Deal Talk EP7: Standstills, strategy and Takeovers Panel scrutiny

In this episode of Defining Matters, partners Kam Jamshidi and Simon Walker unpack one of the most important and frequently negotiated provisions in public M&A transactions: standstills.

Using notable Takeovers Panel decisions, including Diatreme/Metallica and International All Sports, Kam and Simon explore the commercial and legal tensions that arise between bidders seeking flexibility and targets seeking protection.

Key topics include:

• The role and purpose of standstills in public M&A
• How bidders and targets approach key negotiating points
• The importance of due diligence access and information-sharing
• What recent Takeovers Panel decisions mean for dealmakers
• Why parties should not expect the Panel to rewrite a bargain once it has been struck

A great discussion on the negotiation, strategy and risk considerations shaping today's public M&A transactions.

Transcript

Welcome And Why Standstills Matter

SPEAKER_01 0:09

Well, welcome everybody to another podcast of the Deal Talk series from HSF Kramer. Today I'm joined by Simon Walker. Welcome Simon.

SPEAKER_00 0:18

Thanks, Cam. Great to be here with you.

SPEAKER_01 0:19

Now you're our latest minted MA partner. Yes. Public MA specialist, but you can do it all.

SPEAKER_00 0:25

Yes, that's right. So thanks for letting me in the club. That's very good of you. And uh yeah, great to be here today with you talking about um standstills.

SPEAKER_01 0:32

Well, you're always welcome, a high caliber candidate like you. Anyway, enough about us. So standstills. Simon, the Ooh Media situation, four bidders down to three. Yep. Hotly contested standstill, I'm sure. It got us thinking, what would you be putting in if you're a bidder or a target? But first things first, at a foundational level, maybe just build up the knowledge on standstills.

SPEAKER_00 0:56

Sure. A bidder will want access to non-public information of the target, but only on the condition, of course, from the target's perspective, that the bidder agrees to a standstill. And really, what do we mean when we say that? We mean it's an agreement not to acquire shares for a fixed period of

What A Standstill Actually Is

SPEAKER_00 1:10

time. From a target's perspective, the concern's pretty straightforward. If you're allowing another company access to your non-public information, really you're doing it on a friendly basis to do a friendly transaction. What you don't want is for the bidder to turn around later on, change the terms of the deal, potentially go hostile and use your own information against you to force a transaction that you haven't agreed to. So you can see from a target's perspective, of course, it's a pretty important setting. For the bidder, by contrast, of course, they're concerned to uh you know ensure that they've got as much flexibility as possible and they're not prevented from you know pursuing a transaction if circumstances change and maybe things don't pan out in the way that they thought it would. So it's a tension that arises early on in the process. And you know, of course, 99 times out of a hundred, it'll get worked through, but there's a few issues you have to consider as you're doing that.

SPEAKER_01 1:56

Yeah, absolutely. And so for a target, it's really I don't want my bidder to go and buy a blocking stake or even go hostile and undermine the value lever that's available through a recommendation. That's really the the crux of what the target's trying to achieve. For a bidder, they obviously want that flexibility, maximum flexibility, in particular in a competitive situation. So we'll come to that in a minute. Let's talk duration. What's market standard, do you think, Simon, in in this market?

SPEAKER_00 2:22

Look, it it does vary. Six usually at the bare minimum, eighteen months at the outside, and sort of you can land anywhere between that. 12 is a pretty reasonable period.

SPEAKER_01 2:30

And we'll talk about a situation where there was a two-year standstill that went to the panel momentarily. I think that's right, that is the market standard. Now, you raise the point, Market. What's interesting is the terms of these standstills are rarely made public. That's right. So there's no standardization like there is in the scheme implementation deeds. Correct. These are under the cloak of darkness, and it it makes negotiating them more challenging for participants, unless, of course, you've seen a lot of these, as we have, Simon. In addition, you see a lot of variability in the drafting of the terms, and

Target Versus Bidder Incentives

SPEAKER_01 3:05

the drafting is hypersensitive. So the most sensitive aspect, I think, Simon, is what are the exceptions? When is a bit a release from its standstill to go out there and act and maybe just talk a little bit about that?

