No-shop, no-talk and break-up fee agreements in merger and takeover transactions: the case for a fresh regulatory approach

Abstract

Merger and takeover transactions have a profound impact of on the interests of shareholders and society in general. For this reason, it is essential that the legal system provide a reliable mechanism for determining the validity of practices that have the potential either to facilitate or inhibit such transactions. This article seeks to demonstrate that the rules currently governing the exercise of directors’ powers are ineffective to protect the interests of shareholders and society in general in circumstances involving the use of exclusivity and break-up fee agreements, practices that are fairly new, but which are becoming increasingly common in Australia. The equitable doctrines of fiduciary law against which the validity of these arrangements is determined do not provide clear guidance as to when it is acceptable for directors of target companies to enter into such agreements. There is thus need for reform, so as to promote clarity and predictability of the law in this area. This will enable all interested parties to proceed on reasonable expectations in organizing their affairs whenever these arrangements are involved. In undertaking this reform, policy makers would serve investors and society generally better if they adopted shareholder welfare enhancement as the criterion for adopting the applicable rules in this area. Exclusivity and break-up fee agreements should be permitted where they are designed to maximise shareholder wealth but not otherwise. The article explores ways in which the law could be reformed to achieve this objective