The recent decision regarding the proposed takeover of paint manufacturer Wattyl Limited (Wattyl) provided an opportunity for the Takeovers Panel (Panel) to consider the appropriateness of the size of a break fee by reference to target annual profit rather than market capitalisation, and the appropriateness of failure to satisfy a regulatory condition as a trigger for payment of a break fee. While the Panel has not yet given reasons for the Wattyl decision, the undertakings given may be instructive as to the Panel’s rationale.
On 13 February 2006, Barloworld Limited announced a $3.80 per share takeover bid for Wattyl, proposed against the background of a $3.25 per share bid by Allco Equity Partners (AEP) made in December 2005. Alongside the increase of 17 per cent on the AEP offer, the Barloworld bid contained a break fee agreement valued at $3.2 million, payable if AEP’s rival bid succeeded, if the Wattyl board failed to recommend the Barloworld bid, or, should the board recommend the offer, if it subsequently withdrew or revised that recommendation. The pre-bid agreement encompassed an exclusivity provision, which prevented Wattyl from seeking out or initiating any discussions with potential rival bidders.
In addition to these aspects of the bidding history, concerns regarding the effect on competition of the proposed takeover were raised by the Australian Competition and Consumer Comission (ACCC). On 13 February 2006, the ACCC indicated its intention to initiate market inquiries into the proposed acquisition by Barloworld. The ACCC’s concerns must be noted in light of their 1996 veto of a similar proposal, the planned merger of Wattyl and Taubmans. Following rejection of this merger, Taubmans’ British owners sold the company to Barloworld, resulting in a substantial market presence by Barloworld who had subsequently acquired two other paint manufacturers, Bristol and White Knight. The ACCC therefore considered it necessary to assess the effects on competition of a merger between Wattyl and Barloworld, now two of the three major paint suppliers in Australia.
On 1 March 2006, AEP submitted an application to the Panel in relation to several issues concerning Wattyl’s target’s statement and Wattyl’s treatment of the AEP offer and the rival Barloworld offer. Most relevantly, AEP sought a declaration of unacceptable circumstances arising from the break fee and other lock-up devices agreed to by Wattyl with Barloworld, and the effect of possible ACCC opposition to the Barloworld offer.
Takeovers Panel — break fees and other lock-up devices
Wattyl’s commitment to a $3.2 million break fee was one of several issues raised before the Panel. In its Guidance Note 7 on lock-up devices, the Panel indicated that whether circumstances are unacceptable depends on the effect or likely effect of a lock-up device on current and potential bidders, on shareholders, and on the market, and whether the device prevents the acquisition of a target taking place in an efficient, competitive and informed market. Further, the Panel emphasised its guideline that a break fee should not exceed one per cent of the equity value of the target, although size alone is not determinative, and other terms may render an agreement coercive or anti-competitive.
Although in this case, the break fee corresponded to only one per cent of the bid value, the amount was large in relative terms, as it represented a sum higher than Wattyl’s projected profit for 2006. In the matter of Sirtex Medical Limited  ATP 22, the Panel considered whether a break fee which was less than one per cent, but which represented almost 30 per cent of Sirtex’s available cash reserves, gave rise to unacceptable circumstances. In that case, the Panel, in declining to declare unacceptable circumstances, took into consideration the fact that the break fee was not payable merely because Sirtex shareholders did not accept the bid. Moreover, the agreement had a ‘fiduciary carve out’, which allowed directors to withdraw their recommendation to approve the bid consistent with the reasonable exercise of their fiduciary duties, without triggering the break fee. In contrast, however, the Panel in Ausdoc Group Limited  ATP 9 considered that a break fee payable if the bidder’s 90 per cent minimum acceptance condition was not satisfied gave rise to unacceptable circumstances. The Panel held that the fee, which was likely to absorb a large proportion of Ausdoc’s anticipated profits, may have had the effect of coercing shareholders to accept the bid, even if they did not consider it to be in their best interests. Further, this type of break fee was distinguished from other forms of break fees payable where the bid does not succeed due to a higher rival bid because the existing shareholders of the target, rather than the successful rival bidder, bear the cost of the break fee.
