Chapter 8 of Gilbert + Tobin’s 2022 Takeovers and Schemes Review (below) explores the use of implementation agreements and bid conditions in public mergers and acquisitions in 2021.

Implementation agreements

Implementation agreements continued to be a standard feature of agreed M&A transactions in 2021, present in all 53 recommended transactions.

Deal protection measures

In addition to standard obligations on the target board to recommend the M&A transaction to shareholders (in the absence of a superior proposal and, where applicable, subject to a favourable independent expert’s report), the usual suite of exclusivity provisions were present in the implementation agreements for the vast majority of agreed public M&A transactions, namely:

  • restrictions on the target soliciting competing proposals (i.e. no-shop) and talking to potential competing bidders unless approached with a potentially superior proposal (i.e. no-talk);
  • obligations on the target to notify the bidder if it receives a competing proposal; and
  • matching rights in favour of the bidder if a superior proposal emerges, giving the bidder an opportunity to match or better the superior proposal before the target board can change its recommendation. See below for commentary on the battle for Mainstream, where matching rights were in the spotlight.

While our Review generally tracks deal protection measures in binding scheme and takeover implementation agreements, there were also some important developments in deal protection measures during the due diligence phase prior to agreement of binding implementation agreements. This is discussed further in the section on the Takeovers Panel in Chapter 9 – The regulators of public mergers and acquisitions in 2021.

Frequent deal protection mechanisms 

Frequent deal protection measures”: 100% of recommended transactions in 2021 involved a “no shop” and a “no talk” clause

Break fees 

In 2021, there was an increase in the proportion of target boards who agreed to pay break fees in friendly M&A transactions on the occurrence of certain trigger events, including a change in recommendation by the target board or material breach of the implementation agreement by the target.

The percentage of agreed transactions which included break fees rose from 81% in 2020 to 91% in 2021, resulting in a return to levels observed in 2018 and 2019 (92% and 97%, respectively). As noted in last year’s Review, the fall in break fees in 2020 was attributable to a greater number of smaller deals with low premiums and certain deals where the bidder held a significant pre-bid stake.

Where recommended transactions in 2021 did not have a break fee it was for similar reasons to that seen in 2020, including the Templeton Global Growth Fund and Antipodes Global Investment Company acquisitions (both low-premium fund transactions).

For the most part, the quantum of break fees stayed within the Takeovers Panel’s 1% guidance (based on the target’s equity value at the offer price). The highest percentage was in Paragon Care’s $83.6 million acquisition of Quantum Health Group, which had a break fee and reverse break fee of $1 million (representing 1.2% of the target’s equity value). This relatively small departure from the Takeovers Panel’s guidance is consistent with similar examples from the past, where the break fee can be in excess of 1% of the target’s equity value in relatively lower value bids where it is clearly demonstrated that the bidder’s actual costs exceed the 1% threshold.

Reverse break fees were increasingly prominent in 2021, with 66% of agreed transactions valued at $50 million or more including a reverse break fee.

Reverse break fees

Reverse break fees”: 66% of agreed transactions in 2021 involved a reverse break fee, up from 39% of agreed transactions in 2020

Reverse break fee triggers included:

  • failure to satisfy conditions relating to regulatory or shareholder approvals required by the bidder; and
  • material breach of the implementation agreement by the bidder.

In all cases, the quantum of the reverse break fee was the same as the break fee payable by the target.

Bid conditions

A range of bid conditions were included in the off-market takeovers and schemes announced in 2021.

Frequency of conditions

Frequency of conditions”:  Across all transaction structures, material adverse change (MAC) conditions were present in only 81% of public mergers and acquisitions in 2021.

47% of all schemes of arrangement in 2021 were subject to a FIRB condition. By comparison, no takeovers were subject to this condition (down from 41% of takeovers in 2020, though reverting to the 0% seen in 2019). This shows that where foreign bidders are involved, schemes are the transaction structure of choice. In the one on-market takeover bid with a bidder that required FIRB approval (Somers’ bid for Thorn Group), Somers obtained FIRB approval seven days prior to lodging its bidder’s statement.

Material adverse change (MAC)

Across all transaction structures, MAC conditions were present in only 81% of public mergers and acquisitions, a continuation of the 2020 trend which saw the use of MAC conditions decrease from 98% in 2019 to 79% in 2020.

86% of all schemes of arrangement had MAC conditions, as did 80% of off-market takeovers (slightly up from 78% for schemes and down from 82% for off-market takeovers in 2020). Generally, it is not so much a question of whether there will be a MAC clause, but rather what the MAC clause will look like. Falls in EBITDA, revenue, or net assets of the target are common triggers for a MAC. There of course can be a wide range in the detail of the MAC triggers (and also the exceptions to such triggers, i.e. where certain events will not count for an assessment of whether the MAC has been triggered).

The two largest announced public M&A transactions of 2021 (being Block, Inc’s acquisition of Afterpay, and the IFM and GIP-led consortium’s acquisition of Sydney Airport) both included MAC conditions, although not in the typical form for Australian transactions:

  • for Block’s acquisition of Afterpay, the MAC was not tied to particular financial metrics, in line with US practice. On one view, this may be more difficult for a bidder to rely on, as courts often take a pro-target stance on the adverse changes required to trigger a general MAC; and
  • for the Sydney Airport acquisition, the MAC was limited to the occurrence of specific events relevant to the operation of the airport (eg the cancellation of key licences). This target-friendly position came out of the significant public negotiations on price and terms which played out before that transaction was agreed.

Minimum acceptance conditions

Of the 10 off-market takeover bids in 2021, seven (70%) initially had a minimum acceptance condition, a slight decrease from 82% in 2020 and a return to the level seen in 2019 (71%).

