certain in order to convince the Panel that a no-talk agreement is acceptable. The Panel also regards it as essential that a no-talk agreement contain a ‘fiduciary exception’.This means directors must be allowed to respond positively to any better proposal if they believe that to do so would be in the best interests of target shareholders.
No-Shop Agreements
As with no-talk agreements, the period of restraint must be limited and reasonable. Depending on the advantages on offer to shareholders, it may be acceptable for a no-shop obligation to extend into the bid period.The Panel will also consider any ancillary provisions of a no-shop agreement in determining whether it is anti-competitive. For example, provisions obliging a target to provide details of any alternative proposals or restricting the target in communicating relevant information to a potential rival will be taken into account in assessing whether or not an agreement is anti-competitive.
Asset Lock-ups
There is little experience in Australia with asset lock-ups, and so the principles in GN7 are fairly general. In essence, the Panel considers it good practice for a target board to seek expert advice on the appropriateness of any asset lock-up agreement and that there should be an appropriate commercial reason for such an agreement. As the size or strategic value of the asset increases, so too will the scrutiny of the device.
Lock-up Devices with Major Shareholders
Bidders may seek to enter into the above agreements with the major shareholders of the target. Essentially, the panel will apply the same principles as outlined above. The Panel’s primary concern in relation to agreements with shareholders is to prevent the bidder effectively controlling shares above the 20% threshold in circumstances other than those contemplated in Section 611 of the Corporations Act 2001.
While these guidelines do provide some useful insight into the Panel’s view on various lock-up devices, it is important to note that GN7 is not law, and the fact that a lock-up device is viewed as acceptable by the Panel does not do away with other requirements arising under legislation, such as directors duties and the laws in relation to financial assistance. Consequently, the Panel recommends seeking legal advice before entering into a lock-up device agreement.
Mark McNamara (Sydney) Tel: +612 9225 0277 mark.mcnamara@bakernet.com
Danielle Ireland-Piper Tel: +612 9225 1567 danielle.ireland-piper@bakernet.com
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