Considering Australian Securities Law When Drafting Arrangement Agreements to Acquire Australia-Based Companies

November 20, 2024

Written By Robert Staley, Abbas Ali Khan, Bosa Kosoric and Doug Fenton

As a recent decision by the Australian Takeovers Panel (Panel) has confirmed, Canadian issuers looking to complete a merger or strategic transaction with an Australian counterparty in a Canadian plan of arrangement, subject to Canadian law, will need to give careful consideration to applicable requirements of Australian securities law.

In Re Westgold Resources Ltd., the arrangement agreement contained a fiduciary out consistent with Canadian practice, and a break fee at the average of break fees in Canadian public market transactions.

In response to an application by a competing bidder, the Panel required the parties to the arrangement agreement to modify the fiduciary out in the arrangement agreement to conform to Guidance Note 7: Deal Protection (Guidance Note 7). And while the Panel declined to strike down a break fee in excess of the 1 percent of market capitalization threshold in Guidance Note 7, the Panel suggests that Canadian standards will not necessarily govern in transactions involving Australian counterparties.

Background

In Re Westgold Resources Ltd., Ramelius Resources Limited (Ramelius) and Westgold Resources Limited (Westgold), two ASX-listed companies, entered into discussions about a potential transaction.

As a precursor to commencing discussions, the parties entered into a confidentiality agreement that contained a mutual 12-month standstill. Under its terms, the standstill fell away in the event of a recommended transaction between the parties, or if (1) a takeover bid is made for at least 50 percent of the company’s shares; (2) the relevant company recommends a change-of-control proposal whereby a third party will acquire at least 50 percent of its shares; or (3) the relevant recipient of the standstill otherwise waives the standstill requirements.

Ramelius subsequently made a non-binding offer to acquire all issued and outstanding shares of Westgold. Eventually, following the exchange of technical and financial information, Westgold rejected Ramelius' offer and terminated the discussions.

Westgold subsequently entered into an arrangement agreement (Agreement) with Karora Resources Inc. (Karora), a TSX-listed company, to acquire 100 percent of Karora's shares. The transaction was to be completed by way of a plan of arrangement under the Canadian Business Corporations Act and was governed by Ontario law.

The Agreement contained a number of provisions typically found in Canadian plans of arrangement. This included:

1. A standard "no shop, no talk" or non-solicitation obligations, which precluded both Westgold and Karora from soliciting potential alternative bidders. The Agreement also provided that neither Westgold or Karora could release a third party from existing confidentiality and non-solicitation obligations, except with the other's permission.
2. A standard "fiduciary out" which allowed each of Karora and Westgold to consider unsolicited transaction proposals from third parties, provided the proposal was or could reasonably be expected to result in a "Superior Proposal" as defined in the Agreement. The definition of "Superior Proposal" required that the unsolicited proposals be fully funded and subject to conditions substantially similar to the conditions set out in the Agreement.
3. The Agreement also contained a C$40 million mutual break fee, payable if certain termination events took place, one such being the entering into of a legally binding agreement with respect to a Superior Proposal.

After the Agreement was announced, Ramelius submitted an updated bid to the Westgold Board. The Westgold Board rejected Ramelius' updated offer, finding it was not a Superior Proposal. Ramelius also requested that the Westgold Board release Ramelius from its confidentiality and standstill obligations, so that Ramelius could directly solicit Westgold shareholders, but the Westgold Board refused.

In response, Ramelius submitted an application to the Panel seeking a "declaration of unacceptable circumstances", which is similar to a finding under Ontario securities law that a transaction is contrary to the public interest. Ramelius argued, among other things, that:

• The non-solicitation provisions in the Agreement were not subject to an "effective fiduciary out";
• The break fee in the Agreement equivalent to approximately 3.6 percent of Westgold's market capitalization, exceeds the Panel Guidance Note 7, which limits break fees payable by a target to 1 percent of its market capitalization; and
• The Agreement prevents Westgold from releasing Ramelius from the standstill provision without Karora's consent.

Although the Agreement was governed by Ontario corporate and securities laws, the Panel opined that it had jurisdiction to hear the matter because the application primarily related to the control or potential control of an Australian publicly traded company.

The Panel's Decision

On its application, Ramelius argued that the Agreement violated the Panel's Guidance Note 7 because the Agreement did not allow the "target directors to fully exercise their fiduciary duties without unreasonable fetters or constraints."

Ramelius focused its submissions on the requirement under the Agreement that Westgold obtain Karora's consent to release Ramelius from its pre-existing confidentiality obligations. Ramelius argued that even though it was still open to it to submit a "Superior Proposal" to Westgold, and even though the Westgold Board maintained that it had no intention to release Ramelius from its pre-existing confidentiality agreements, Westgold's obligation to seek consent from Karora to release Ramelius was an "unreasonable fetter" on Westgold's fiduciary out. Ramelius was supported in this submission by Staff of the Australian Investments and Securities Commission (ASIC).

To address concerns raised by the Panel and ASIC, Karora and Westgold undertook to remove the requirement for Westgold and Karora to consent to the release of third parties from their confidentiality arrangements (including with respect to Ramelius). The Panel relied on this undertaking in finding that the fiduciary out complied with the requirements of Australian securities law. However, the Panel indicated that in the absence of the undertaking, it may have been prepared to make a finding of "unacceptable circumstances."

With respect to the break fee, the Panel's Guidance Note 7 provided that "[i]n the absence of other factors, a break fee payable by a target not exceeding 1 percent of the equity value of the target" is permissible. There was no dispute that the break fee payable under the Agreement exceeded 1 percent of equity value; the core issue was whether the Panel's Guidance Note 7 applied to the transaction.

Both Westgold and Karora argued that Guidance Note 7 did not apply because the break fee payable was a "mutual break fee" or, as it related to Westgold, a "reverse break fee" payable by the acquiror. By contrast, Guidance Note 7 was stated to apply only to break fees payable by the target.

Westgold and Karora also argued that Guidance Note 7 could not apply extra-territorially to a plan of arrangement governed by Ontario law. In Canadian public company merger transactions, termination fees are typically between 2-5 percent of transaction value (with the average being 3.5 percent of transaction value).

The Panel did not ultimately reach a decision on the break fee issues, finding only that the break fee was not "currently having an anti-competitive effect." It therefore declined to decide whether the break fee potentially payable by Westgold was properly characterized as a "break fee" or a "reverse break fee" and whether the 1 percent threshold in Guidance Note 7 applied.

Key Takeaways

Re Westgold Resources Inc. serves as a warning to Canadian issuers considering transactions with Australian public companies. Even where the transaction is governed by Canadian law and implemented by way of a plan of arrangement overseen by the Canadian courts, the Panel may still intervene and conduct proceedings to determine whether the transaction complies with Australian securities law.

Canadian issuers should also appreciate that some typical or standard clauses in Canadian plans of arrangement may not be acceptable under Australian securities law. The text of the "fiduciary out" and "non-solicitation" provisions at issue in Re Westgold had been used in dozens of Canadian plans of arrangement, but still invited a potential finding of unacceptable circumstances.

In a similar vein, careful consideration will need to be given to whether the break fee or termination fee payable by the Australian issuer on termination of the transaction violates Australian securities law. Break fees firmly within the range of fees found to be reasonable and acceptable under Canadian law may not pass muster under Australian securities law.

Acting for Karora on this action, the Bennett Jones team was able work alongside Australian counsel to resolve the matters before the Panel and close out the transaction between Karora and Westgold.

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