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Australia – Break Fees And Andrews v ANZ.

3 October, 2012

 

In brief

 

  • The High Court's decision in Andrews v ANZ may encourage targets to claim that break fees are penalties and refuse to pay.
  • Changes in drafting of break fees are likely as bidders seek to counter this.

 

The High Court's widening of the penalty doctrine in Andrews v ANZ raises the question of whether some break fees might now be void as "penalties".

 

The penalties doctrine prevents enforcement of provisions imposing a penalty as punishment for non-observance of contractual requirements or the failure of contractual conditions.

 

In Andrews v ANZ the High Court held that the doctrine is not confined to circumstances where a penalty is imposed upon a breach of contract.

 

Previously it has been argued that break fees cannot be penalties since the triggers for payment (or at least some of them, such as the announcement of a competing bid) do not involve a breach of contract. That argument is now no longer available.

 

In fact many break fees do have triggers involving a breach of contract, eg breach of a "no shop" or breach of an obligation on the target to procure a recommendation by directors. The "penalty" threat has always been there for break fees charged for those triggers. In the past, it has been common to provide a series of triggers for break fees, in the hope that recovery may have been possible under those triggers that did not involve breach of contract, eg the announcement or success of a competing proposal. The High Court's decision takes away this fall-back argument, and there may now be little point in drafting triggers in a form that does not require breach of contract.

 

The High Court's decision does not give clear guidance as to exactly what will amount to a penalty. The increased uncertainty it creates may encourage targets to resist paying break fees, especially once a competing bidder has gained control. This has occurred in the past, of course, but targets may now have a stronger case, depending on the terms of the break fee.

 

To address this threat we may well see some changes in the drafting of break fees, as bidders seek to: 

 

  • reduce the likelihood that the break fee is a penalty; or
  • insert measures to assist with enforcement.

 

Possibilities might include:

 

  • Terms supporting arguments that the break fee is not a penalty Although further decisions will be required to clarify the limits of the doctrine, a number of changes can be made to the standard drafting to strengthen arguments that the break fee is not a penalty.
  • More use of security bonds The use of a security bond was approved by the Takeovers Panel in Normandy Mining Limited 03. Normandy arranged a security bond in Newmont's favour for the sum of the break fee it had agreed to. The Panel rejected an argument that this was unacceptable, stating that they thought the protection sought by Newmont in the security bond was sensible and reasonable on its part when balanced by certain protections given to the target that applied if the break fee (or part of it) were found to be unlawful or illegal.
  • Earlier triggers for payment Ideally bidders will wish to have a break fee triggered and paid before a competing bidder gains control. However careful drafting will be necessary for this to be consistent with the Panel's Guidance Note 7 (Lock-up devices).

 

 

 

For further information, please contact:

 

Bruce Dyer, Partner, Ashurst

bruce.dyer@ashurst.com

  

Ashurst Dispute Resolution Practice Profile in Australia

 

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