Potentia Capital’s takeover bid for Tyro Payments: Aggressive Grok uses shares in bid to lure prey
As far as corporate law is concerned, a good old-fashioned takeover battle is about as close to blood sport as you can get. Granted, most of the blows are delivered on A4 paper and no one (generally speaking) goes home on a stretcher, but there is something definitively sporting about companies battling it out in a high stakes corporate wrestling match.
Even more so when one of the players is one of Australia’s richest people with some recent form in causing a significant ruckus at board level (just ask AGL). And so it is that the move by Potentia Capital in seeking to acquire Tyro Payments (which counts Mike Cannon-Brookes’ vehicle, Grok, as a 12.5% shareholder) has the hallmarks of a gripping AFL preliminary final decider (go Lions!).
But what makes Potentia’s bid for Tyro more interesting than your usual takeover contest is the unique agreement that Potentia has made with Grok as a precursor to Potentia seeking to acquire Tyro.
As per the usual takeover strategy, Potentia sought out Grok to have them sign up to a “pre-bid agreement”. So far, nothing unusual there.
However, the agreement that Grok struck with Potentia is unique and is making some waves, not so much in terms of its form (which looks a lot like a usual pre-bid agreement) but in terms of how it is structured and why the agreement was structured in that way.
We will explain a little more about the peculiarities of that agreement below, but first, what is a pre-bid agreement, I hear you ask?
A pre-bid agreement is in a family of what are referred to “lock-up devices”, essentially attempting to give a bidder (in this case, Potentia) a “head start” by having a shareholder (in this case, Grok) agree to support the Potentia bid even before it is announced to the public. 1 In other words, by the time Potentia makes its offer to Tyro public, it can already say that 12.5% of the shares in Tyro are essentially locked up.2
That might sound simple and eminently sensible; however, getting them is not as easy as it may seem (at first blush).
One of the challenges with pre-bid agreements is that they expose a flaw in the human condition that can best be described in the following hypothetical exchange between a bidder and a shareholder:
Bidder – “Will you agree to lock up your shares under a pre-bid agreement at $1.27 per share so that if I bid at that price you will accept it?”
Shareholder – “Sure thing. However, if someone wants to pay more than $1.27 in the future, then I also want the right to tear up our agreement and sell to that person. Ok?”
And so it is that many discussions around pre-bid agreements fall over, because if a bidder was required to allow a shareholder an “out” under its pre-bid agreement (if a third party offered to pay more for the target company), then the bidder is hardly getting the “deal certainty” it was seeking in asking for the pre-bid. The phrase “hardly worth the paper it’s written on” comes to mind.
Faced with a scenario where it cannot get pre-bids on terms it is happy with, a bidder may decide not to proceed with the bid at all for risk of losing out.
A shareholder’s acute case of corporate FOMO can, and from time to time does, derail potential control transactions.
Interestingly, in the pre-bid agreement between Potentia and Grok, provision was included to the effect that Grok would agree to support the Potentia deal at $1.27 per share, provided that no third party came in with a better offer and that offer was 25 cents or more above the Potentia offer. In simple terms, Grok would support the Potentia bid, provided no one bid more than $1.52 per Tyro share.
In terms of structure, what Grok and Potentia have agreed to is not necessarily rocket science; however, in effect, what Grok is saying to the world at large is, unless you are serious in seeking to better Potentia’s offer for Tyro (which in their mind means an offer at least 25 cents above what Potentia is willing to pay), then Grok is throwing its ‘chips’ on Potentia’s side of the table.
However, if there are other serious bidders out there which believe in significant additional value in Tyro, then Grok is telling Potentia that, unless Potentia can come up with the money to match the competing proposal within 10 business days, all bets are off.
In a sense, there is a ‘sharing’ of risk:
And that is why it’s so interesting – a shareholder is both supporting Bid A whilst potentially inviting Bid B (or Bids C, D etc) to come in over the top.
