Case: Re Arthur Yates and Co Ltd (2001) 36 ACSR 758
Outcome: discussed
Clauses 10.1 and 10.2 of the Implementation Agreement contain "no-shop" and "no-talk" provisions during the "exclusivity period", defined as the period from the date of the Implementation Agreement to the "sunset date" or the date when the agreement is earlier terminated. The sunset date is 31 May 2008. During that period, Hostworks is obliged to ensure that neither it nor its representatives directly or indirectly solicits or invites any discussions in relation to, or which may reasonably be expected to lead to, a competing transaction, that is defined as any expression of interest, proposal or offer by a third party to evaluate or enter into any transaction similar to the proposed scheme or by which a person would acquire an interest in 10% or more of the issued shares in Hostworks or engage in other like transactions. During the same period, under the "no-talk" provision, Hostworks is to ensure that neither it nor its representatives negotiates with any persons in relation to, or which might reasonably be expected to lead to, a competing transaction, even if it was not solicited or initiated by Hostworks in any way. It is also obliged under cl 10.3 to ensure that neither it nor any of its representatives in relation to a competing transaction, facilitates any other party undertaking due diligence investigations in relation to Hostworks, or makes any non-public information relating to Hostworks available to any such person. Because such clauses provoke obvious concerns as to the directors' potential breach of fiduciary duty or statutory obligations by entering into such agreements, cl 10.7 contains what is called "fiduciary and other carve-out" provisions. It provides that the restrictions in cl 10.2 and cl 10.3 do not apply to the extent that, in response to an approach by a third party, Hostworks informs the third party that it can only participate in negotiations or discussions with that third party if the third party proposes a competing transaction of a certain quality. If a competing transaction is then made which meets certain criteria, and if Hostworks' directors determine in good faith and acting reasonably that failing to respond to a bona fide competing transaction would "more likely than not" constitute a breach of their fiduciary or statutory obligations, they are not bound to comply with cl 10.2 or cl 10.3. Before that carve-out operates, the directors of Hostworks must be satisfied that the competing transaction is bona fide and in writing by a reputable entity, and they must have determined in good faith and acting reasonably (after independent advice) that the competing transaction is capable of being valued and completed, and is of a higher value to Hostworks and its shareholders than the proposed scheme. They must also have received written advice from Hostworks' external legal adviser that failing to respond to such a bona fide competing transaction would more likely than not constitute a breach of the independent directors' fiduciary duties or statutory obligations. In Re Arthur Yates and Co Ltd (2001) 36 ACSR 758, Santow J expressed the view that no-talk provisions should satisfy certain particular concerns, at [9] which Lindgren J in Re APN News Ltd 62 ACSR 400 at [29] described in the following terms: (a) it should be for no more than a reasonable period capable of precise ascertainment; (b) while it may differentiate between actively soliciting an alternative merger proposal and simply dealing with an unsolicited one, in either case the provision should be framed so that it is subject to the overriding obligation not to breach the directors' fiduciary duties or be otherwise unlawful; and (c) there should be adequate prominence given to the provision in the explanatory memorandum sent to shareholders. 34 I note that the Takeover Panel "Guidance Note: 7 Lock-up Devices" distinguishes between the anti-competitive effect of "no-talk" agreements and "no-shop" agreements. It identifies the former as inherently more anti-competitive at [7.30], and so considers it necessary for a "no-talk" agreement to contain an appropriate fiduciary carve out. It does not require generally that a "no-shop" agreement be similarly subject to a fiduciary carve out, because such a clause generally only prevents the target company from soliciting alternative or additional bidders or transactions, and does not prevent an interested party from bidding: at [7.31] and [7.7]. 35 As I have noted, the exclusivity period will expire by no later than 31 May 2008, and the "no-talk" provision in the Implementation Agreement is subject to a carve out recognising the directors' fiduciary obligations and statutory duties. The evidence also indicated that the directors of Hostworks (other than Mr Shore who did not participate in the decision-making processes at all) considered the interests of the members of Hostworks in agreeing to those provisions, including the procuring of legal advice about them.