What are 'standstills'?

A 'standstill' is the colloquial term for a contractual agreement where one party, typically in exchange for the receipt of non-public information from another party, agrees to 'standstill' in the sense that the recipient will not, for a fixed period, acquire any (further) shares in the disclosing party. Standstill provisions are typically agreed in contemplation of a possible takeover bid, scheme of arrangement, or similar change of control transaction. In most cases, standstill provisions are included in a confidentiality or non disclosure agreement. The party receiving non public information (e.g. the prospective acquirer) agrees that for, a certain fixed period, neither it nor its associates will purchase or otherwise acquire a (further) relevant interest or any economic interest in voting shares of the disclosing party (e.g. the target) without the consent of the target.

Standstills typically restrict the party receiving the non-public information from buying shares in the target or even making a takeover offer for the target without the consent of the target for a specified period, usually between six to 12 months.

Purpose of standstills

Standstills are a contractual mechanism that a prospective target company uses to manage the inherent risk with providing its non-public information to another party in circumstances where the intended purpose for which the information is being provided (typically a recommended control transaction) may not ultimately eventuate. Specifically, if a company allows another company to access its non-public information in contemplation of a potential 'friendly' acquisition of the first company, the prospective acquirer could subsequently decide that it does not wish to proceed with that transaction at all or that it wishes to proceed but at a lower price than initially indicated and otherwise on terms that are not acceptable to the disclosing company (i.e. a hostile transaction). Without a standstill restriction, there is a risk for the disclosing company that the recipient may subsequently use the confidential information it has accessed to purchase shares in the disclosing company (either on-market, by private treaty from another shareholder or by making a hostile off-market bid). The standstill restriction protects the disclosing company's interests in two ways. First, by the time the standstill period expires, some or all of the non-public information to which the recipient has had access is likely to have become stale. Although there may be an overlap between the operation of the standstill and the insider trading prohibition, from the disclosing company’s perspective, a contractual standstill that applies for a fixed period serves as an important supplement to the recipient's statutory obligation to comply with the insider trading prohibition. This is because a contractual standstill avoids the debate about whether any given piece of information would have a “material effect on the price or value” of the disclosing company's securities (this being one of the elements needed for information to qualify as “inside information”). Instead, the recipient is simply prohibited for a fixed period from purchasing securities of the disclosing company, subject to certain generally accepted exceptions. A standstill restriction also gives the disclosing company a defence to any claim that it has communicated price-sensitive information to someone who is likely to trade or to 'procure' someone else to do so thereby contravening the 'tipping' prohibition.

Secondly, for the duration of the standstill period, the disclosing company has the safety of knowing that the recipient is precluded from making a takeover bid or otherwise acquiring shares in the disclosing company without the board's consent.

On the one hand, 'standstill' restrictions are inimical to a well-functioning, competitive market for control of the disclosing company, being the party that has the benefit of the standstill. That is because the disclosing company is effectively immune from being taken over for the duration of the standstill period by the party that is subject to the restriction. Simply put, the standstill operates to insulate (lock-up) the disclosing company from the financial and governance discipline of potentially being susceptible to a takeover from the party that is subject to the restriction. Viewed in this light, standstills do not serve a proper public interest.

On the other hand, standstills give a disclosing company the confidence to release its non-public and potentially price sensitive or commercially sensitive information with the safety of knowing that the recipient cannot subsequently use that information in a way that the target board may apprehend could be disadvantageous to the target and/or its shareholders (e.g. an opportunistically timed and priced hostile takeover). Standstills therefore facilitate the flow of information and in turn encourage sale processes, protect companies and their officers against insider trading liability, and ultimately advance shareholders' interests. Viewed in this light, there is a countervailing public interest in enforcing confidentiality agreements and standstills, as they promote the exchange of information and the maximisation of value to shareholders.

The sensitivity around the threshold of question of whether there should even be a standstill (and if so its terms) can sometimes hinder the progress of a control transaction. For example, in Bain Capital's recent approach to Bapcor, it was reported that the relationship between those parties disintegrated when Bain declined to sign what was described in the media as a “belts and braces” non-disclosure agreement which included a standstill, in return for three pages of “high-level forecasts" from Bapcor.