The caveat to a potential bidder being seemingly guaranteed Grok’s support, is that the pre-bid also gives Potentia protection in this scenario. It provides Potentia a 10-business day period to match the price offered by the competition. Again, a matching right is fairly standard, but all Potentia has to do is match that competing offer. In such a competitive scenario, a competing bidder must then beat Potentia’s matched price by a further $0.25 in order to unlock the Grok shares from the arrangements with Potentia.
Pre-bid agreements (to sell shares firm or to accept an offer) are a common form of a shareholder lock-up device.
Another form of a lock-up device that is commonly employed is the “shareholder intention statement”.
Shareholder Intention Statements are often used in the context of a takeover bid or scheme, either in support of the proposal or against the proposal and can often influence the decisions of other shareholders.
Common Shareholder Intention Statements include:
Shareholder intention statements operate under ASIC’s policy of “truth in takeovers”, which essentially requires substantial shareholders who make statements either in support or against a control proposal, to act in accordance with their stated intention (or potentially, face regulatory consequences).
As members of HopgoodGanim Lawyers’ Corporate Advisory and Governance team, we have written extensively on this topic. As legal practitioners, we’ve advised on a significant number of mergers and acquisitions which have effectively employed shareholder intention statements to leverage exceptional results for target shareholders. For example, we recently advised Cardinal Resources Limited (ASX,TSX:CDV) on multiple competing control transactions.3
The Cardinal process involved four competing bidders, seven applications (including a review application) to the Australian Takeovers Panel and effectively utilising shareholder intention statements as part of the overall strategy, which resulted in the highest premium paid (~330%) in Australia in 2020 (and also for the prior five years) across all public mergers and acquisitions.
At this stage, the jury is still out and it remains to be seen whether we will see more of this type of pre-bid. While it is certainly a novel approach and is likely to appeal particularly to target shareholders asked to provide pre-bids, we suspect that Grok, as a fairly influential investor, was able to dictate terms to an extent in this instance.
In our view, the Grok pre-bid is a clever structure which seeks to balance the competing interests of a shareholder in seeking to maximise a return on its investment, while maintaining flexibility and a bidder in securing a launch-pad from which to make its bid. In particular, it places Potentia in the box seat in any competitive scenario, as the 25 cent step-up required in a competing bid is likely to deter private equity rivals (who generally operate on fairly lean margins), while at the same time, not ruling out the possibility of an industry-based bidder coming over the top (in which case, Potentia will likely bank a handsome profit on the ~3 million other shares that it has a relevant interest in outside of the Grok shares). If we had to pick a winner between Potentia and Grok, the ongoing requirement for a competing bidder to not only beat Potentia’s offer (as may be varied), but to continue to beat it by a magnitude of 25 cents in order to unlock the Grok shares, probably tips the balance in Potentia’s favour and it would appear that Potentia have potentia-lly (forgive us) gotten the better deal here.
For more information or to discuss your own circumstances, please contact our Corporate Advisory and Governance team.
1.Pre-bid agreements are often structured as an agreement by a shareholder to accept a bidder’s bid in due course, provided that the bid is made or announced within a short period of time after signing the pre-bid. Pre-bids are usually structured in this manner for a number of reasons, including so as to ensure that the arrangements do not offend the statutory prohibition against “escalation” agreements (section 622 of the Corporations Act). Essentially, this prohibition against escalation agreements means that a bidder cannot structure their Pre-bid in such a way that they agree to increase the price paid for the pre-bid shares pursuant to an increase in their bid. Instead, by structuring the pre-bid to require the shareholder to accept the bid, the shareholder then obtains the benefit of a statutory escalation under a different section of the Corporations Act (section 650B), as the bidder is required at law to pay all shareholders who accept the bid (including the pre-bid shareholder) the increased bid consideration. A very fine distinction, we know!
2. A bidder obtains a “relevant interest” in the shares the subject of a pre-bid agreement. Australian law generally prohibits a bidder exceeding a 20% relevant interest in a target entity (including as a result of a pre-bid agreement) before it makes its takeover. One top tip for bidders and target shareholders alike is to ensure that any pre-bid agreement never relates to more than 20% of the shares in the target (including any shares already held by the bidder and their associates).