SPEAKER_00 3:17

Yeah, well the the key one, of course, is any transaction that's ultimately recommended by the target board or or agreed to by the target board is not going to be restricted. So that's really sort of point number one. If they come through the front door, the board, the target board controls it. Makes sense. It makes sense. The next one that you often see is where a competing proposal arises and a bidder wants to be in a position to compete, they don't want to be hamstrung and it's superior to their offer. Well then, yes, often you'll see a standstill fall away in that situation. From the target's perspective, though, you do actually want to make sure that that's not a totally unfettered right of the bidder at that point to put forward an offer. Sometimes you'll see that kind of restriction subject to the bidder making a competing offer that is subject only to a 50.1% minimum acceptance condition that's unwaivable. That way you're effectively saying to the bidder, look, you can compete, but we want shareholders ultimately to decide. If you get the support of 50% of the shareholders, then you can proceed.

SPEAKER_01 4:13

Yeah, that's spot on. I mean, look, acting for a bidder, I'd probably start my negotiations by saying, well, why should that only arise when there's a competing bid? I should be able to put an offer to shareholders with a 50.1% condition at any stage of the process. And I think uh a big reason why a target would push back on that is again using the recommendation as a value lever, effectively saying, well, if there's no competing proposal, you've got to come to me and we've got to negotiate, and I'll only let you go if

Typical Duration And Hidden Terms

SPEAKER_01 4:45

it's if it's agreed. So that's really interesting. The US practice on standstills, you we looked at this in the Newcrest Newmont situation very, very closely. I think that it's safe to say, first of all, their market is much more transparent.

SPEAKER_00 4:59

It is.

SPEAKER_01 4:59

The terms are often That's right.

SPEAKER_00 5:01

So you find that the terms of the standstills and US agreements will appear in detail in the disclosure documents that are sent to shareholders, and as a result of that, of course, as you'd expect, there's convergence. So there's not a lot of variability between their standstill terms and they are fairly market standard. The term, of course, is usually negotiated, as you'd expect. So some variation there, but otherwise, you know, a relatively standard set of restrictions and exceptions.

SPEAKER_01 5:24

And I think the two other feats, first of all, on term, quite often longer dated terms than what we see here in Australia. So that's a tick for us in terms of facilitating M ⁇ A activity, good for the local market. Not sure why the Americans are lagging on that front. The other interesting bit is what's called a don't ask, don't give clause. I think to summarize this, and I think it's a really interesting theoretical point. If a bidder approaches the target and says, release me from my standstill, there is there's a director's duties question. Is that in the best interest of the company to actually release the bidder?

SPEAKER_00 6:05

Yes.

SPEAKER_01 6:05

Puts the target board in a difficult situation. So I think what targets were putting into these agreements were don't ask, don't give. It effectively says, don't put me in a bad situation where the board has to carefully consider its fiduciary duty as to whether to release or not.

SPEAKER_00 6:21

Yeah, that's right. So in other words, the bidders effectively pre-agreeing in that situation that they're never going to ask for the stance still to be waived, no matter what happens.

SPEAKER_01 6:29

Yes. And we haven't seen that creep into the local market, but it does raise a really interesting theoretical question, I think.

SPEAKER_00 6:35

It does. And you know, I I think for our you know particular policy settings and the presence of the takeovers panel, I think it would be probably quite a brave target company to ask for that, you know, not knowing how it's going to be treated in that different regulatory setting.

SPEAKER_01 6:47

I'm glad you brought the takeovers panel up. There's been a line of cases on standstills. We acted on the most recent one, which is

Exceptions And The 50.1% Lever

SPEAKER_01 6:55

the Metallica diatreme situation. But you know, the the core question of for the for the panel is what is its role when a bidder may go to the panel and say, I'm subject to a standstill, I want to make an offer. This is part of an efficient, informed, and competitive market. So release me and let me let me actually make the offer I want to make. And you know, wh why don't you go back to international all sports where really the substance of this question first came into focus?