Common standstill exceptions

Exceptions to the standstill restriction are typically negotiated for the benefit of the party that is bound by the restriction (i.e. the prospective acquirer). These exceptions include allowing the prospective acquirer to acquire (further) target shares during the standstill period where:

• the acquisition is made under a takeover bid or scheme that the target's board recommends; or
• an alternative (competing) proposal for the target is publicly announced. The rationale for this exception to the standstill restriction is that if another party has publicly entered the contest for control of the target, the first prospective bidder does not wish to be restrained, for example, from being able to acquire target shares on market, as this may be a legitimate response by the initial bidder to the emergence of a rival bidder. The counter argument here is that this should ultimately be a decision of the target. For example, if an announced alternative transaction is a hostile transaction, then the target could potentially be fine with agreeing to release the initial bidder from its standstill. On the other hand, if the announced alternative transaction is a friendly recommended transaction, the target board is unlikely to conclude that it is in the best interests of its shareholders to allow the first bidder to be released from its standstill if the target board forms the view that (a) the first bidder only intends to amass a stake in the target which is large enough to defeat or otherwise impede the consummation of the friendly recommended transaction and (b) the first bidder does not to intend to proceed with a competing control transaction for the target.

In a proposed merger of equals, the standstill provisions (including their exceptions) typically apply to each merger party on a reciprocal basis.

Previous Panel decisions

In International All Sport Limited [2009] ATP 4, the Takeovers Panel stated:

"A standstill is 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.

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.

Our view is that, subject to their duties, 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. This view is supported by the Panel in Goodman Fielder Limited 02 , despite a different context applying in that matter, the Panel stated that:

"in exchange for giving access to company information, the Goodman Fielder directors received valuable undertakings from prospective alternative buyers, requiring them to make only recommended or permitted bids. Goodman Fielder said that similar access for Burns Philp would give Burns Philp additional certainty and reduce its risk. On that basis Burns Philp should not expect to be given the information for free. Goodman Fielder said that more favourable terms for Goodman Fielder shareholders was the appropriate price for reducing Burns Philp's risks and uncertainty. Subject to the overriding requirement to comply with statutory and regulatory requirements it has set out above in relation to the other constraints on target directors, the Panel considers this is a reasonable position for a target board ". See s1043A and Goodman Fielder Limited 02 [2003] ATP 5.

Accordingly, if standstill arrangements are agreed in contemplation of the exchange of commercially sensitive information, and if such information is in fact exchanged, it is more likely for there to be a justifiable commercial basis for the standstill.

As to the length or duration of a standstill, in International All Sport Limited, the Takeovers Panel considered that a standstill for 6 to 12 months was consistent with market practice and commercially justifiable – see International All Sport Limited 01 [2009] ATP 4 at [25]. On that basis and having regard to other considerations, the Panel declined to make a declaration of unacceptable circumstances where the directors of the target (International All Sport Limited) decided not to release the bidder (Centrebet) from a standstill restriction which it had agreed to as part of its participation in an earlier sale process the target had initiated. This decision was upheld by a Review Panel which agreed that a standstill is a legitimate way to enable a company to disclose confidential information to potential purchasers of its shares or assets and the term of a standstill should be commercially justifiable according to the nature of the information to be provided under it.

Recent consideration of standstills by the Takeovers Panel

After a 15 year hiatus from the International All Sport Limited decisions, the Panel has now considered two applications in relatively quick succession that have raised standstill issues. Each of these decisions is considered below. Although these two decisions are helpful in advancing the underlying principles that regulate standstills, there remain some unanswered questions about their permissible limits. Is it now time for the Panel to issue market guidance in this area? Possibly. After distilling each of these recent decisions, we offer some general guiding principles for prospective acquirers and targets.

Metallica Minerals Limited

On 21 May 2024, Diatreme Resources Limited (Daitreme) made an application to the Takeovers Panel in relation to the affairs of Metallica Minerals Limited (Metallica). Metallica was the subject of an unsolicited, hostile scrip takeover bid by Diatreme. Both Metallica and Diatreme operate silica sands projects close to each other in Queensland.

The application was primarily concerned about a mutual standstill agreed by Metallica and Diatreme in a confidentiality deed between them dated 30 October 2023. So far as is relevant to this article, Diatreme agreed that, for the term of the confidentiality deed, being two years or an earlier date agreed by the parties, Diatreme would not acquire, purchase or sell, or agree to acquire, purchase or sell any securities in Metallica without Metallica’s prior written consent (Diatreme Standstill).

No confidential information was ever provided by Metallica to Diatreme (or vice-versa) under the confidentiality deed.

On 16 February 2024, Diatreme announced its intention to make a takeover bid for Metallica. The announcement did not include a defeating condition that Metallica waive the Diatreme Standstill, but a condition to that effect was subsequently included.

