Panel case on deal protection - Ross Human Directions

The decision in Ross Human Directions [2010] ATP 8 is not a "game changer" when it comes to deal protection in M&A transactions, but it does provide some fairly clear guidance to advisers negotiating deal protection provisions in M&A transactions. While the Takeovers Panel has issued a revised Guidance Note 7 (Lock Up Devices), this guidance note is concise, and it is always helpful to see how the Panel applies its policies in practice.

Applicant complained about the deal protection provisions of a scheme implementation agreement. In the event, the parties amended the provisions in question so that the Panel did not make a declaration of unacceptable circumstances, but the Panel's reasons nevertheless provide some useful guidance to companies and their advisers negotiating deal protection.

General observations

The Panel observed that deal protection measures are not per seunacceptable and may indirectly facilitate competition by encouraging a bid to be made. Further, according to the Panel such provisions are now commonplace and do not prevent a "serious" competing bid emerging.

The Panel said there was no requirement for a public sale process (although Guidance Note 7 does suggest that this is a relevant factor).¹ However, there are certain basic structural requirements that are even more important where there is no public sale process:

• No talk and no due diligence restrictions must be subject to a "fiduciary out", allowing the target to respond to a competing proposal that could reasonably be expected to lead to a superior proposal (i.e. an existing superior proposal is not required).
• The "fiduciary" out cannot be subject to "fetters or constraints" that unreasonably restrict the target's ability to rely on it.
• A matching right cannot be for a duration that means a rival bidder will be deterred.
• A notification obligation cannot require the target to disclose information regarding a competing proposal that would make it unlikely that a competing bid would be made.

Amendments to the Implementation Agreement

The Panel proceedings caused the implementation agreement to be brought more closely into line with these principles:

• The no talk and no due diligence restriction were originally framed so as to require a superior proposal before the fiduciary out could be triggered - this was amended to apply to a competing proposal that could be reasonably expected to lead to a superior proposal.
• The "fiduciary out" required the board in determining whether failing to respond would likely constitute a breach of duty to act reasonably as well as in good faith (our observation is that we are unsure whether in practice this is a material relaxation because it only assists an 'unreasonable' board, but it does circumscribe the area for potential dispute).
• The no diligence provision required a rival to enter into equivalent confidentiality obligations, including standstill obligations, as entered into by the bidder - the Panel rejected this as not being required for a level playing field - and presumably as a little bit too anticompetitive.
• The 'no shop' obligation (which was not - consistent with virtually universal practice - subject to a 'fiduciary out') used the word "facilitate", such that it might be interpreted as preventing the target from responding to an unsolicited competing proposal - "facilitate" was therefore deleted.
• The obligations of the target to use best endeavours to procure the directors to recommend the deal was subject only to the absence of a superior proposal, and omitted the "usual" second qualification that a favourable independent expert's report be obtained - this was altered, despite the fact the draft IER had already concluded that the scheme was in the best interest of target shareholders.
• The notification and matching rights required the provision of any information to the bidder that had been given by the target to the rival bidder, i.e. not limited to information concerning the target. This was clarified.
• The 5 clear business day period to match a competing was refreshed for any modification to a competing proposal, not just material changes. This too was clarified.
• The "fiduciary out" to the notification or matching rights (which doesn't always appear) needed to be, in the Panel's view, rewritten to make it easier to rely on - implicitly suggesting that notification and matching rights should generally be subject to a fiduciary out. Whether this was intended remains unclear.
• The Panel had some concerns about a 5 clear business day period for a matching right, but in the end let the matter pass - although the parties did amend the period to 3 business days.
• In considering the anticompetitive nature of the deal protection measures, the Panel considered it important, and sought to clarify, that the target's sole liability for breach was the payment of the break fee. There is some debate as to how significant a factor this is.

Comments

Advisers will do well to keep this decision in mind when negotiating deal protection mechanisms in M&A implementation agreements, as well as the preparedness of the Panel to intervene to cause deal protection provisions to be rewritten in appropriate cases.

Download the decision here.