SPEAKER_00 7:31

Yeah, so international all sports, famous panel case from back in 2009, and it sort of established, you know, standstills as a concept, they're not objectionable in principle, and they serve a valuable purpose in protecting the confidential information of targets and and enabling um you know an efficient, competitive, and informed market. So point one is that, you know, as a concept, they're not objectionable for the panel. Point two, though, as you say, there can be circumstances in which it is unacceptable when a bidder asks to be released and the target refuses to release them. Again, that is seemed to, in some cases, you know, run contrary to the idea of having a competitive market for a control of a company if a bidder is locked up in that way. However, in the international all sport case, what they did say is that a standstill of six to twelve months is consistent with with market practice and is commercially justifiable. So if all you're doing is asking for release on the basis that you've been locked up for six to twelve months, then a target's justified in in refusing that request. You've got to have some other sort of special circumstances present.

SPEAKER_01 8:29

And a really interesting point in that matter CENIBET made a hostile takeover bid conditional on the standstill falling away, effectively conditional on the the panel releasing Cenabet from the standstill. It's a good little point for bidders, I reckon, because often people will say, Well, I'm subject to a standstill, I can't make a hostile bid. Actually, you can make a bid, it just has to be conditional on the release from the standstill. Yes. And what I think that can do is build a lot of pressure on a target, especially if the acceptance is arising. So I thought that was a neat little way to navigate the

US Transparency And Dont Ask Dont Give

SPEAKER_01 9:10

standstill. That also came up in our diatreme Metallica situation as well.

SPEAKER_00 9:14

Trevor Burrus, Jr.: So in that case, I mean the the additional question that the panel had to consider is in the context of the standstill, what happens if confidential information is actually never disclosed? Because that is ultimately at the heart of the bargain. You're exchanging information for the restrictions. And so if no information flows, can the restrictions still stand?

SPEAKER_01 9:31

Aaron Powell I mean what's fascinating, Simon, is if a target wanted to be difficult, they could encourage a bidder and say, look, we're going to give you access to due diligence, give us this standstill, and then underwhelm on the information. And what they've received is they've locked the bidder down and really can tighten the screws on negotiation. We see that dynamic very early. People have cottoned onto it. And in fact, quite often a bidder will say, Well, show me an index, give me a list of what you're going to give me. I need to be clear that if I'm going to give you a standstill target, I'm going to get substantive information back.

SPEAKER_00 10:09

Yeah, and you sort of end up in this cascading situation where you have a bidder that says, Okay, show me the index of the data room before I agree to the standstill. Okay, I've got a list of documents. How do I know that the names of these documents actually reflect the content? Okay. You know, do you get some sort of warranty that the content reflects the names? Even as far as saying sometimes you'll have a bidder that wants an actual early look in the data room itself. I want a representative for go and rustle around for you know a few hours to make sure that what's in there is legitimately what we can expect. So practically speaking, there's a few different ways that we can deal with that, you know, in in in the NDA agreement in which the standstill's often contained. But I think sort of previously in the past you might have found parties were a little bit more trusting, maybe, than you know, entering into these arrangements without sort of verifying what was sitting behind them. These days, I think, you know, a well-advised bidder wouldn't sign a standstill unless they had some kind of comfort that the information that they're expecting to see in the data room is actually there.

SPEAKER_01 11:01

Yeah, absolutely. Now I want to come back to Diatreme Metallica, because I think it's a very interesting matter. Just broad brush, the facts were the parties, Metallica, the target, diatrime, the acquirer, the parties that entered into a mutual standstill for two years. So I'd say outside of market practice. Yes. Two years. And as you say, Simon, um, Metallica never actually gave any information to Diatreme. And so really, Diatreme's given this standstill and got not much back in return. Some negotiations ensue, and Diatreme ultimately makes a hostile takeover bid, notwithstanding the standstill, and again subject to that condition that it was conditional on the standstill being released, effectively the panel making orders or the parties agreeing release. So Diatrime and Metallica entered into discussions about how to navigate the standstill in line of the condition. And where they got to is effectively if by a certain period, I think it was about a month, there was no superior proposal, they'd be released. Yes.

