AusNet Services Limited in the Takeovers Panel: “Hard” Exclusivity and Deal Protection Lore Reform

The Takeovers Panel’s decision in AusNet Services Limited 01 [2021] ATP 9 has drawn comment from a number of quarters.

In essence, in AusNet the Panel decided that an eight week exclusivity period gave rise to “unacceptable circumstances”. The eight week period granted by AusNet to one bidder (Brookfield), when a second bidder (APA) was knocking on the door (each proposing an acquisition of AusNet by scheme of arrangement), was not subject to a so-called “fiduciary out”,[1] that is, an exception to exclusivity that would permit the target’s directors to engage with another potential bidder where that might lead to a superior offer.

The absence of the “fiduciary out” when viewed in light of the other circumstances persuaded the Panel that it should intervene to break the exclusivity and give the other bidder a chance to engage. The Panel found that AusNet had not conducted enough of an “auction” before granting exclusivity. While insisting (as they should) there is no requirement to conduct a “public auction”,[2] the Panel found that AusNet did not tell APA that there was any other interested party and did not meaningfully engage with APA on price or terms before granting exclusivity to Brookfield.[3]

Has the Panel moved too far in the development of the “lore” of deal protection? Virtually the entirety of the regulation of deal protection in the context of Australian takeovers and "unacceptable circumstances" is an emanation of the Panel’s published guidance[4] and the decided Panel cases; there is very little in the way of basis for the Panel’s policy in the words of Chapter 6 itself. Of course the “Eggleston principles” in section 602 include the “efficient, competitive and informed market” criterion with which an acquisition of control should occur, but a pre-bid or pre-scheme agreement between a bidder and target cannot result in any acquisition of control – that is a matter for the shareholders to decide in due course.

There are a good number of examples over time of exclusivity provisions that were preliminary to a public announcement of a deal and did not have a “fiduciary out” – what might be called “hard” exclusivity. Invariably, these could be characterised as pro-competitive because they resulted in a control proposal that would probably not have occurred if a bidder could have been “shopped” by the target at any time. The purpose of the exclusivity was to get a bidder to engage.

In each case, the period of “hard” exclusivity was followed by the announcement of an implementation agreement with a suite of deal protection measures, including exclusivity provisions with a “fiduciary out” and a break fee.

At that point in time, with (generally speaking) several months remaining before the proposal would be voted on by the target shareholders, any other potential bidder could then submit a proposal to the target, and if a superior proposal the target could engage.

For this purpose, it must be kept in mind that a break fee should be de minimis and immaterial, hence should not be regarded as anti-competitive by itself.

In AusNet the Panel had regard to there being two serious bidders at AusNet’s door at the same time.  The decision does not say how that came about. But it is not unusual for a target to put out “feelers” to more than one party seeking preliminary expressions of possible interest.  There is still the challenge of getting any potential bidder to seriously engage, and often that has required the grant of “hard” exclusivity. 

While the “competition” for AusNet might have been deferred for a time, the effect on control was merely temporary.

So one may query how a period of “hard” exclusivity will necessarily chill competition to the extent that it should be pre-emptively banned.

In the writers’ view, the Panel has fallen into a trap of confusion about the relevance of an auction process. It is one thing to say that a fulsome auction means that the anti-competitive effects of subsequent deal protection can be ignored (albeit exclusivity with a “fiduciary out” and a de minimis break fee will not be a major impediment to a serious counter-bidder). It is quite another to say - or imply - that an auction is somehow a requirement imposed on target boards before any exclusivity can be granted, even before any proposed transaction is announced. No, the possible anti-competitive effects of a deal protection measure must be assessed on the basis of the probative material actually before the Panel and practical considerations – notably that any proposed scheme transaction once announced will take months before shareholders vote on it and so there is ample time for counter-bidders to emerge – and not some sort of new and prescriptive default auction requirement. That should rightly be the subject of law reform rather than the Panel’s own “lore” reform.

There is no “Revlon” duty on directors to auction a company in Australia. While the AusNet decision might be thought at first sight to help target boards by ensuring that they retain the flexibility to treat with other bidders, the inability to grant “hard” exclusivity will remove a card that the target board could otherwise play for the ultimate benefit of the target shareholders.

All that said, perhaps the problem was that for a period of eight weeks was simply too long. Certainly, this was one of the factors pointed to by the Panel, although by no means the only one.[5]

Would a shorter period of “hard” exclusivity pass muster under the Panel’s “enhanced” deal protection policy now in force? Only time will tell.

The writers also observe that the form of the order by the Panel – cancelling the entire “no talk” exclusivity clause unless a “fiduciary out” was inserted – would seem to exceed the proper exercise of the Panel’s powers: if inserting a “fiduciary out” was all that was required to alleviate the effect of the “unacceptable circumstances”, an order going beyond that would seem to be excessive (and perhaps in terrorem).

One final observation: a body like the Panel, exercising executive power, and not being subject to close judicial oversight, needs to tread carefully so as not to exceed its jurisdiction and undercut the rule of law that is so important to the proper functioning of Australia’s capital markets.