Generally, bidders leaned towards including a minimum acceptance condition with a 90% threshold (this was the case in five out of 10 off-market takeovers). In addition, Ramelius Resources’ acquisition of Apollo Consolidated initially had a 90% minimum acceptance condition, which was later removed by entry into an amended unconditional implementation agreement.

The remaining two off-market takeovers that included a minimum acceptance condition (other than JBS’ alternative bid for Huon Acquaculture, which is described below) were WAM Capital’s proposed acquisition of PM Capital Asian Opportunities Fund, and Westgold Resources’ withdrawn proposal to acquire Gascoyne Resources, each requiring that the bidder only achieve a 50.1% shareholding. Westgold’s bid was intriguing, as it was made while Gascoyne was in the process of acquiring Firefly Resources, and its bid was conditional on the scheme implementation deed between Gascoyne and Firefly (Firefly SID) being terminated. Despite the Gascoyne board determining that the final Westgold bid was superior for Gascoyne shareholders, by this point in time Firefly’s shareholders had approved the scheme and agreed to be acquired by Gascoyne, and Gascoyne, as bidder under the Firefly SID, had no termination rights. As such, Westgold ultimately withdrew its bid for Gascoyne.

Minimum acceptance tactics 

JBS’ acquisition of Huon Aquaculture (Huon) attracted significant media interest, in part because of one of its significant shareholders, Andrew Forrest’s investment vehicle, Tattarang Agrifood.

On 6 August 2021, JBS entered into a scheme implementation deed to acquire Huon. Five days later, Tattarang increased its stake in Huon from 7.3% to 18.5% while campaigning against JBS with allegations of a history of bribery and corruption and poor animal welfare standards.

Taking into account JBS’ 40% interest in Huon (which it was not able to vote), and typical voting turnout levels, Tattarang’s 18.5% could have effectively prevented the scheme vote from being passed.

In response, JBS entered into a new agreement with Huon, and subsequently made an off-market takeover bid for Huon which was for the same price, and was conditional on the scheme not going ahead. It also included a minimum acceptance condition with a 50.1% threshold (which of course could include JBS’ stake). This alternative bid is a good example of a strategy which bidders can use where a significant shareholder is threatening to vote against a scheme of arrangement. Ultimately, JBS and Tattarang made peace and the scheme proceeded, with JBS securing Tattarang’s vote by adopting Forrest’s “no pain, no fear” animal welfare mantra.

Unconditional bids  

Unconditional takeover bids continued to be relatively rare, with only four bids being unconditional from the outset. In each instance, the bid was considered hostile and rejected by the target’s board.

As mentioned above, Ramelius Resources amended its initial bid for Apollo Consolidated to make it unconditional, responding to the fact that its initial bid was countered by Gold Road Resources’ unconditional bid and Gold Road Resources taking a 19.99% stake in Apollo, rendering its 90% minimum acceptance condition practically impossible to achieve.

Deal highlight: Contest for Mainstream 

Mainstream Group Holdings Limited (MAI), an ASX-listed company which is primarily a fund administrator for fund managers, superannuation trustees and listed companies, found itself the object of attention from three different suitors (Vistra, SS&C and Apex), receiving 15 different bids over a period of 13 weeks.

Timeline for contest for control of Mainstream

9 March 2021

Vistra $1.20 and 19.99% relevant interest in MAI via entry into call option deed

9 March 2021 – 12 April 2021

MAI “Go-shop” period

11 April 2021

MAI and SS&C enter SID at $2.20

27 April 2021

MAI receives NBIO from an undisclosed third party for $2.20; SS&C $2.25

29 April 2021

Apex $2.35; SS&C $2.35

30 April 2021

Apex $2.55

6 May 2021

SS&C $2.56; Apex $2.60

14 May 2021

SS&C $2.60

18 May 2021

Apex $2.65

25 May 2021

SS&C $2.66

26 May 2021

Apex $2.75

1 June 2021

SS&C $2.76

10 June 2021

Apex $2.80

28 June 2021

MAI and Apex enter SID at $2.80

27 October 2021

MAI / Apex scheme implemented

In March 2021, MAI and Vistra entered into a scheme implementation deed (SID) under which it was proposed that Vistra would acquire MAI at a price of $1.20 per share. The SID, unusually, contained go-shop arrangements, providing MAI with the option to solicit competing bids for a period of one month. The go-shop arrangements were included against the backdrop of a relatively low premium for the Vistra offer (only 12%), and were presumably tolerable to Vistra on the basis it also took a call option from existing shareholders over 19.99% of MAI’s shares. This call option had an exercise price of $1.20, and was exercisable where equal or superior proposals for MAI arose. However, if a superior proposal was to emerge prior to the expiry of the go-shop period, Vistra was obliged to vote those shares in support of the superior proposal. Through this, if the go-shop period resulted in higher offers, Vistra stood to gain the economic benefit of the higher offer in respect of the shares the subject of the call option, but would not have any ability to frustrate the success of that superior proposal.

Prior to the expiry of the go-shop period on 11 April 2021, SS&C emerged with a superior bid at $2.20 per share, entering into a SID with MAI conditional on Vistra not exercising its matching right, MAI terminating the Vistra SID and MAI making payment of the Vistra break fee.

After execution of the SID between MAI and SS&C, a third bidder, Apex, emerged by submitting to MAI an NBIO at a higher offer. This triggered the matching rights of SS&C under the SID with MAI, which it exercised. A protracted competitive bidding competition between SS&C and Apex began, with Apex increasing its price in each round and SS&C exercising its matching rights in respect of each higher Apex bid. Ultimately, Apex’s bid of $2.80 just over two months later, representing a 133% premium from Vistra’s initial bid, was not matched by SS&C and MAI and Apex entered into a SID in June 2021. MAI delisted in October 2021.

Expertise Area