A take-private deal is arguably the most critical corporate action a target board needs to navigate, with heightened reputational risks for the directors. There is little margin for error in what is a very public process after the initial announcement. Many of the same lessons outlined above for prospective acquirers are relevant to target boards but with a different angle. We distil five key lessons for target boards.
Lesson 1: Push as much regulatory approval risk as possible onto the prospective acquirer
Deals are invariably subject to regulatory approval, including FIRB, ACCC clearance or similar clearances in other jurisdictions. A target board should seek to contractually allocate as much of the risks associated with those approvals as possible to the prospective acquirer. This can be done in the transaction agreement by (i) requiring the prospective acquirer to agree to a reverse break fee if a regulatory approval is not obtained, (ii) placing an obligation on the prospective acquirer to accept conditions that a regulator may impose on its approval, (iii) placing an obligation on the prospective acquirer to pay a 'ticking fee' (an increase in the offer price) for any delay in receiving regulatory approvals beyond a set date.
Lesson 2: Be wary of material adverse change (MAC) conditions
Due to embedded statutory timeframes that apply to any take-private deal in the Australian market, there is a long lead time between public announcement and closing – at least two months but often longer if multiple regulatory approvals are required and/or if the proposed deal terms or offer structure have added complexity that attract elevated disclosure requirements (e.g. if target shareholders are being offered listed or unlisted securities in the acquirer or if there is a capacity for target shareholders to make a 'mix and match' type election between part cash, part scrip etc). To protect the prospective acquirer's position during this lead time, it is standard for the acquirer to have the benefit of a 'no material adverse change' condition.
Target Boards need to negotiate carefully the scope of this condition. There have been multiple examples over the years where prospective acquirers have sought to invoke material adverse change conditions to withdraw entirely from a publicly announced deal or to renegotiate a lower price. This was especially the case with the onset of the Covid pandemic. In some cases, the acquirer succeeded. Even if the acquirer did not succeed, the purported reliance on the material adverse change condition created material delay and market instability for the target, and sometimes a reduced offer price.
Lesson 3: Engage with your key shareholders before going public
History has repeatedly shown that it is dangerous for a target board to publicly announce and recommend a take-private transaction without sounding out their key institutional shareholders in advance. Failure to lock in support from key shareholders exposes the prospective acquirer (and, by practical extension, the target board) to a subsequent price negotiation behind closed doors. This could either play out with a 'who blinks first' binary outcome – either the prospective acquirer seeks to accommodate the privately communicated price expectations of the key shareholder (and then the enhanced deal gets approved) or the prospective acquirer sticks to its original pricing and rolls the dice on the outcome of the scheme vote. If the deal fails, the target board will need to explain to shareholders why the board embarked on an expensive and time consuming process that ultimately failed, without sounding out and shoring up the key shareholder support from the outset.
Lesson 4: Don’t just blithely assume that target shareholders will vote the scheme up
Even if a prospective acquirer is offering a compelling premium, has secured the unanimous recommendation of the target board, has the public support of one or more key shareholders and the endorsement of the independent expert, you cannot just assume that shareholder approval of the scheme will be received as a matter of course. You cannot take anything for granted. Ahead of the scheme meeting, you need to ensure that the target is undertaking a concerted shareholder engagement campaign to read the temperature of as many shareholders as possible. Likewise, the acquirer itself should also consider the dual approach of contacting as many shareholders as possible and reminding them of the reasons to vote yes. You don’t want to find yourself in a situation where, contrary to all expectations at the outset, the voting result comes down to the wire and falls the wrong way.
Lesson 5: Beware of industry competitors who may want to scupper your deal
There are multiple instances where an industry competitor has sought to protect their market position by purchasing target shares on-market (up to 20%) between public announcement and expected deal completion, with a view to defeating the scheme vote or blocking, or securing a 'seat at the table'. If this risk arises, the target board will then be forced into a concerted shareholder engagement campaign to elicit the required level of shareholder support. Sometimes this type of campaign works (e.g. Amcom Telecommunications and Vocus, in the face of TPG buying 19.9% of Amcom). Often, a concerted shareholder engagement campaign is not enough to neutralise the voting impact of the spoiler (e.g. Origin Energy and AustralianSuper).
Lesson 6: Ensure there's robust deal protection in scrip mergers
So-called 'mergers of equal' and other scrip-based mergers necessarily have a notional acquirer, which will be the continuing listed entity, and a notional target, which will become a wholly owned subsidiary of the notional acquirer and delisted from ASX. The implementation agreement for transactions must have reciprocal deal protections (exclusivity, break fee and matching rights) that apply equally for the notional target's benefit. If not, the notional target could be left high and dry with high sunk costs if the notional acquirer withdraws to pursue a superior proposal that it subsequently receives before the scrip merger is consummated (e.g. Horizon Oil and Roc Oil, 2014).