'Fiduciary outs' are standard fare in Australian public M&A transactions, allowing target company boards to appropriately manage their directors' duties when entering into an agreed transaction that contains customary deal protection provisions.
These 'fiduciary outs' typically allow the target to engage with a competing proposal that emerges after the announcement of a transaction where the target board determines (in good faith and after receiving legal and financial advice) that:
- the competing proposal is, or would reasonably be expected to become, superior to the existing transaction; and
- failing to respond to the competing proposal would be reasonably likely to constitute a breach of the target board's fiduciary or statutory obligations.
In addition to considering the price offered by the competing proposal, target boards are generally required to assess all aspects of the competing proposal when considering whether it is reasonably likely to become a superior proposal for these purposes, including:
- the conditionality of the competing proposal;
- the timing considerations associated with the competing proposal (such as delays in completion);
- the identity, expertise, reputation and financial condition of the person making the competing proposal; and
- any other matters affecting the probability of the competing proposal completing.
Whilst designed to provide target boards with flexibility to appropriately explore rival proposals in accordance with their statutory and fiduciary duties, making the wrong call on whether a 'fiduciary out' applies exposes the target to the risk of the existing bidder walking away, as well as potential damages for breach of contract.
The recent battle for control of
In this instance, St Barbara entered into an asset sale agreement to sell its Leonora gold assets to
Completion of the Genesis Transaction remained subject to a number of conditions, including the approval of both St Barbara and Genesis shareholders. The Genesis Transaction contained reciprocal deal protection provisions (including matching rights) and were expressed to be subject to customary 'fiduciary out' exceptions in relation to the 'no talk' and 'no due diligence' obligations. As an asset level deal, only the material terms of the asset sale agreement were released to ASX.1
Shortly after the Genesis Transaction was announced to the ASX, rival Australian gold miner
The Silver
Importantly, progression of the Silver
However, the St Barbara board declined to engage on the Silver
In reaching this position, the St Barbara board noted that it had considered a range of factors, including that:
- the Silver
Lake Proposal only provided a 9% premium in value to the Genesis Transaction (after taking into account the break fee that it would need to pay to Genesis); -
the Silver
Lake Proposal remained conditional upon completion of due diligence, whereas the Genesis Transaction did not3; -
the Silver
Lake Proposal provided St Barbara with less cash with which to fund its remaining operations than that provided by Genesis; - the independent expert's report requirement created significant risk for St Barbara, given that the expert's conclusions were uncertain; and
-
there was perceived to be significant time risk associated with any engagement with Silver Lake, noting that the Silver
Lake Proposal was likely to complete in mid-to-lateAugust 2023 compared to the Genesis Transaction (which was expected to complete around30 June 2023 ). St Barbara noted that its financiers had only waived compliance with certain financial ratios in its debt facility until30 June 2023 .
Not to be deterred, Silver Lake restructured and re-submitted its proposal, which did away with the requirement for an independent expert's report so as seek to enable the transaction to be completed by the end of
Before responding on Silver Lake's restructured proposal, St Barbara announced that Genesis had improved the terms of the Genesis Transaction by increasing the scrip component, paying a
Genesis also subsequently announced that shareholders representing 49% of its issued capital had indicated support for the Genesis Transaction, so as to highlight the low completion risk associated with that transaction.
Having regard to the improved terms offered by Genesis, St Barbara then formed the view that it was still "not entitled to engage with Silver Lake" in respect to the Silver
Silver Lake remained determined to test the St Barbara board's mettle on its 'fiduciary out' right and submitted a further, improved proposal representing (at the time) a 16% premium to the value offered by the improved terms of the Genesis Transaction. Silver Lake also obtained the commitment of St Barbara's largest shareholder to vote against the Genesis Transaction if the St Barbara board continued to refuse Silver Lake due diligence access to seek to progress its proposal to a binding offer stage.
Whilst acknowledging the premium offered by the improved Silver
Given the conditionality associated with the Silver
The risk/return equation that a target board needs to consider when determining whether to exercise a 'fiduciary out' is always a judgment call. Courts are generally loath to second-guess the business judgment of a director unless no reasonable director could have reached a similar conclusion.
The St Barbara board's determination that the 'fiduciary out' did not apply to the proposed sale of its Leonora assets to Genesis deprived St Barbara and its shareholders of the potential opportunity to consider a materially higher value proposal, and potentially also testing whether Genesis would be prepared to offer more for its Leonora assets through the matching right process, However, by not seeking to exercise such rights, St Barbara avoided the risk of the existing Genesis Transaction evaporating as a result of investigating a competing proposal4.
In essence, the value of a 'fiduciary out' may very well just come down to the risk profile of the target board and how far out on the limb they are prepared to go to facilitate the progression of competing proposals for the benefit of their shareholders.
Corrs acted for
Footnotes
1 If the transaction was a corporate level transaction, it is market practice for the full terms of the implementation agreement to be disclosed to the ASX, as was done in relation to an earlier aborted proposal for St Barbara to acquire Genesis by way of an Australian court-approved scheme of arrangement.
2 The additional scrip consideration offered pursuant to the Silver
3 Genesis completed its due diligence prior to entering into the Genesis Transaction. As the Genesis Transaction contained a 'no due diligence' undertaking, Silver Lake was only able to conduct due diligence on the Leonora assets if the St Barbara board's 'fiduciary out' right applied.
4 It is relevant to note that if the 'fiduciary out' applied (which would only have been tested if the St Barbara board formed the view that the Silver
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