Break fees limited to 1 per cent of the equity value of a company that is a takeover target may be putting businesses at risk of not being able to access rescue funding for example, from the US high-yield debt market.

Where a board of directors of an ASX-listed company has conducted a lengthy and transparent process in circumstances where their company’s financial position is deteriorating, and the lender requires a market break fee to secure the proposal, the question should be whether the board’s business judgment should be second guessed by limits on break fees imposed by the Takeovers Panel?

In our minds there is a serious question as to whether the 1 per cent cap on break fees is appropriate in a distressed loan transaction. A lender assumes a fundamentally different risk in this kind of transaction compared with the typical control transaction, because the lender advances the loan funds to the distressed borrower months before shareholder approval can be sought. Whereas in a typical control transaction the bidder does not pay the bid price until after it is sure the conditions precedent are satisfied and its bid is successful.

So we believe there are circumstances where a larger fee would be justified and indeed deserved by a party who is providing benefits to the company and its shareholders. A good example is the recent battle to provide a rescue funding package to Billabong.

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This article was originally published in The Australian.


Guy Sanderson is a partner in the Firm’s Sydney office, and co-leads the Firm's Australian Capital Markets team. Guy advises clients on public company takeovers and mergers, private company acquisitions, ASX listings, equity capital markets, debt capital markets, cross border listings, buy-backs, and corporate governance.

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