Deal background

Perpetual Limited had entered into a Scheme Implementation Deed (SID) to purchase Pendal Group Limited. Perpetual then itself became the subject of a consortium non-binding offer for it, which was conditional on it not proceeding with its acquisition of Pendal.

Key issues

Pendal and Perpetual took the unusual step of seeking a declaration from the court as to what their respective rights were under the SID. Perpetual argued that if it breached the SID in order to pursue the consortium transaction, all Pendal was entitled to was the SID specified reverse break fee of AUD 23 million. Pendal argued that the SID did not limit its remedies, and an order for specific performance or an injunction could be sought requiring Perpetual to comply with the SID in addition to its rights to the AUD 23 million.

The court focused on the terms of the reverse break fee, the termination rights in the SID, and the wording around limiting liability. 

The court found as follows as a matter of contractual interpretation:

1. The SID did not include a termination right in circumstances where a control transaction for Perpetual arose.
2. The SID did not prevent the grant of remedies or orders to comply with obligations, nor did it cap liability flowing from either.
3. The limitation of liability clause did not extinguish Perpetual's liability to Pendal shareholders (who were not parties to the SID).
4. Pendal shareholders might be able to obtain a specific performance order requiring Perpetual to proceed to enter into the deed poll giving them direct rights to require Perpetual to proceed with the transaction.
5. The rights and remedies in the SID were in addition to other rights and remedies arising by law.

The upshot was that Pendal's right to seek an injunction or order for specific performance was affirmed, and Perpetual's arguments were dismissed.

As a consequence of the decision, Perpetual and Pendal decided to proceed with their transaction, but on re-negotiated terms.

Implications

1. At one level, the decision is merely one of contractual interpretation. Implementation agreements should make it clear if a bidder can terminate a transaction if an offer for the bidder itself is subsequently made, and whether or not the reverse break fee is an exclusive remedy or not.
2. However, it is important to understand that courts will be wary of allowing parties to treat a reverse break fee as a simple fee to terminate by way of a "fiduciary out" without a clear contractual intention of the parties allowing the bidder to do so.
3. It may well be difficult for bidders to change the current norm. A target will generally resist an attempt by a bidder to include such a "fiduciary out" in an implementation agreement.
4. One example where bidders are able to change this norm is in the area of reverse takeovers (involving a smaller bidder seeking to takeover a larger target). The Takeovers Panel has made it clear in the Gloucester Coal decisions that reverse takeovers should allow the bidder shareholders an opportunity to vote if a separate proposal emerges for the bidder itself, and effectively walk away from the reverse takeover. This position is supplemented by Listing Rule provisions for reverse takeovers involving share consideration to similar effect. 
5. By coincidence, the matter has some resemblance to Elon Musk's bid for Twitter when, at one stage, the bidder was trying to avoid proceeding with the acquisition and just pay the break fee. The bidder there had argued that the break fee was the exclusive remedy, but ended up proceeding with the offer.