Specific performance is essential

Here’s one for the M&A buffs out there.

Cast your minds back twelve months ago to the agreed merger between Perpetual (ASX: PPT) and Pendal Group (ASX: PDL). The deal closed successfully in early 2023 but not without a bit of a rollercoaster ride along the way.

As a refresher, Perpetual agreed to buy Pendal in a recommended Scheme of Arrangement transaction before Perpetual turned from hunter to hunted when a Regal Partners (ASX: RPL) led consortium tabled a non-binding offer to acquire Perpetual. Importantly, Regal’s offer was conditional on the termination of the Perpetual/Pendal scheme.

At the heart of it was an optically simple question – could Perpetual, as bidder, pay a reverse break fee to terminate the Pendal scheme and progress its own proposal? There was no specific right within the scheme implementation deed to terminate without cause, but at what point does a bidder’s fiduciary responsibility override its contractual obligations?

The simple line of questioning belied the complexity of establishing an answer that intersects a wide range of considerations; fiduciary responsibility, transaction structure, and regulatory jurisdiction.

Pendal went on the offensive and publicly declared that Perpetual was on the hook to complete regardless of whether it was entertaining its own offer. Perpetual maintained that its own fiduciary duty gave them an out - the reverse break fee acted like an option fee, so they could pay it and walk when it was no longer in their interests to complete. 

We know how it worked out for Elon Musk's acquisition of Twitter, but we were entering unchartered waters for Australian Schemes of Arrangement. 

As we detailed in our November 2022 newsletter to clients, both transaction structures of Schemes of Arrangement and Takeover Offers in Australia appear to work identically in achieving a change of control when everything goes to plan. When they don’t, however, the deficiencies of schemes in offering target shareholder protections similar to those enjoyed under takeover offers become apparent. In the past, we have seen bidders walk from schemes that would have otherwise been enforced had they been structured as a takeover.

In short, a court decision sought by Pendal found that should Perpetual terminate the scheme to progress the Regal bid, it did not exclude Pendal’s right to seek specific performance or injunctive relief. It was a significant decision that narrowed the gap between schemes and takeovers. We may have had a glass of champagne or two in the office in celebration.

Regal’s offer was never formalised and the Pendal scheme completed without further issue, so a ruling of specific performance was never attained. The threat of one was enough of a warning to bidders thinking about reneging on their contractual obligations, and we are now starting to see the implications work their way into implementation agreements.

Enter essential metals

Essential Metals (ASX: ESS) announced a binding Scheme of Arrangement with Develop Global (ASX: DVP) earlier this month, and Essential’s legal advisors, HopgoodGanim Lawyers, have evidently been keeping tabs. Amongst the often cookie-cutter clauses of scheme implementation deeds, our eyes were drawn to clause 14.5:

14.5 Remedies
The parties acknowledge that damages may not be a sufficient remedy for breach of this deed and that specific performance, injunctive relief or any other remedies which would otherwise be available in equity or law are available as a remedy for a breach of threatened breach of this deed by this party, notwithstanding the ability of the other party to terminate this deed or demand payment of the Target Payment or the Bidder Payment (as the case may be).

In layman’s terms, should Develop terminate the scheme for any reason other than what is explicitly detailed in the implementation deed (and thus breach the agreement), Essential can seek specific performance. A far more target shareholder-friendly structure than what we are used to, and the first time we’ve seen it explicitly written.

There is still some way to go in improving the structure of Schemes of Arrangement and even Takeover rules in Australia more broadly – a conversation we intend to participate in actively – but this is a welcome step in the right direction.