Prospective acquirers often want the opportunity to undertake due diligence on the target company to firm up on the value proposition before committing to make a takeover offer or merger proposal for the entire company.
However, directors of public companies need to think carefully before allowing prospective acquirers to have access to confidential information about its business. Such information is often valuable proprietary information, and should only be used for the advantage of the company and its shareholders. In making such information available, there is a risk that a prospective acquirer may seek to use that information to seek to acquire the target company on the cheap.
In such instances, one option for the board of a target company is to insist that the prospective acquirer enters into a 'standstill agreement' as a mechanism to facilitate the disclosure of additional information to assist both parties to explore the potential transaction further, without the target company being under the constant threat of the prospective acquirer turning hostile.
The Takeovers Panel in the International All Sports Ltd case has recently indicated a willingness to review standstill agreements to ensure that the duration of the standstill is not unreasonable in the context of the information made available to the prospective acquirer.
What is a standstill?
A 'standstill' is a contractual commitment by the prospective acquirer not to buy shares in the target company for a specified period, except with the consent of the target company's board. In effect, the agreement states that if the prospective acquirer, having had the opportunity to review the target's confidential information, decides not to proceed with an offer on terms which are acceptable to the target company's board, then the prospective acquirer is effectively locked out from acquiring any further shares in the target company for a specified period of time.
There are many examples of prospective acquirers that have signed up to a standstill to access due diligence information, but then found that they have been unable to agree acceptable acquisition terms with the target's board. One way of tackling this issue is for the prospective acquirer to turn to the target's shareholders to put pressure on the target board to waive the standstill requirement and allow a takeover offer to be made. In practice, such tactics have rarely worked, and have inevitably led to the acquirer raising its bid price in order to secure a recommendation from the target board and a waiver of the standstill, to allow it to proceed with its bid (such as Cape plc's bid for PCH in 2007). Or withdrawing their proposal entirely so that target shareholders are not afforded the opportunity to consider the potential offer.
Until the recent Takeovers Panel (Panel) decision in International All Sports, the interpretation of standstills has been largely a contractual matter. Rarely have the Courts intervened to read down the effect of a standstill. While directors of target companies need to be mindful of their fiduciary duties to act in the best interests of the company and for proper purposes in entering into such arrangements, breach of directors duties in these circumstances are often difficult to prove (particularly where there are mixed purposes in insisting on the standstill).
Standstills themselves do not sit comfortably with the notion in the Panel's 'Frustrating Action' Guidance Note that decisions about control and ownership of a company are properly made by its shareholders. In effect, standstill provisions can provide the target board with the ability to control whether target shareholders have the opportunity to consider an offer for their shares. However, the difficulty with standstills (similar to other lock-up devices such as exclusivity and break fees) is that they are often used as a mechanism to facilitate the investigation of a potential transaction, which may never have eventuated if the target board did not grant access to prospective acquirer to conduct due diligence.
While the Panel has previously raised questions about whether its Guidance Note 7 "Lock up Devices" should be expanded to deal specifically with standstill agreements, until now there has been little guidance as to when such arrangements may infringe on the principle that acquisitions of control takes place in an efficient, competitive and informed market.
International All Sports Limited
In April 2008, Centrebet gave confidentiality and standstill undertakings in favour of International All Sports Limited (IAS) before it was provided with information about IAS for the purposes of a possible acquisition of its assets. The standstill was expressed to prevent Centrebet from acquiring shares in IAS for a period ending 12 months after the date Centrebet withdrew from the asset sale process. Centrebet subsequently withdrew from the asset sale process, and IAS subsequently announced the termination of the asset sale process in November 2008. On 2 February 2009 Centrebet announced a cash takeover offer for all the shares in IAS, conditional on being released from the standstill either by IAS or the Panel.
Centrebet submitted that the standstill provisions constituted unacceptable circumstances on the basis that the provisions were (among other things):
- an anti-competitive lock-up arrangement without proper legal or commercial justification; and
- a frustrating action tantamount to a poison pill.
Centrebet submitted that the standstill, and IAS's refusal to release Centrebet from it, had the effect of excluding Centrebet from the market for IAS shares. This meant that IAS shareholders were being denied the opportunity of participating in the proposed bid without any proper commercial justification. Centrebet submitted that this was contrary to the principles set out in sections 602(a) and (c) of the Corporations Act, namely:
- inhibiting an efficient, competitive and informed market for IAS shares and
- denying shareholders a reasonable and equal opportunity.
Centrebet also submitted that non-disclosure of the standstill arrangements indicated an intention by the IAS board to render IAS 'takeover proof' unless the IAS board first approved of the bid.
The Panel considered that standstill agreements are a useful means to enable price-sensitive information to be provided to a potential acquirer of a company's shares. Among other things, a standstill helps facilitate sale processes, protect companies and their officers against insider trading liability and ultimately advance shareholders' interests. Standstills also protect against the 'forced' disclosure of information under s636 if a bid is made.
In the Panel's view, there is a public interest in enforcing confidentiality agreements and standstills as they promote the exchange of information and the maximisation of value to shareholders. Failure to enforce such agreements could disrupt the process of negotiating and consummating business transactions. Subject to their duties, the Panel believed that target directors are entitled to release the target's information at their discretion and with the conditions they desire. In this case, one such condition was the standstill and the recipient of the information agreed to that condition.
However, the period of a standstill should be negotiated with regard to the nature of the information made available under it, so as to be commercially justifiable. It is reasonable for parties to agree a fixed end date for a standstill to give commercial certainty to their contractual arrangements, but the duration of the standstill needs to be commensurate with the materiality of the information to be provided.
In this case, IAS provided Centrebet information relating to IAS management profit and loss, and income, forecasts for periods up to the financial year ending 30 June 2010. The forecasted periods extended well beyond the term of the standstill. Having regard to the information to be (and actually) provided to Centrebet, a 12 month standstill appeared in the Panel's view to be commercially justifiable. In forming this view, the Panel considered it relevant that a standstill for 6 to 12 months from a relevant time (for example, withdrawal from the sale process) is consistent with market practice.
The Panel went on to consider whether it may give rise to
unacceptable circumstances for IAS to continue to enforce the
standstill if all the information provided to Centrebet has ceased
to be price-sensitive. However, the Panel found that not all of the
information made available to Centrebet had ceased to be
price-sensitive, and so declined to make such a declaration.
Centrebet has since applied for a review of the Panel's decision.
The IAS decision signals a potential willingness of the Panel to review standstill arrangements to determine whether they have an anti-competitive effect.
While a standstill may protect the target company from a prospective acquirer taking advantage of non-public materially price sensitive information, it can also have the effect of reducing the pool of potential acquirers unless the period of the standstill is reasonable, it may give rise to unacceptable circumstances. Care needs to be taken in negotiating standstill arrangements to ensure that the effect of the standstill is not disproportionate to the information which the standstill is seeking to protect.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.