TAKEOVERS + SCHEMES REVIEW 2021 | Chapter 8
Implementation agreements continued to be a standard feature of agreed M&A transactions in 2020, present in all 31 recommended transactions.
While the form of implementation agreements was largely in line with usual practice, the COVID-19 pandemic led to increased focus on certain terms, in particular material adverse change (MAC) conditions.
MAC conditions and the COVID-19 pandemic
The sudden and dramatic change in business and market conditions brought about by the COVID-19 pandemic (and the responses of governments to it) put MAC conditions in the spotlight.
MAC conditions triggered in 2020
MAC conditions were invoked in a number of announced transactions in April / May 2020.
The largest transaction where a MAC condition was invoked was EQT’s acquisition of ASX-listed Metlifecare by scheme (see further below). That deal ultimately proceeded on revised terms, giving credence to the conventional wisdom that, where there is a material change in circumstances (but a deal still makes sense), a MAC condition may be most useful as a starting point for renegotiation.
That said, the outcome for the Pioneer Credit and CML Group implementation agreements, which were both terminated with reluctant agreement of the target, demonstrate that even if there is doubt about whether a MAC condition has been triggered, it can be practically challenging for a target to implement a scheme where the bidder no longer wishes to proceed and is alleging that there has been a MAC.
Australian and New Zealand deals where MAC conditions were invoked in 2020
Renegotiated under threats of litigation
|CML Group||Affinity owned Scottish Pacfic Group||Scheme||$130 million||Terminated by mutual agreement after dispute, with bidder agreeing to pay $1 million of target costs|
|Abano Healthcare*||BGH Capital||Scheme||$129 million||
Renegotiated with lower offer price and modified consideration structure
|Pioneer Credit*||Carlyle Group||Scheme||$120 million||
Terminated by target after dispute
|Liquefied Natural Gas||LNG-9||Takeover (off-market)||$115 million||Withdrawn|
*These transactions were announced in 2019
Metlifecare – EQT scheme 2.0
The acquisition of Metlifecare by EQT was first announced in December 2019. The implementation agreement had a standard MAC condition, triggered by a material reduction in net assets and / or net profit. The impact of changes relating to general economic and market conditions were excluded, unless there was a disproportionate effect on the target group. No break fee was payable if the transaction was terminated due to a MAC.
In April 2020, EQT asserted that the change in circumstances caused by the COVID-19 pandemic had triggered the MAC condition. This was denied by Metlifecare, including on the basis that the pandemic had not had a disproportionate impact on Metlifecare. Metlifecare pursued various ways to require EQT to fulfil its obligations under the implementation agreement, including initiating court proceedings.
On 10 July 2020, it was announced that the parties had entered into a new implementation agreement, without a MAC condition, for a revised recommended transaction at a value of $1.2 billion.
Implications for wording of MAC conditions in implementation agreements
The experience of the COVID-19 pandemic on transactions in 2020 has already led to increased focus on the wording of MAC conditions. In particular, the common carve-outs which provide that the impact of general economic and market conditions will be disregarded in assessing whether a MAC has occurred are being more closely scrutinised.
We also expect that greater time will be spent considering the obligations on the target in relation to conduct of its business in the ordinary course between signing the implementation agreement and transaction completion. The pandemic demonstrated that circumstances can arise where conducting a business in the ordinary course consistent with past practice is impossible. As some bidders in 2020 alleged a material breach of these provisions (which would have given rise to an ability to terminate the implementation agreement), we expect that targets will want to ensure that there are appropriate exceptions for circumstances beyond the target’s control (eg compliance with laws including lockdown laws).
Deal protection measures
In addition to standard obligations on the target board to recommend the transaction to shareholders (in the absence of a superior proposal and, where applicable, subject to a favourable independent expert’s report), implementation agreements in 2020 continued to include the usual exclusivity protections in the vast majority of agreed transactions, namely:
- restrictions on the target soliciting competing proposals (ie no-shop) and talking to potential competing bidders unless approached with a potentially superior proposal (ie 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.
In 2020, there was a reduction in the proportion of target boards who agreed to pay break fees in recommended transactions on the occurrence of the usual 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 fell from 97% of transactions in 2019 to 81% of transactions in 2020. At least part of the decline can be attributed to the particular circumstances of certain deals in 2020. For instance, there was no break fee in WPP plc’s bid for the 38.5% of WPP AUNZ which it did not already own, or in two smaller agreed deals (amaysim / WAM Capital and Australian Leaders Fund / Watermark Funds) which had relatively low premiums in the mid-teens.
For the most part, the quantum of break fees stayed within the Takeovers Panel’s guidance of 1% of the target’s equity value. The acquisition of Alacer Gold by SSR Mining was the only exception, and featured a break fee and reverse break fee of $108 million (4% of the target’s equity value). However, although ASX-listed, Alacer Gold is a Canadian company and so the transaction was not within the Takeover Panel’s jurisdiction or considered by the Australian courts.
There was a further decline in reverse break fees, with 39% of agreed transactions valued over $50 million including a reverse break fee in 2020. This figure was down on 49% and 54% for 2019 and 2018, respectively.
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 nearly all cases, the quantum of the reverse break fee was the same as the break fee payable by the target. The exception was the successful acquisition of DWS by HCL Australia Services, where the reverse break fee was 50% of the break fee payable by the target.
The usual range of bid conditions were included in off-market takeovers and schemes announced last year.
Material adverse change
83% of all off-market takeovers, and 78% of schemes, had MAC conditions (down from 86% for off-market takeovers and 100% for schemes compared to 2019). MAC conditions featured in 54% of hostile bids.
The decline in MAC conditions in schemes can in part be attributed to the particular circumstances of certain transactions, including WPP plc’s proposed acquisition of the minorities in WPP AUNZ by scheme and the renegotiated scheme for the acquisition of Metlifecare by EQT, which did not have MAC conditions. In some transactions later in the year, the lack of a MAC condition from the outset was highlighted to target shareholders as one of the virtues of the transaction in uncertain times. In one of these transactions (being Vault Intelligence / Damstra Holdings), although there was no general MAC condition, there were specific more limited conditions related to circumstances which would have had a material adverse effect on the target (an absence of business disruption from cyber incidents and that certain material contracts had not been terminated).
The triggers for MACs typically include reductions in EBITDA and net assets, although other triggers (including reductions in revenue and increases in net indebtedness) were also used.
Minimum acceptance conditions
82% of all off-market takeover bids had a minimum acceptance condition, an increase from 71% in 2019. Four off-market takeover bids had a 90% minimum acceptance condition whereas 10 bids required that the bidder achieve only 50.1% of the target.
Unconditional on-market takeover bids continued to be relatively unusual, with only two announced in 2020 (up from one in 2019). In both cases, there were specific circumstances for the bid being unconditional:
- Nord Gold’s proposed acquisition of Cardinal Resources was unconditional from the outset as the bidder had already received approvals to proceed with the transaction. This was in contrast to the highly conditional competitive bid by Shandong Gold (which required FIRB and a number of other foreign regulatory approvals, although was ultimately recommended by the Cardinal Resources board).
- The acquisition of Stanmore Coal by Golden Investments Australia (a company owned by Golden Energy and Resources and Ascend Global Investment Fund SPC), where the bidder had a pre-existing shareholding of 31% and was the largest shareholder of the target. FIRB approval was obtained prior to the bid being announced in May 2020, allowing shareholders to receive consideration two business days after acceptance (enhancing the appeal of the offer).