On 24 April 2024, Metallica released its target’s statement in which the Metallica directors unanimously recommended that Metallica shareholders reject Diatreme's offer. Noting the existence of the Diatreme Standstill as a fundamental barrier to Diatreme lawfully acquiring any Metallica shares under the offer, the Metallica board said that it intended to release Diatreme from the standstill only at either of the following points in time:

(a) if no superior proposal for Metallica emerged, immediately prior to the end of the offer period under Diatreme's takeover bid; or

(b) if a superior proposal for Metallica emerged, after Metallica shareholders have voted down that superior proposal.

Diatreme complained that this was all too uncertain in the sense that the standstill would remain in place for an indeterminate period and that this detracted from the overall certainty and benefits of Diatreme's offer. Diatreme sought a declaration of unacceptable circumstances and orders from the Panel to the effect that Metallica be directed to release Diatreme from the standstill no later than 30 May 2024, as Diatreme's offer was scheduled to close on 3 June 2024.

The Panel declined to make the requested declaration or orders on the basis that Metallica was prepared to amend the standstill to ensure that it no longer continued for an indeterminate period. In particular, Metallica agreed to amend the standstill to include a more prescriptive definition of 'superior proposal', and to commit to a fixed date for the standstill to be released (being 28 June 2024) if a superior proposal for Metallica was announced before 17 June 2024. As it turned out, no superior proposal for Metallica emerged before 17 June 2024 (or subsequently). Therefore, the standstill fell away on 17 June 2024 and, on that date, Diatreme declared its offer unconditional. Diatreme's offer was extended to 23 July 2024 with Diatreme achieving voting power of 79.67% in Metallica at the time that it extended its offer.

The interesting aspect of this application is that the Panel was prepared to allow Metallica to have the continuing benefit of the standstill even though Metallica had not disclosed any confidential or other information to Diatreme from the date that they entered into their confidentiality deed.

Westgold Resources Limited

On 29 May 2024, Ramelius Resources Limited (Ramelius) made an application to the Takeovers Panel in relation to the affairs of Westgold Resources Limited (Westgold).

Westgold and Ramelius are both ASX listed gold mining companies with operations in Western Australia. Karora Resources Inc (Karora) is a TSX-listed mineral resource company established in Canada with mining interests located in Western Australia and in the same region as two of Westgold's mines.

On 14 November 2023, Ramelius and Westgold entered into a confidentiality deed which included a mutual standstill for a period of 12 months ending on 14 November 2024 (Confidentiality Deed).

On 8 April 2024, Westgold announced that it had entered into an arrangement agreement with Karora (Arrangement Agreement) under which Westgold would acquire 100 per cent of Karora via a Canadian plan of arrangement. The Arrangement Agreement is the Canadian equivalent to a Scheme Implementation Agreement in the Australian market. Karora shareholders would receive a combination of cash, Westgold shares and shares in an spin-off entity in exchange for Westgold acquiring their Karora shares, with the end result that Karora would become a wholly-owned subsidiary of Westgold and delisted from TSX. The former Karora shareholders would emerge with a collective holding of 49% in Westgold.

As is usual with a merger of equals transaction, the Arrangement Agreement contained mutual exclusivity arrangements including non-solicitation covenants, matching rights and an obligation on each of Wetsgold and Karora to enforce any pre existing confidentiality or standstill agreements and not waive any standstill without the other party's consent. The Arrangement Agreement also included a termination fee of C$40 million (A$43 million) payable by Westgold to Karora if Westgold terminated that agreement for various reasons including if Westgold decided to pursue a superior proposal for Westgold (Westgold Break Fee).

Ramelius submitted (among other things) that:

• the Arrangement Agreement prevented Westgold from releasing Ramelius from its standstill restrictions vis-a-vis Westgold (Ramelius Standstill Restrictions) without Karora’s consent - which Karora was unlikely to ever give;
• the Ramelius Standstill Restrictions together with the Arrangement Agreement acted as an unacceptable lock up device over Westgold; and
• the Westgold Break Fee was equivalent to approximately 4 per cent of Westgold’s market capitalisation and exceeded the Panel's 1% guidance – therefore it operated as an anti-competitive disincentive for Ramelius (or anyone else) making a competing offer for Westgold.

Ramelius sought final orders in relation to the Ramelius Standstill Restrictions and that the Arrangement Agreement be unenforceable against Westgold unless the Westgold Break Fee was amended (reduced).

The Panel indicated that it had concerns with the mutual non-solicitation provisions in the Arrangement Agreement, in particular, the ineffectiveness of the ‘fiduciary out’. The Panel considered those concerns were sufficiently addressed by Westgold's and Karora’s undertakings to amend the Arrangement Agreement to reduce the fetters or constraints on the ‘fiduciary out’. In particular, Westgold and Karora agreed to remove the requirement to obtain the other party's consent to waive any standstill. On this basis, the Panel declined to make a declaration of unacceptable circumstances.

