Panel Releases Revised Guidance Note 7 - Lock-Up Devices

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The Takeovers Panel has today released a final version of its revised Guidance Note 7 on lock-up devices. Minor amendments have been made to the final version in response to comments received when the Panel released a draft for public consultation.

This revised version follows the Panel's review of its existing Guidance Note 7 (Previous GN7). The Panel went through several stages in its review process, which commenced in 2004.

Initially, the Panel invited interested parties to provide feedback in relation to their observations of GN7's operations and application so far and what aspects (if any) should be modified. The Panel asked several specific questions regarding the performance of Previous GN7, in addition to calling for general comments.

The Panel received submissions from, Allens Arthur Robinson, the Australian Securities & Investments Commission, Blake Dawson Waldron, the International Banks & Securities Association of Australia, the Law Council's Business Law Section, Macquarie Bank Limited, Minter Ellison and the Securities Institute.

The Panel's review was undertaken in large part by a sub-committee. The Panel wishes to thank the sub-committee members: Panel members Simon McKeon, Simon Mordant, Peter Cameron, Peter Scott and Professor Ian Ramsay. The Panel is also grateful for the input and assistance received from external sub-committee member, David Williamson (Blake Dawson Waldron, Melbourne).

The sub-committee considered the submissions received regarding Previous GN7, as well as the Panel's own experiences in proceedings dealing with lock-up devices. Following its internal review process, the Panel released for public comment a revised draft of Guidance Note 7 (Revised GN7). Comments at this stage were received from Atanaskovic Hartnell, Freehills, the Law Council's Business Law Section, Minter Ellison, and the Securities Institute.

The Panel wishes to express its gratitude to each of the organisations who provided their valuable feedback during the process. The respondents were broadly supportive of the Revised GN7, and the sub-committee did not consider that major changes to the public consultation draft issued in October 2004 were needed.

Set out below are the more general issues raised in submissions regarding the consultation draft of Revised GN7, along with a brief explanation of the Panel sub-committee's responses to those issues.

  • Several submissions called for greater use of practical examples in the guidance note, either by reference to previous Panel matters or to hypothetical scenarios. The Panel has included references to previous Panel matters where it considers that those references clarify the key underlying principles of the guidance note. However, it was felt that any further elaboration by example may be interpreted as unnecessarily prescriptive. Market participants should focus on the principles of Competitive Neutrality and Non-coercion which underpin the guidance note when considering lock-up devices; they should not be distracted by trying to apply or distinguish factual examples used in the guidance note.
  • The submissions called for further clarification in the guidance note regarding the relationship between break fees and costs. The Panel considers that the revised guidance note is sufficiently clear on this point: costs are not of primary importance to the Panel in assessing whether a break fee satisfies the principles of Competitive Neutrality and Non-coercion, but may be relevant in assessing whether, in specific circumstances, it is acceptable for a break fee to exceed the 1% guideline.
  • The issue of break fees payable upon rejection by shareholders of a proposal was raised in submissions (and was also the subject of a specific query by the Panel when calling for submissions on Previous GN7). This issue was considered at great length by the Panel sub-committee. For the reasons set out in [7.16] of the revised guidance note (i.e. that a break fee can operate as an option price paid to secure an opportunity for shareholders), it can be appropriate for a break fee to be paid on rejection by shareholders of a transaction. Of course, the Panel will still consider all of the particular circumstances of any such break fee in deciding whether or not it is unduly coercive.

The revised Lock-up Devices guidance note is available on the Panel's website at Guidance Notes.

Nigel Morris
Director, Takeovers Panel
Level 47, 80 Collins Street
Melbourne, VIC 3000
Ph: +61 3 9655 3501