Navigating 11th hour bids: guidance for target boards in scheme deals

Every so often, interlopers emerge at the 11th hour to put forward competing proposals that a target board must consider before proceeding to hold the scheme meeting, where its shareholders will vote on an existing scheme proposal. 

As knowledge of the existing scheme proposal is in the market for a significant period of time prior to the scheme meeting, usually the timing for submission of any such competing proposals is strategic and directed at achieving a forced deferral of the scheme meeting in an effort to buy time (whether to firm up on whether the making of a competing proposal is possible or as a strategy to properly test whether the existing bidder will pay more). 

The ‘fiduciary out’ in any exclusivity arrangements generally permits the target board to entertain a competing proposal if the target board determines, in good faith, that the competing proposal could reasonably be expected to become superior to the existing transaction. Whilst an 11th hour competing proposal often dangles the carrot of a materially improved transaction consideration, they can be short on detail so as to put the spotlight on the target directors’ assessment as to whether such a proposal can reasonably be expected to become superior. 

The existing bidder can also be expected to put the heat on the target board in assessing whether the ‘fiduciary out’ applies - making the wrong call may result in a breach of the implementation deed and give rise to the existing bidder being able to walk away from its current proposal. 

So great care needs to be taken by a target board in deciding how to respond in such a scenario. 

The challenge for target boards when rejecting a late proposal

Ultimately, if the target board takes the decision to reject the 11th hour competing proposal, the question then becomes: what should be done about holding the scheme meeting to consider the existing scheme proposal? Do you proceed in accordance with the original timetable or must the scheme meeting be deferred - and if so, for how long?

Case study: Peak Rare Earths and the GICP proposal

In the recent Peak Rare Earths Ltd (Peak) scheme, Justice Black of the New South Wales Supreme Court suggested that there are circumstances where a target board, faced with such a predicament, may have to postpone the scheme meeting in order to allow target shareholders sufficient time to consider the developments before voting on the scheme proposal.

In Peak, Shenghe Resources Holding Co., Ltd (Shenghe) proposed to acquire 100% of Peak by way of an Australian scheme of arrangement, valuing Peak at A$195 million. Two days before the scheme meeting was scheduled to be held to consider the Shenghe proposal, Peak received an unsolicited, non-binding, conditional letter of intent from General Innovation Capital Partners (GICP), an alternative asset manager based in the United States, regarding the potential acquisition of Peak for A$240 million, being at a material premium to the consideration offered by Shenghe. The letter of intent was expressed to be subject to a number of conditions, including completion of satisfactory due diligence (over a three week period), Tanzanian Government approval and execution of binding transaction documentation. Importantly, the letter of intent was expressed to remain in effect until 7.00am on the day of the scheme meeting. 

The Peak board ultimately rejected the GICP letter of intent, noting in its announcement to the ASX that (amongst other things):

• GICP had not provided (i) sufficient quantitative and qualitative information to support its proposal (including how it intended to complete its due diligence enquiries within the proposed timeframe and gain the necessary Tanzanian government support to execute any proposed transaction); (ii) any substantive evidence of its ability to fund the proposed transaction or develop Peak’s Ngualla Rare Earth Project; nor (iii) any indication whether it had received advice from or retained any legal or financial advisers in putting together its letter of intent;
   
• Shenghe (which was a 19.8% shareholder of Peak) had indicated that it was not willing to accept or support the proposed transaction, such that the GICP proposal was unlikely to be able to be completed in its current form; and
   
• there was significant time risk associated with engaging on the GICP proposal, which would remain uncertain, compared to the existing Shenghe proposal where completion of the transaction was imminent.

After updating Peak shareholders of the receipt and subsequent rejection of the GICP proposal by way of an ASX announcement, Peak proceeded to hold the scheme meeting to consider the Shenghe scheme proposal in accordance with its original timetable (rather than defer the scheme meeting). Peak shareholders voted in favour of the Shenghe scheme proposal by the requisite majorities.

Should the scheme meeting be deferred? The Court’s view

At the second Court hearing to approve the Shenghe scheme, Justice Black noted that “there are some circumstances where it will be appropriate to adjourn a scheme meeting by reason of the receipt of a third party proposal”. Relevantly, if a Court finds that the scheme meeting should have been adjourned (but wasn’t), the target company could find itself in the unenviable position of having to convene another meeting of its shareholders to ratify the proposed scheme before a Court is able to consider its approval. 

However, in Peak’s case, Justice Black noted that “no further question arose of putting that non-binding “offer” to Peak shareholders for consideration at the scheme meeting, not least because that “offer” was structured so as to expire just before that meeting took place.” The stated expiry of the GICP letter of intent before the scheme meeting to consider the Shenghe proposal was held was a key factor in Justice Black’s view that Peak was not required to adjourn the Shenghe scheme meeting.

Black J’s comments do however raise the uncomfortable question of whether a scheme meeting must be postponed if a third party submits an alternative proposal shortly before the scheme meeting and that proposal remains capable of acceptance at the time of the meeting. 

Whilst the target directors, who are ultimately the gatekeepers of whether an alternative proposal is able to proceed through the ‘fiduciary out’, might find the alternative proposal unattractive, Black J’s comments suggest that the mere existence of an alternative proposal capable of being pursued may be material new information that target shareholders require before voting on the existing scheme proposal, such that there is no option but to postpone the scheme meeting.

Implications for future scheme transactions

The prospect that a board may need to adjourn a scheme meeting simply because a late proposal is capable of being pursued (whether or not it is supported by the target board) could encourage rival bidders or dissatisfied stakeholders to submit conditional last minute expressions of interest strategically to delay or disrupt transactions. Whether this becomes a common tactic remains to be seen. When confronted with such a scenario however, target boards must carefully consider the implications on the scheme implementation timeline regardless of whether it is a proposal that the board wants to pursue.

* Corrs Chambers Westgarth acted for Peak Rare Earths Ltd