Takeovers Panel View And Conditional Bids

SPEAKER_01 12:05

If there was a superior proposal, it got a little bit murkier. Effectively, there was an exception, the the standstill would be terminated if they got a shareholder approval, effectively. That creates a lot of uncertainty for Diatream and also makes it very hard to build momentum into their takeover bid. So they went to the panel and effectively said, panel, we should be released and we would the conditions should be satisfied. I think they had a big chunk of acceptances. I want to say it was of the order of 40 or 50 percent. So, you know, it w it was sort of a position of power going to the panel and a position of quite reasonable to go to the panel asking for the request.

SPEAKER_00 12:47

What did the panel find, Simon? So really kind of two key findings, Cam. The first one is that it actually didn't matter that no confidential information had actually flowed. So it was found that well-advised, you know, commercially sophisticated parties, that that was fine. The fact that you know the commercial inf the confidential information hadn't actually been provided, that didn't prevent the standstill from operating. The second point, though, and and so perhaps more importantly, was that the way that the way that the standstill had been dealt with as a result of that back and forth was that it had a really uncertain end period. So ultimately, the panel declined to make a declaration of unacceptable circumstances on Dietriam's application. But what they did do is they said, well, you've got to have a you know a an actual sort of definite endpoint for the standstill so people know, you know, okay, that's the point at which it will ultimately fall away.

SPEAKER_01 13:32

Yeah. So basically the panel showed the parties the writing on the wall and said you better agree a more a more certain end point for the standstill. Yeah.

SPEAKER_00 13:40

So which was seven days after a certain specified timeline for a superior proposal to emerge. Yeah.

SPEAKER_01 13:45

The takeaway for me from both international all sports and the dietary metallica situation is parties should not be sitting there thinking that the panel is going to save them if they've signed up to a standstill. I think the panel is generally going to say sophisticated and well-advised parties enter into a standstill where there's a quid pro quo, the receipt of confidential information, provided the terms are sensible, the panel's going to expect the parties to hold to the standstill they've struck. That's right. I think that's the big takeaway.

SPEAKER_00 14:17

Yeah, if you if you're a well-advised bidder, I don't think the panel's going to rescue you just because the panel's accepted that standstills are justifiable from both a legal and commercial perspective. However, you know, if there are sort of uncertain aspects to them, that can be where you know the panel will step in and effectively bridge the gap between what the parties thought might have happened and and actually how things have played out in practice. So, you know, I think the overarching message from the panel is is one of restraint. Prima facie, they're not going to be unacceptable, but you know, you shouldn't seek to rely on the panel to rewrite the terms of them if things don't work out.

SPEAKER_01 14:51

I had a question in my mind, Simon, is that the right setting for the takeovers panel? And I'll go out on the limb and say at the end of the day, chapter six is designed to facilitate changes in control where the shareholders uh determine that it's reasonable. These standstills are a constraint or can be used as a fetter by the target. But in circumstances where an offer is unable to be made to shareholders, perhaps the panel has a role to step in and effectively allow a a potential change of control or at least the offer of it to shareholders. That's one side of it. On the other, I can see the panel saying this is for the parties to negotiate up front with a view to how things may transpire. And they do not want to be put in a position of having to be an arbiter of whether terms are sensible and have been bargained appropriately. So I get both sides of it, but I can also see this argument that, well, this is an offer potentially beneficial to shareholders, provided the right guardrails are in place, i.e. a 50.1% acceptance condition, then then maybe the panel does have a greater role.

SPEAKER_00 15:58

Look, I mean I don't screw with you, Cam. I mean ultimately what I often come back to is that if you're in the position of the target, you know, sitting there as a director, ultimately, you know, will you facilitate an offer for the company that ultimately is not one that you're going to accept? And I think from the tires perspective, that's the key concern. You don't want to either in fact or be seen to have facilitated, you know, a low-ball offer for the company or or an offer that you know you as a director would not have recommended had

Diatreme Metallica Lessons On Certainty

SPEAKER_00 16:25

it actually come through the front door, as you said.