In the Wattyl case, the relative value of the break fee in relation to annual profits was considerable, and the pre-bid agreement contained fewer carve-outs than in the Sirtex case, providing that payment of the break fee would only be excluded in the event that a court, tribunal, a regulatory authority or the Panel determined that the fee was unlawful, constituted a breach of the duties of Wattyl directors, or constituted unacceptable circumstances. The Panel, however, skirted the issue of whether such a fee would be considered unacceptable, by accepting undertakings from both Barloworld and Wattyl to amend the pre-bid agreement. In short, the amendment stipulates that the break fee will not be payable if:
- the competition condition, a regulatory approval clause which requires that the ACCC does not oppose the acquisition, is not satisfied by 13 August 2006, being six months after the announcement by Barloworld of its proposed bid, or
- prior to 13 August 2006, the approval needed to satisfy the competition condition is refused and that decision is accepted by Barloworld (that is, no appeal, litigation, request for authorisation or similar is pursued).
On the basis of these undertakings, the Panel declined AEP’s request for a declaration of unacceptable circumstances in relation to the break fee. The willingness of the Panel to accept undertakings only in relation to the competition condition may indicate that it did not consider the relatively high break fee to be an issue, however, until the publication of the reasons for the decision, this will not be known.
A second issue of concern before the Panel involved the ‘no shop’ provision contained in the pre-bid agreement, under which Wattyl agreed, until the end of the offer period, not to solicit, encourage or initiate any enquiries, discussions or proposals in relation to a competing transaction. Importantly, the exclusivity provision did not prohibit Wattyl from responding to a proposed competing transaction that was superior to the Barloworld offer.
The inclusion of this exception proved vital in the case before the Panel. The Panel found that the exclusivity provision was very close to one that would be unacceptable, yet distinguished between a ‘no shop’ and a ‘no talk’ clause. While a ‘no talk’ clause, which would forbid Wattyl from talking to other bidders or prospective bidders, would be unacceptable, the Panel was persuaded by assurances from Wattyl and Barloworld that the provision contained in the pre-bid agreement did not extend to a ‘no talk’ provision. The Panel therefore considered the clause acceptable. This is reflective of the Panel’s stance in Guidance Note 7, which indicates that ‘no-talk’ agreements are inherently more anti-competitive than ‘no-shop’ clauses. However in the Wattyl case, the Panel issued a caveat: if, in practice, Wattyl and Barloworld acted as if the provision was a ‘no talk’ provision, there could be grounds for the Panel to reconsider the clause in a new application.
Takeovers Panel — disclosure requirements
Following the ACCC’s announcement of its investigation into the market effects of a successful Barloworld bid, AEP, in its application to the Panel, raised issues concerning the consequences of possible ACCC opposition. In particular, AEP sought a declaration of unacceptable circumstances in relation to the lack of guidance given by the Wattyl directors on the possibility of the ACCC opposing the Barloworld bid, and the associated risks and potential for delay. At the 2005 annual meeting, Wattyl chairman John Ingram had expressed doubt as to the likelihood that the ACCC would in fact authorise a merger with Barloworld. Yet Wattyl’s target statement was silent in this respect, and made no comments as to the possibility of ACCC opposition.
In response, the Panel accepted undertakings by Wattyl to produce and dispatch a third supplementary target’s statement, approved by the Panel, and addressing those matters on which the Panel required further disclosure. The Panel indicated that further disclosure concerning competition issues was required in relation to:
- a statement made by the chairman of Wattyl to the annual general meeting in October 2005 concerning the ACCC’s 1996 veto of the Wattyl–Taubmans merger
- the history of ACCC opposition to the Wattyl–Taubmans merger in 1996, and Barloworld’s subsequent acquisitions in the Australian market, and
- the fact that Barloworld’s proposed bid would be subject to a competition condition, but the satisfaction or triggering of the condition was unlikely to be known within the timeframe of the AEP offer.
Ultimately, the Panel, in accepting undertakings by Wattyl and Barloworld, declined to make findings of unacceptable circumstances. On 3 April 2006, the bid period for the AEP offer ended, without satisfaction of the bid conditions. By declining to extend its bid period, AEP signalled that it did not wish to wait for the process to be resolved according to the timetable established by Wattyl and Barloworld, under which Barloworld had until August to reach an agreement with the ACCC. For now, all attention will be turned to the ACCC, and the Mergers Review Committee’s findings, set to be handed down on 4 May 2006.
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