As for Ramelius' complaint that the quantum of the Westgold Break Fee was excessive, the Panel disagreed and concluded that this did not currently have an anti-competitive effect but noted that the Panel did not reach a concluded view on a number of matters raised regarding the Westgold Break Fee and a future Panel may well need to consider such matters. The Panel also did not consider Westgold’s continued enforcement of the standstill in the Confidentiality Deed to be inappropriate. In other words, the Panel did not displace the contractual framework Westgold and Ramelius (which the Panel noted were both sophisticated parties) had agreed for their mutual standstill arrangements.

The Panel's decision and the amendments to the Arrangement Agreement meant that any waiver of the standstill in the Confidentiality Deed by Westgold in favour of Ramelius would no longer require the consent of Karora. It is important to note that under the Confidentiality Deed, no waiver from Westgold would be required if Ramelius had put forward an alternative control proposal for Westgold that the Westgold board concluded would deliver a superior outcome for Westgold shareholders to the Karora transaction. In other words, the standstill provisions in the Confidentiality Deed did not impede Ramelius from putting forward a superior proposal for Westgold and in fact, Ramelius had put forward two proposals to the Westgold board prior to its Panel application, both of which were rejected. It was suggested by Westgold that the intent behind Ramelius seeking to be released from the standstill provisions was in order for Ramelius to selectively contact Westgold shareholders and proceed with a hostile takeover bid.

As it transpired, on the same day the Panel released its decision, Ramelius announced that, "given the amount of time which has passed" since Ramelius first submitted its Panel application (namely, almost six weeks), Ramelius confirmed that it was no longer in any corporate transaction discussions with Westgold. In other words, Ramelius announced that it would not be submitting a competing proposal to Westgold. The reference to the "amount of time which has passed" has to be viewed in the context of the Karora shareholder vote to approve the Westgold/Karora acquisition, which is scheduled for 19 July 2024, being only 8 business days after the Panel's decision. Under the Arrangement Agreement, if the Karora shareholder meeting proceeds as scheduled on 19 July 2024 and if Karora shareholders approve the merger with Westgold, then after the date of that approval, Westgold would have limited ability to terminate that agreement to pursue a superior proposal.

Unresolved issues

Although the Panel's recent decisions in Metallica and Westgold have helpfully confirmed the permissible limits of standstills, there are still some important ancillary questions that are not fully answered. Specifically:

• Is an acquirer that is itself an ASX listed entity required to ensure that any mutual exclusivity provisions agreed between that acquirer and a target contain a completely unfettered, unrestricted fiduciary out provision enabling the acquirer to respond to a competing proposal for the acquirer that is reasonably likely to result in a superior outcome for the acquirer's shareholders, as compared to proceeding with the announced acquisition of the target?

Put another way, are the interests of the listed acquirer's shareholders (in terms of their directors having maximum flexibility to respond to and engage with the proponent of an unsolicited competing proposal that may deliver the best outcome for those shareholders) to be preferred over the interests of the listed target's shareholders (in terms of their directors seeking to lock-up the listed acquirer by constraining its ability to abandon a transaction with the target and subsequently pursue a deal that may deliver a better outcome for the shareholders of the listed acquirer)? Based on the concerns raised by the Panel in the Westgold proceedings and well as proceedings relating to the Gascoyne Resources / Firefly proposed merger in 2021, the Panel appears to be leaning in the direction of giving primacy to the interests of the listed acquirer's shareholders, as outlined above. See Gascoyne Resources Limited [2021] ATP 10 and Gascoyne Resources Limited 02R [2021] ATP 11 where the Panel expressed some disquiet about the lack of utility of Gascoyne having a so-called fiduciary exception to its 'no-talk' restriction but with no corresponding termination right for Gascoyne if it concluded that the competing proposal was in fact a superior one to its merger proposal with Firefly. See our 2022 article M&A brides and grooms - lessons from the altar of the NSW Supreme Court where the New South Wales Supreme Court in Re Pendal Group Limited [2022] NSWSC 1575 clarified that, provided a merger agreement is suitably clear on a prospective acquirer's inability to walk away if it receives a superior proposal, a Court will be prepared to make an order directing an equivocating acquirer to specifically perform its obligations to consummate a merger.

On the other hand, in the Perpetual / Pendal proposed merger in 2022, the New South Wales Supreme Court was prepared to give primacy to the interests of the listed target's shareholders.