SPEAKER_01 16:27

Now, Simon, there's a lot there already. We haven't even gotten into the insider trading aspects of relevant to a standstill. But I just think to myself, there is a lot there, and there's a lot of bargaining to be done early on in the engagement when a public company gets an NBIO. There's a lot to be done, and this can really slow parties down, and as you say, can be a real flashpoint, attention point. Have we seen situations in the market where the parties have been unable to progress by virtue of a breakdown in negotiations on a standstill?

SPEAKER_00 17:01

Look, there is one well-known one, and that's the engagement between Bain as the bidder and Baccore as the target. It was reported that they were unable to reach agreement on a standstill after quite a protracted period of negotiations, and as a result of that, the transaction actually, you know, didn't get past base.

SPEAKER_01 17:18

Yeah, it's interesting. There was the the other one was TPG InvoCare, where they really it was protracted and you know the there were multiple announcements saying we're still going on the negotiations. It's a really interesting dynamic when an NBIO is being made public and you've got to make announcements around how the standstill negotiations are going. On the one hand, there's pressure on the board and quite often shareholders will say, Aren't these market standard terms? Just sign them up, let them in, we want to see an offer. On the other, you can put a pressure on the bidder as a target, you can put pressure on the bidder and say, Well, sign up to my terms and get going. And you know, bidders are quite quite often keen, especially on it's in the public domain, to get going, avoid the risk of a competitive bid, for example, get deal certainty. So that tension can ebb and flow from situation to situation, but it can create a really interesting dynamic around the negotiations of the standstill itself.

SPEAKER_00 18:13

Yeah, and look, following the sort of the recent panel cases for Hum Group Limited, where there was a protracted period between announcement of the NBO and signing of the NDA, I think there's going to be only more and more focus on, okay, in situations where an approach has been made public, what are the parties doing in that period between initial announcement and agreeing terms for diligence? Because in the Hum matter, the panel was quite critical of the amount of time that was taken. And uh previously I I don't think market participants thought that that would be something that the panel identified as particularly concerning. But now I think, you know, in those early stages of engagement, parties are going to be saying to themselves, okay, well, look, you know, really do we just need to kind of get on with this? And of course, as you say, when you're coming to negotiating what's ultimately quite an important commercial term in the standstill, it's just going to heighten the focus on um, you know, kind of getting to yes quickly on those provisions.

SPEAKER_01 19:03

I think Simon, the negotiations on a standstill, they sort the wheat from the chaff. Is that the right terminology?

SPEAKER_00 19:09

Yes, yeah.

SPEAKER_01 19:10

Because I think if you're well advised, people understand how to navigate these provisions and how and what the right settings are with all the commercial sensitivities in mind and can quickly advise you on the right outcome. Whereas lawyers less less experienced in these sort of deals, the situations, uh are often a bit slower and it just takes more time, which is generally unhelpful.

SPEAKER_00 19:33

Yeah, and look to the point you made earlier, Cam, unlike other aspects of public MA transactions, standstill terms aren't always public. So, you know, if you're in the position of either a target or a bidder, you're really relying on it, you know, needing to have experienced advisors who have seen it all before and are able to help you navigate through these

When Standstills Stall Deals

SPEAKER_00 19:50

complexities.

SPEAKER_01 19:50

Well, you're the man, Simon. You've seen plenty of these and you've thought about the issues deeply. So I look forward to our next standstill negotiation. I'm glad I'm on your side, not on the other side. That's it on standstills. If you've got any questions for us, please reach out to Simon or myself or any of our MA partners. Simon, really enjoyed the discussion today.

SPEAKER_00 20:08

Me too. Thanks, Ken.

SPEAKER_01 20:10

Thanks for watching, thanks for listening, and we'll catch you on the next episode.