Break fee avoided when scheme of arrangement abandoned

(Or Q: When is the date of a general meeting not the date of a general meeting? A: When it is cancelled.)

A dispute about whether Symbion Health Limited (Symbion) was required to pay a $19.575 million break fee has been ruled on by the New South Wales Supreme Court.

The Court’s decision was really about how the break fee provisions of the October 2007 implementation agreement between Symbion and Healthscope should be construed.

The provisions said that Symbion would be obliged to pay a break fee to Healthscope if a competing proposal to the Healthscope proposal was announced prior to the date of the general meeting to approve the Healthscope proposal, and that competing proposal was completed within a year of the agreement.

On 8 November 2007 Primary Healthcare (Primary) had announced a takeover (which was subsequently completed). The general meeting to approve the Healthscope proposal was due to be held on 27 November 2007.

The general meeting was cancelled just before it was due to be held. This was because the Australian Tax Office advised that it would not issue the favourable Capital Gains Tax ruling which was a condition precedent to implementation of the Healthscope proposal.

Had Primary’s competing proposal been announced prior to the date of the general meeting – the meeting which had been cancelled?

Liability of Symbion to pay the break fee turned on whether the reference in the break fee trigger clause to the date of the general meeting meant:

• the date when the general meeting was scheduled to be held, or
• the date the meeting was held.

This was the question for the Court to consider both as a matter of pure language and in terms of what were the commercial objects of the parties.

The Court decided that Symbion and Healthscope did not intend the break fee to be payable if the general meeting did not occur and the Healthscope agreement was terminated before the general meeting was scheduled to be held.

The Court concluded that the interpretation of date of the general meeting being a reference to a date on which the meeting was actually held was consistent with the plain meaning of the words used, the use of words elsewhere in the agreement, the sensible and congruent operation of the provisions of the agreement and the commercial objects of the agreement.

Symbion was not liable to pay the break fee and was awarded costs.

What does this mean for break fees?

Firstly, what doesn’t it mean?

Most importantly this case does not mean any change to the ability of parties to use break fees to allocate the consequences of risk in a transaction. Break fees have been considered by the courts in the context of schemes of arrangement (for example Re Bolnisi Gold NL (No 2) [2007] FCA 2078) and the Takeovers Panel (for example Magna Pacific (Holdings) Limited 02 [2007] ATP 03). Nothing in the decision in Healthscope v Symbion reduces the ability of parties to enter into break fee arrangements consistent with those arrangements previously considered.

So what does it mean?

What it may lead deal-doers to think to themselves is:

• Have we thought about, and provided for, the contingencies?
• Have we thought about the contingency of the initial proposal being abandoned after a competing proposal has been announced and why that abandonment may occur?
• What are each of the conditions precedent to the implementation of the first proposal and how might nonsatisfaction play out?

For the disappointed deal-doer getting a break fee is significant:

• Have we thought about how we can demonstrate that our commercial intent (and that of the target company) is that the break fee is to be paid in all these contingencies?

What lawyers will take from this is:

• use care in drafting any trigger by reference to a ‘date of’ an event—say a meeting—which may not occur
• use care in consistency of language
• use care in achieving sensible and congruent operation of the terms of the agreement containing a break fee, and
• be unambiguous.

Even if the deal do-ers and lawyers have regulated their contingencies in unambiguous language, that won’t amount to a guarantee of enforceability of a break fee to the proponent of an abandoned deal. There may be other bases on which a target company’s commitment to pay a break fee may be successfully challenged, for instance breach of directors’ duties.

Finally, this case is another example that target companies and out-bid parties will take on seriously a dispute on whether a break fee is payable. No doubt there are more fine questions of construction, commercial objects and directors’ duties to which we can look forward.

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