A recent study (October 2001) of takeover bids for Canadian targets has produced some interesting results. The survey looked at 75 announced bids since Justice Blair gave judicial approval for the use of breakup fees (also known as break fees) as bid inducements in the contest for WIC Western International Communications in early 1998.
In Canadian contests for control, courts (as in the WIC case) have found the following circumstances to be relevant in determining whether break fees are appropriate:
- the break fee is necessary in order to induce a competing bid to come forward;
- that bid represents a better value for the shareholders; and
- the break fee represents a reasonable commercial balance between its potential negative effect as an auction inhibitor and its potential positive effect as an auction stimulator.
Against this judicial backdrop, the above-noted study concluded that:
- break fees generally decrease inversely proportional to the size of the bid when one examines highs, lows, means and medians. This may reflect the fact that bidders and targets are generally sensitive to possible judicial scrutiny of break fee percentages which, when applied to the larger transactions, might produce a monetary amount which could seem excessive and auction inhibiting by the courts;
- while the high-low range of break fees in initially hostile bids as compared to friendly bids appear to be elevated, the median was lower. This perhaps reflects the negotiating position of a self-trumped bid in some cases, but does not support the generalization that all acquirers in initially hostile bids which subsequently turn friendly are able to negotiate higher break fees than in initially friendly deals;
- contrary to what one might expect, white knights are generally not able to command higher break fees compared to bids without white knights. Again, while an elevated high-low range was observed for white knight deals, median break fees were lower for white knight deals compared to bids without white knights; and
- toehold position acquirers are generally able to command higher break fees than in situations where bidders do not have prior equity positions in targets.
The study's conclusions supported some conventionally held beliefs and violated others. Both bidders and targets should be armed with empirical support to justify the appropriateness of break fees when challenged before the courts.
Phyllis Boyd and Nicholas Dietrich