Panel endorses bidder standstills

In the recent decision of International All Sports Limited, the Takeovers Panel considered for the first time whether standstill agreements were unacceptable as a matter of policy and, if not, in what situations could the terms go beyond the acceptable boundaries.

Potential bidders commonly enter into standstill arrangements with companies which are considering either a change of control transaction or the sale of significant operations. The standstill is often incorporated into a confidentiality agreement. While terms vary, at the heart is an undertaking not to acquire, or to offer to acquire, a relevant interest (or similar economic interest) in the shares of the target company without the target company’s consent. The duration may extend for a period beyond the relevant sale process. The rationales for standstills centre around managing an orderly sale process and giving companies comfort about disclosing confidential or sensitive information to prospective bidders.

The Panel upheld the standstill in question, but noted that it might intervene in other arrangements if the duration is unreasonable having regard to the information disclosed, or if all of the information disclosed to the bidder has ceased to be either price-sensitive or commercially sensitive.

Background

After receiving a number of unsolicited approaches, International All Sports Limited (IAS) established a formal sale process in late 2007. Centrebet, and several other parties, participated in the process, and a number of proposals were made to the IAS board. However, none of these was considered acceptable. Centrebet withdrew from the process in April 2008, and IAS subsequently called off the process in November 2008.

Like other parties in the process, Centrebet had provided IAS with a confidentiality and standstill undertaking prior to being provided with information about IAS. Under the standstill, Centrebet undertook not to acquire or dispose of any shares of IAS, nor to procure or induce any other person to do so, for a period of 12 months from the date of its formal withdrawal from the sale process, unless it obtained the prior written approval of IAS.

In early February 2009, 10 months after withdrawing from the sale process, Centrebet announced a two-tiered cash offer for the shares in IAS, subject to a number of conditions, including that it be released from its confidentiality and standstill obligations—either by IAS agreeing to this, or by the Panel making orders to this effect.

Centrebet launched a Panel application on the same day as it announced its bid.

Panel application

Centrebet applied to the Panel for a declaration of unacceptable circumstances in relation to its standstill obligations, arguing that:

• the standstill was an anti-competitive lock-up arrangement without proper legal or commercial justification (and hence was a frustrating action tantamount to a poison pill)
• the standstill, and IAS’s refusal to release Centrebet from it, excluded Centrebet from the market for IAS shares and denied IAS shareholders the opportunity of participating in the proposed bid without any commercial justification. This contravened sections 602(a) and (c) of the Corporations Act 2001 (Cth) by inhibiting an efficient, competitive and informed market for IAS shares and denying shareholders a reasonable and equal opportunity, and
• the standstill arrangements should have been disclosed to the market, because non-disclosure indicated an intention by the IAS board to render IAS ‘takeover proof’ in the absence of a board recommendation.

The Panel decision

Both in the initial decision and subsequent review, the Panel declined to make a declaration of unacceptable circumstances. In doing so, it noted the following key points:

• Standstills are useful in facilitating sale processes as they protect companies and officers against insider trading and enable sensitive information to be provided to potential purchasers as part of the due diligence process. There is a public interest in enforcing standstills as they promote the exchange of information and the maximisation of value for shareholders.
• Subject to compliance with their duties, it is for target directors to decide what information to release, and what conditions to attach to that release, including standstills.
• The duration of a standstill needs to be commercially justifiable, and the nature of the information being disclosed will be relevant here. The Panel suggested that a standstill period extending until 6–12 months after a relevant time (that is, after a bidder withdrawing from a sale process) would be consistent with market practice.
  
  (Freehills comment: in our experience, such a lengthy standstill period (ie potentially a six month sale process plus a further 12 months) is beyond what target companies may reasonably expect to obtain in the current market—though of course this depends on the parties’ bargaining power in the particular situation.)
  
• The Panel concluded that some of the information disclosed by IAS (particularly management forecasts) remained price-sensitive at the time of Centrebet’s bid, and hence it was not difficult for the Panel to conclude that continued enforcement of the standstill by IAS did not amount to unacceptable circumstances. On review, the Panel also noted that if the information held by Centrebet had merely been commercially sensitive (e.g. customer lists) rather than price-sensitive, it would have reached the same conclusion. However, if none of the information held by a bidder remained either price-sensitive or commercially sensitive at the time of making a bid, then it may be difficult for the target company to continue to enforce the standstill.

More information

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