Ahead of the Deal: Pre-bid exclusivity

Tony Damian:

Hello everyone, I’m Tony Damian.

Amelia Morgan:

And I'm Amelia Morgan.

Tony Damian:

And welcome to Ahead of the Deal.

Today we're going to be talking about pre-bid exclusivity. Amelia, a lot to think about there, maybe take us away.

Amelia Morgan:

Yes, there's lots of issues for a target to be considering in determining whether to grant pre-bid exclusivity and some detailed Panel guidance.

Tony Damian:

There is indeed, perhaps a good place to start when we talk about exclusivity, and in particular, soft and hard exclusivity. What do we mean by that? Maybe if you could set the scene for the viewers.

Amelia Morgan:

Yes, so typically exclusivity at the pre-bid stage involves a ‘no shop’ obligation. So the target's restricted from shopping around for rival bids. It's also restricted from talking to rival bidders about a competing proposal and sharing confidential information with third parties.

Sometimes you might also see a notification obligation, so the target has to notify the bidder if it gets a competing bid and maybe even a matching right if it gets a competing proposal coming along. But, Tony, there’s a bit of background to all of this. So, tell us about how we ended up here.

Tony Damian:

Well, there certainly is. And, we go back to 2021, a company called AusNet, which had attracted the interest of APA and Brookfield. Now, AusNet ended up, in return for a price increase from Brookfield, granting eight weeks of hard exclusivity. Plus, there was a week of notice period in there as well. There was a cost reimbursement clause, there were notification obligations and a few other things. That was granted to Brookfield. APA found out about this and went to the Takeovers Panel and the Takeovers Panel looked at all of that and said, the combination of all of those circumstances, led to unacceptability and the eight weeks of hard exclusivity, the fact APA had been in the situation as well, all of that led to the Panel's finding.

More importantly, that opened up a broader discussion and that discussion led to consultation around Guidance Note 7. And then the Takeovers Panel finalised the revisions to Guidance Note 7 in the middle of 2023, and it came out, particularly on that hard exclusivity in the pre-bid stage and said that can be anti-competitive so you need to think about that.

It really focused on the timing and said four weeks was about right, in terms of the maximum length of hard exclusivity. And it set out some situations in which it would be acceptable for a board to grant hard exclusivity. But they were inclusive examples, and I think the Panel quite rightly noted a lot of it turns on the timing. And I think by definition, once you limit the time, you’re probably limiting any potential anti-competitive effects.

Amelia Morgan:

Some helpful guidance from the Panel there. We've seen a bit since then. What are some examples where we've seen hard exclusivity?

Tony Damian:

Yes, and so, the $5 question, after the Guidance Note was finalised was, well what's going to happen in the market? And I think it's fair to say that hard exclusivity in the pre-bid stage, observing the four week rule that the Panel’s imposed in Guidance Note 7, has become very common, very standard.

So in corporate deals, there's a long list of them, for instance, Domain’s a recent one, relatively recent one, where you had hard exclusivity on the sponsor front as well. So in take-privates again, very common - Qube, CC Capital, Johns Lyng, just a few examples. There are many, many more, that demonstrate market participants have observed Guidance Note 7.

And target boards have found it pretty easy to get their heads around the upside of granting hard exclusivity which is to encourage a bidder and to get them from the non-binding stage to the binding stage which is, of course, a good day for shareholders if they can get there.

Amelia Morgan:

Indeed, indeed. So, disclosure’s also relevant to pre-bid exclusivity and often you'll see that these arrangements aren't disclosed because continuous disclosure obligations don't require it.

But the Panel does say there’s a couple of circumstances where disclosure should really occur otherwise there might be unacceptable circumstances. And those are where there's a notification obligation, and that involves disclosure of the identity of the bidder and the terms of a competing proposal.

And also, interestingly, where the target agrees to actually recommend a binding proposal if it's on the same terms as an indicative proposal from the original bidder.

Tony Damian:

Indeed, and those ones you just mentioned are very important, and again, the market, I think, has observed that, and 2023 feels like a long time ago because it's become pretty standard fare as long as you're observing the things you need to observe.

Amelia Morgan:

Indeed. But that's why you see, you know, some exclusivity arrangements disclosed and some, you know, remain behind closed doors.

Tony Damian:

They do indeed.

Amelia Morgan:

So lots to think about with pre-bid exclusivity. Until next time...

Tony Damian:

Stay Ahead of the Deal.