• Has the time now come for the Takeovers Panel to release market guidance on this point? Will any such guidance be of much practical assistance, noting the inherent difficulty with a 'one size fits all' approach on what is a complex and nuanced issue which will be largely driven by the factual circumstances?
• Similarly, does a reverse break fee that is potentially payable to the target by an acquirer that is itself listed on ASX need to be calibrated to 1% of the equity value of the acquirer (as opposed to 1% of the equity value of the target)? Is this necessary to ensure that the quantum of the reverse break fee is not so large as to act as an anti-competitive disincentive for a third party to make a competing offer for the ASX-listed acquirer? Based on the Panel's decision in the Westgold proceedings, the answer to this appears to be unresolved (especially in the context of merger of equals) and a future Panel may well need to consider such matters.

Standstills – practical tips for prospective acquirers

1. Ensure that the standstill provision is drafted clearly to say that it only applies if in fact the prospective acquirer actually receives any confidential (non-public) information from the target. Prospective acquirers may also wish to include a provision to the effect that the standstill restriction will cease to apply if the confidential (non-public) information ceases to be price sensitive or commercially sensitive or ceases to be confidential other than by reason of the recipient's own breach of the provision.
2. Seek to incorporate prescriptive exceptions for when the standstill will be released. These exceptions should be focused on scenarios where the target is 'in play' (e.g. a third party has proposed a scheme or recommended takeover bid involving a control transaction for the target). If this is resisted by the target, a possible compromise could be where the prospective acquirer has responded to the third party's proposal with an offer which is higher than that offered under the third party's proposal and which does not impose a greater level of conditionality than the third party's proposal. To address the fact scenario in the Westgold Panel decision, consider including an exception where the target has proposed a merger of equals or an analogous control transaction involving the acquisition of another entity (on the basis that this type of transaction could also result in the target being 'in play').
3. Resist a standstill period longer than 9 months.
4. Request for a 'most favoured' nation provision, where the target agrees that it will not agree to a standstill provision with any subsequent third party which is on less onerous terms that those with the prospective acquirer.

Standstills – practical tips for prospective targets

1. Resist any requirement that the standstill restriction will only apply if in fact the target actually releases any confidential (non-public) price sensitive or commercially sensitive information to the prospective acquirer. Argue that the standstill serves a broader purpose which is not tied to the release of information. Ultimately however, this is an outcome which is within the control of the target (e.g. the target can satisfy any such requirement by providing the prospective acquirer with confidential (non-public) price sensitive or commercially sensitive information).
2. Resist prescriptive exceptions for when the standstill will be released – generally, the ideal position is to only include two exceptions, namely (i) a change of control transaction that is recommended by the target board or (ii) otherwise with the target board's consent. No fetter or overlay should be allowed as to when that consent should be given by the target board (e.g. "not to be unreasonably withheld"), as it would potentially allow the prospective bidder to frustrate a subsequent proposal to which the target board has recommended in the discharge of its duties. Explain that the target will give its consent if the directors, acting consistently with their legal duties, decide based on the then prevailing circumstances, that it would advance the best interests of the target company and maximise shareholder value if the standstill was released.
3. Resist a standstill period shorter than 12 months.
4. Resist a 'most favoured' nation provision, especially at the start of any sale process as this would limit flexibility and negotiation 'wriggle room' when dealing with other subsequent third parties, who may require a looser standstill regime in exchange for putting forward a demonstrably superior proposal.

Reverse standstills

As a separate concept, 'disposal' or 'reverse' standstills are arrangements under which a party is restricted from disposing of their existing shareholding in the target (or the acquirer) for a set period. Disposal or reverse standstills have also featured in M&A transactions. For example, in 2013, Archer Daniels Midland Co (ADM) (the acquirer) undertook to GrainCorp (the target) that ADM would not dispose of its 19.85% stake in GrainCorp. Different considerations will apply in the context of disposal or reverse standstills.

A reverse standstill is like a voluntary escrow arrangement which gives the issuer a relevant interest in its own shares. ASIC has amended the Corporations Act to facilitate voluntary escrow arrangements under an IPO so that the relevant interests of an issuer, professional underwriter or lead manager arising from the escrow agreement is disregarded for the purposes of the takeover provisions, but not the substantial holding provisions (section 609B). ASIC has also provided guidance on the permissible terms of voluntary escrow arrangements that would otherwise fall outside section 609B – see Regulatory Guide 5 (Table 10).

Alberto Colla was a sitting member in the Metallica Minerals Limited Takeover Panel proceedings but the views set out in this article are expressed in his separate professional capacity only.

Please reach out at any time to discuss the use of standstills in control transactions for ASX listed targets.