The Situation It was recently reported that an Australian proxy adviser had queried whether the directors of a substantial Australian Securities Exchange-listed ("ASX") target, DuluxGroup, should have negotiated a Go Shop period as part of agreeing to a binding offer from Japan-based Nippon Paint. The comment raised eyebrows, not least because Nippon agreed to pay a 35% premium—and a whopping EBITDA multiple of 16.1x.
The Result The headline concept of a Go Shop may be appealing, particularly to proxy advisers, dissident shareholders or shareholder activists who want to make sure that target boards have properly tested the market. However, Australia's M&A laws are already designed to preserve an auction for control of listed companies. They do not inhibit other bidders with a better offer coming forward. Target boards that push too hard for a Go Shop may risk losing the deal.
Looking Ahead The talk around Go Shops in Australian M&A is not new. Though pundits have suggested that they will become a feature of our market, Go Shops remain very rare—and we do not see the trend catching on. Even in the United States, where Go Shops have long been a feature of the M&A advisers toolkit, their usage has fallen away.
A Go Shop clause allows a target board to recommend a takeover offer, whilst reserving the right to solicit a higher offer from another bidder during an agreed period.
The rationale for a Go Shop is straightforward: A target board can actively test the market for a higher offer through proactive inquiries to provide target shareholders with some level of market-based evidence that they are getting the best offer available.
For a long time, Go Shops were a mainstay of deal protection measures adopted in the U.S. M&A market, although our experience in that market shows us that Go Shops are now on the wane for reasons explained below.
The same cannot be said for the Australian market, where Go Shops never really got off the ground.
Typically in Australia, well-advised targets will consider the potential for better offers (e.g., through its bankers making confidential inquiries, or giving their best assessment of other possible contenders, or occasionally publicly revealing the approach) after an initial approach before signing up to the typical "No Talk", "No Shop" and "No Due Diligence" provisions which protect the bidder's deal before it completes. Although there have been a few examples of Go Shops in Australia, deals featuring Go Shops in Australia have certainly been the exception rather than the rule.
Australian's Framework of Deal Protection
So why haven't go shops caught on in Australia? Primarily it's because our corporate law facilitates rival bidders competing for control of a target entity.
No Talk clauses are always subject to a "fiduciary out". If someone approaches the target with a better deal, and the target directors form the view (after taking advice) that they would be in breach of their fiduciary duties if they didn't talk to them, then they can do so. Whilst they would generally have to pay a break fee to take the better deal, the break fee is limited and usually justified because target shareholders received a better deal.
No Shops are not subject to fiduciary outs, and they invariably accompany a No Talk. A No Shop reassures bidders that even though the target reserves the right to take a better offer, the target is not actively soliciting a better offer in the interim period before the deal completes. The No Shop can also restrict a target from haggling with a competing bidder to improve their terms.
It's increasingly common for a bidder also to negotiate a matching right before a target can take a better offer, but the principles that guide Australia's takeover regime (the Eggleston Principles) will apply. Meaning, these deal protections should not go so far as to chill a potential auction from emerging.
This framework means a Go Shop rarely adds much. Once the deal is public, other investment banks know that a rival bidder can put a strong competing proposal forward, and it can be considered. If it's out there, they will find it.
When Obtaining a Go Shop Makes Sense
So, are there any scenarios where a Go Shop makes sense? One deal earlier this year—albeit with a relatively unique factual backdrop—may shed some light on this question.
A bidder announced an indicative offer (for an ASX-listed company) and at the same time announced that it had put its foot on 19.9% of the target's stock, secured from an exiting cornerstone investor. After a period of due diligence, the bidder revised its offer downwards by 10%.
It surprised some in the market when the target's board ultimately agreed to recommend the lower offer, but in so doing, highlighted that they had secured a Go Shop, so the market would be tested for a "Superior Offer". Should a Superior Offer be found and accepted, the payment of a break fee to the bidder would not be triggered. This is relatively novel—contrast to the United States, where a Go Shop would often trigger payment of a break fee.
To qualify as a Superior Offer, it would have to be an all-cash offer at least 5% higher than the original offeror's and be made within 60 days of the current recommended deal having being announced. The incumbent bidder would vote all of its target shares in favour of the Superior Offer, if one were found in the time allowed.
In that scenario, the Go Shop arguably made sense. The board had agreed to a reduced price, with the bidder in a powerful position. Also, the fact of the locked in sell-down (by the individual bidder) and no break fee significantly reduced the risk of Takeovers Panel action, gave some comfort to shareholders and put the board in a stronger position to recommend the offer. The bidder also stood to make a profit on its 19.9% stake if the Superior Offer emerged. Without this, the bidder may not have been so willing to agree to the Go Shop.
How Did It Work Out?
Ultimately, there was no Superior Offer forthcoming. Right from the start, the bidder had played a strong hand, and it gave every signal of being confident in its price. Admittedly, the Go Shop period partially ran through the Australian summer holiday season, but the deal had been public for several months. If there were other genuine bidders, they may have emerged with or without the Go Shop.
Beware the Go Shop—Putting the Deal at Risk?
Should target boards be tempted to press for a Go Shop, the risk of losing a genuine offer becomes a live one.
Take the DuluxGroup transaction, for instance. Where a "knock out" offer enables shareholders to realise a substantial premium to market value, it would be a bold director who was willing to roll the dice by (i) infuriating the incumbent bidder; (ii) taking the chance on a better offer coming forward; and (iii) being upfront with shareholders if, at the end of the day, there are no offers on the table at all. Before agreeing to recommend the Nippon offer, DuluxGroup's board would have stared its bankers in the eyes and asked if anyone else could realistically put up an executable deal on better terms.
Our recent U.S.-market deal experience also tells us that where a deal has already been "shopped" prior to signing, seldom is a Go Shop secured, it would make little difference.
Closing the Expectations Gap?
Bidders offering a price that both parties recognise is inconsistent with shareholder's expectations will be the kinds of deals where a Go Shop might be contemplated. If you add circumstances that limit the target's ability to test the market before a deal is struck, then perhaps the scales might tip in favour of a Go Shop … perhaps.
However, in most cases and in the absence of some highly compelling strategic reasons, target boards are well advised to focus on negotiating a strong offer to put to their shareholders—which is what DuluxGroup did. A Go Shop is no substitute for forming a view on value and being prepared to back it.
In most cases, a bidder will not agree to a Go Shop. If the target makes it a dealbreaker, it might just risk losing the deal. If the course of action suggested to DuluxGroup by proxy advisors had been adopted and the deal faltered, directors duties would have become a live issue.
Appreciating that Australia's takeover laws are designed not to chill the auction for control, target boards (and proxy advisers) should be confident that most of the time a Go Shop is not worth the hype.