Breaking free not an option Observations on the NSWSC decision on the Perpetual Pendal scheme

Key Points

• Target boards have always pursued an express 'fiduciary out'.  Now bidder boards should consider doing so as well if the transaction could be an impediment to a control transaction at the bidder level.
• Limitation of "liability" or liquidated damages clauses typically limit financial liabilities only (e.g. capped to the amount of a break fee).  A party in breach may still need to perform their obligations even after payment of the break fee.  However, careful drafting to limit other obligations or remedies may achieve a different outcome.
• A party seeking flexibility or fiduciary duty comfort should build in clear rights to terminate the contract, not 'breach and walk' in reliance of a break fee and limitation of liability clause.  This will also simplify the risk of a "tortious interference" claim potentially faced by a party proposing a transaction to the bidder.
• Targets may again start to consider the benefits of a takeover bid which limits the conditions that a bidder can have for its own benefit (versus a scheme).

Background

On 25 August 2022, Perpetual¹ and Pendal² entered into a Scheme Implementation Deed (SID) to pursue a merger under which Perpetual would acquire 100% of the issued shares in Pendal by scheme of arrangement for scrip and cash consideration (Scheme).

On 3 November 2022, before the First Court Hearing for the Scheme, Perpetual announced it received (and rejected) an unsolicited offer by BPEA Private Equity Fund VIII (via its indirect wholly-owned subsidiary) and Regal Partners Limited to acquire 100% of Perpetual (Competing Offer).  The Competing Offer was conditional on the Scheme not proceeding, and was re-submitted on improved terms on 10 November 2022, but was again rejected.

The parties subsequently sought a declaration from the Supreme Court of NSW³ to clarify the operation of the SID in the hypothetical circumstance where Perpetual breaches its obligations under the SID (or indicates that it will do so), including to pursue a "Perpetual Major Transaction" such as the Competing Offer, which could make the Scheme impossible or impractical to progress and implement.

The issue at hand was whether, if Perpetual breached its obligations under the SID to progress and implement the Scheme, the Liquidated Damages Clause⁴ and the Limitation of Liability Clause⁵ would exclude Pendal's rights at law to seek specific performance of Perpetual's obligations or injunctive relief.

The Court's Conclusions

The Court declared that remedies such as injunctive relief or specific performance would not be excluded under the SID including under the Limitation of Liability Clause and the Liquidated Damages Clause. 

In this context, Black J made two key observations. 

a)  "Maximum liability" necessarily contemplates a cap on a monetary payment.  That is, the wording used in the Limitation of Liability Clause (in particular the reference to "liability" rather than "obligation") cannot be applied to exclude (for example) the grant of an injunction or an order for specific performance which do not give rise to a direct monetary liability.  Such an order may be appropriate where third parties will suffer loss (e.g. Pendal shareholders would lose the opportunity to benefit from the Scheme if Perpetual breached the SID to pursue another transaction).

b)  A Liquidated Damages Clause does not give a party an "option" to pay damages instead of performing contractual obligations, and does not ordinarily exclude other remedies.  This is particularly relevant where the Liquidated Damages Amount, which referenced the Reverse Reimbursement Fee (calculated so as to compensate Pendal's costs in pursuing the Scheme), would not compensate Pendal shareholders for their loss of opportunity to benefit from the Scheme.  In such a circumstance the Liquidated Damages Clause should not be read in a manner such that it excludes other forms of relief.

Implications Going Forward

The Court's observations noted above will have several implications for scheme implementation agreements (and in some cases contracts generally) going forward.

First, limitation of liability clauses (now better described as exclusive "remedy" clauses) will need to be carefully drafted to ensure (if the parties so intend) that if an agreed sum of liquidated damages is paid, all other remedies are also excluded.  This is relevant for both the bidder and the target, particularly so in the current market where reverse break fees have become far more common even in cash schemes.

Second, parties will need to carefully consider the circumstances where they may re-evaluate their position on pursuing the transaction at hand.  The availability of a 'fiduciary out' does not (unless the contract expressly says so) release the party from its liabilities or obligations to pursue an agreed transaction.  For instance a party wishing to rely on a 'fiduciary out' clause in a SID should also seek the right to terminate the SID, rather than seek to 'pay and walk' (i.e. breach the SID, pay a break fee and rely on a limitation of liability clause).  This will also simplify the risk of a "tortious interference" claim potentially faced by a party proposing a transaction to the bidder.

Finally, if in similar circumstances the relevant transaction was proposed by way of a takeover bid, the approach may have been different.  For instance, Chapter 6 of the Corporations Act limits the types of defeating conditions a bidder can include in its offer terms for its benefit.  Accordingly, targets may again start to consider the benefits of a takeover bid when negotiating the structure of a control transaction.

1. Perpetual Limited ABN 86 000 431 827
2. Pendal Group Limited ABN 28 126 385 822
3. In the matter of Pendal Group Limited [2022] NSWSC 1575.
4. Clause 13.8 of the SID
5. Clause 11.8(f) of the SID