Chapter 8 of the Gilbert + Tobin Acquisitions and Programs Review in 2021 (see below) examines the use of Implementation Agreements and Offer Terms in public mergers and acquisitions in 2020.
Implementation agreements were also a standard feature of agreed M&A transactions in 2020, which were included in all 31 recommended transactions.
While the form of the Implementation Agreements was largely in line with standard practice, the COVID-19 pandemic resulted in a greater focus on certain terms, particularly the Conditions for Material Adverse Change (MAC).
MAC Terms and the COVID-19 Pandemic
The sudden and dramatic change in business and market conditions caused by the COVID-19 pandemic (and government responses to it) has brought MAC conditions to the fore.
MAC terms triggered in 2020
MAC terms were enforced in a series of announced transactions in April / May 2020.
The largest transaction in which a MAC condition was asserted was the takeover of Metlifecare listed on the ASX by EQT according to the scheme (see below). That deal ultimately proceeded on revised terms, confirming conventional wisdom that if there is a significant change in circumstances (but a deal still makes sense), a MAC term may be most useful as a starting point for renegotiation.
However, the outcome of the Pioneer Credit and CML Group’s implementation agreements, both of which ended with reluctant approval of the target, shows that it can be practically difficult for a target to enter a scheme even when there is doubt as to whether a MAC condition has been triggered where the bidder no longer wishes to proceed and claims that there was a MAC.
* 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 substantial reduction in net assets and / or net income. The effects of changes in general economic and market conditions were excluded, unless there was a disproportionate impact on the target audience. No pause fee was payable if the transaction was terminated due to a MAC.
In April 2020, EQT claimed that the change in circumstances caused by the COVID-19 pandemic triggered the MAC condition. This has been denied by Metlifecare, also on the grounds that the pandemic did not have a disproportionate impact on Metlifecare. Metlifecare took several avenues to require EQT to meet its obligations under the Implementing Agreement, including initiating legal proceedings.
On July 10, 2020, it was announced that the parties had entered into a new implementation agreement for a revised recommended transaction valued at $ 1.2 billion with no MAC condition.
Effects on the wording of the MAC terms in implementation agreements
Experience with the COVID-19 pandemic in transactions in 2020 has already led to an increased focus on the wording of the MAC terms. In particular, the joint spin-offs, which provide for the effects of general economic and market conditions to be disregarded when assessing whether a MAC has occurred, will be examined more closely.
We also anticipate spending more time reviewing the Target’s commitments to management in the normal course between the signing of the Implementation Agreement and the closing of the transaction. The pandemic has shown that circumstances can arise in which it is impossible to conduct a normal business that is compatible with previous practice. With some bidders claiming a material breach of these provisions in 2020 (which would have created an opportunity to terminate the Implementation Agreement), we assume that the Objectives are trying to ensure that there are reasonable exemptions for circumstances beyond our control target (e.g. compliance) with laws including blocking laws).
Take protective measures
In addition to the standard obligations of the target body to recommend the transaction to the shareholders (in the absence of a higher-level proposal and possibly subject to a favorable independent expert opinion), the implementation agreements in 2020 continued to contain the usual exclusivity protection in the vast majority of the agreed transactions in the EU, namely:
- Limitations on the aim of soliciting competing proposals (ie not doing business) and speaking to potential competing bidders unless there is a potentially superior proposal (ie no conversation);
- Commitment to the aim to notify the bidder if it receives a competing proposal; and
- Matching rights in favor of the bidder if there is a higher-level proposal, which gives the bidder the opportunity to conform to the higher-level proposal or to improve it before the target body can change its recommendation.
In 2020, the proportion of target bodies that agreed to pay break fees for recommended transactions when the usual triggering events occurred (including a change in recommendation by the target body or a material breach of the implementation agreement by the target) decreased.
The percentage of agreed transactions that included break fees decreased from 97% of transactions in 2019 to 81% of transactions in 2020. At least part of the decrease is due to the special circumstances of certain deals in 2020, break fee in WPP plc’s offering for 38.5% of WPP AUNZ that it did not own, or in two smaller agreed deals (amaysim / WAM Capital and Australian Leaders Fund / Watermark Funds), which had relatively low premiums in their mid-teens.
The break fee level remained largely within the takeover panel’s stipulations of 1% of the target’s equity value. SSR Mining’s acquisition of Alacer Gold was the only exception and included a break fee and a reverse break fee of $ 108 million (4% of the target’s equity value). Although Alacer Gold is listed on the ASX, it is a Canadian company, so the transaction did not come under the jurisdiction of the acquisition panel or under review by the Australian courts.
Reverse break fees continued to decline: 39% of agreed transactions valued at over $ 50 million, including a reverse break fee in 2020. That number declined 49% and 54%, respectively, for 2019 and 2018 .
Reverse break fee triggers include:
- Failure to meet the conditions required by the bidder in relation to regulatory or shareholder approvals; and
- material breach by the bidder of the implementation agreement.
In almost all cases, the amount of the reverse break fee was the same as the break fee payable by the target. The exception was the successful takeover of DWS by HCL Australia Services, where the reverse break fee was 50% of the break fee payable by the target.
The usual terms and conditions of the offer were included in the off-market takeovers and programs announced last year.
Significant adverse change
83% of all off-market takeovers and 78% of programs had MAC terms (down from 86% for off-market takeovers and 100% for programs compared to 2019). MAC conditions were included in 54% of the enemy bids.
The decline in MAC terms in systems can be attributed in part to the specific circumstances of certain transactions, including the proposed acquisition of the minority interests in WPP AUNZ by WPP plc through the system and the newly negotiated system for the acquisition of Metlifecare by EQT without MAC terms. On some transactions during the year, the lack of a MAC condition was highlighted from the start to appeal to shareholders as one of the virtues of the transaction during uncertain times. In one of these transactions (Vault Intelligence / Damstra Holdings), although there was no general MAC condition, there were specific more restricted conditions regarding circumstances that would have had a material adverse effect on the target (no business interruption from cyber) incidents and that certain material ones Contracts have not been terminated).
The triggers for MACs typically include a decrease in EBITDA and net worth, although other triggers (including a decrease in sales and an increase in net debt) have also been used.
Minimum acceptance conditions
82% of all off-market takeover bids had a minimum acceptance requirement, up 71% in 2019. Four off-market takeover bids had a minimum acceptance requirement of 90%, while 10 bids required the bidder to only meet 50.1% of the target .
Unconditional takeover bids in the market continued to be relatively uncommon. Only two were announced in 2020 (up from one in 2019). In both cases, there were special circumstances in which the offer was unconditional:
- The planned takeover of Cardinal Resources by Nord Gold was unconditional from the start, as the bidder had already received approval to continue the transaction. This was in contrast to Shandong Gold’s highly conditional competitive offer (which required the FIRB and a number of other foreign regulatory approvals, although 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), in which the bidder already held 31% of the shares and was the target’s largest shareholder. FIRB approval was obtained prior to the announcement of the offer in May 2020 so that shareholders could receive consideration two business days after acceptance (which increases the attractiveness of the offer).