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The Australian Takeovers Panel recently declared a break fee to be unacceptable. The break fee was payable in shares, giving the offeror (Rexadis) the right to acquire a substantial interest in the target company (Ballarat Goldfields) if the shareholders rejected a proposal for Rexadis to buy assets of the company. The Rexadis proposal was one of three competing proposals for the future of Ballarat Goldfields. The Panel considered the break fee was likely to have a coercive effect on shareholders when considering the proposals. A rejection of the Rexadis proposal by shareholders could have diluted shareholdings. The Panel thought it was in the shareholders' best interests to be able to make an unfettered choice on the proposals.

The Panel ordered Ballarat Goldfields not to issue the break fee shares and not to give any other consideration in substitution for the break fee.

Elements influencing the Panel's decision included:

  • that the break fee was payable in shares was essential to the Panel's jurisdiction – a break fee merely for cash might have been an issue solely of director's duties and corporate governance not subject to review by the Panel;
  • Ballarat Goldfields failed to disclose the existence and terms of the break fee immediately to the market;
  • the directors were unable to produce evidence that the break fee was necessary to avoid the company going into receivership or administration – if that had been the case, the break fee might have been in the best interests of shareholders and would not have been unacceptable; and
  • the Panel made no adverse finding on the intentions or good faith of the directors, acknowledging that they were faced with a difficult decision with considerable uncertainty and limited time.

This decision highlighted how a break fee payable in shares may not be enforceable in Australia. Offerors and target companies should bear this in mind when structuring takeovers.

Paula Teague

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