Shareholder agreements, joint ventures and similar arrangements often contain transfer procedures that are administered by the board of the relevant company as agent for the party transferring its shares or interests.
A recent case highlights some of the risks that boards are exposed to when they undertake these roles, particularly in relation to the extent of information that must be disclosed to interested bidders so they can make an informed assessment about whether and how much to bid for the relevant shares or interests.
Who needs to know?
Anyone who is involved in drafting, negotiating or advising on shareholders’ agreements, joint ventures or any other similar contractual arrangements where one of the parties is responsible for administering a sale process on behalf of one of the other parties.
Recent Case
The recent New South Wales Court of Appeal decision in Sanpoint Pty Ltd v V8 Supercars Holdings Pty Ltd [2019] NSWCA 5 arose from a dispute between V8 Holdings (the company that operates the V8 Supercars Championship in Australia) and one of the race teams (Sanpoint) that held an entitlement to enter a car in the championship.
The entitlement was set out in the ‘Racing Entitlement Contract’ (REC) entered into between Sanpoint and V8 Holdings in 2011. Sanpoint also entered into the ‘V8 Holdings Shareholders Agreement’ and was granted one class A preference share in V8 Holdings. Around this time, 35% of the shares in V8 Holdings was held by the race teams and 65% was held by Archer Capital.
It is unclear whether Sanpoint paid any money under the REC to acquire its racing rights or whether the REC simply replaced an earlier contract from 2009 under which Sanpoint had already paid approximately $1.38 million to participate in the championship.
The REC required Sanpoint to submit its entry form for the 2014 championship by no later than 1 December 2013. Sanpoint did not submit an entry form. Therefore, Sanpoint was required to “surrender its Rights under this Contract” in accordance with clause 10 of the REC.
Clause 10 relevantly stated that:
- the sale of the rights would be administered by the board of V8 Holdings “as agent for the Team in its absolute discretion” (clause 10.1(a)); and
- V8 Holdings “will ensure that the price paid for the Rights is as commercially advantageous as possible having regard to the current market situation by offering the Contract to the market by tender” (clause 10.1(b)).
The board conducted a tender process. Only 5 potential bidders registered their interest. No bids were made by any of them. Shortly afterwards, the board transferred Sanpoint’s rights under the REC, together with Sanpoint’s preference share in V8 Holdings, to a related company of V8 Holdings for $20,000 (about 1.4% of what Sanpoint had paid in 2009).
The Tender Process
A press release inviting expressions of interest was published by V8 Holdings on 24 June 2014. A period of two weeks then followed for interested persons to register their interest. Interested parties were then allowed to undertake due diligence during the period of two weeks commencing on 18 July 2014. This included access to a data room and a confidential information memorandum. The closing date for bids was 1 August 2014.
The Missing Information
Around the time the tender was being conducted, the board of V8 Holdings was in negotiations with its largest shareholder (Archer Capital) about restructuring ownership of V8 Holdings, including restructuring the annual distributions paid by V8 Holdings to the race teams. Apparently, many teams were suffering significant losses each year and several teams were at risk of pulling out of the championship for 2015.
The gross annual cash distribution per team for the 2014 financial year was $208,116. Various items (such as tyres and catering costs) were deducted from the gross amount to result in a net cash distribution of only $35,145 per team. This financial information was included in the information memorandum together with distribution details for some prior years as well as a forecast of the gross cash distribution for the 2015 financial year of $279,760.
It appears from the evidence that the board of V8 Holdings was well aware that the ongoing negotiation with Archer Capital was material information that should be disclosed to potential bidders under the tender. In fact, some high level information about the negotiation was disclosed in the information memorandum, including the fact that the board was in “confidential discussions” with Archer Capital and that the negotiations may result in revised annual distributions to teams which are “expected to be in excess of the current annual distributions”.
The negotiations with Archer involved various proposals. The Court found that on 27 May 2014 Archer Capital made a proposal that would have guaranteed gross payments to each team of $400,000 for the coming seasons.
While the Court recognised that the board had made some disclosure in the information memorandum about the existence of the confidential negotiations with Archer, the Court held that the fact that Archer had made a definite offer of $400,000 was “important information” that a potential bidder “would be interested to know” particularly because the offer was greater than the return predicted in the information memorandum. The Court reached this conclusion even though the $400,000 offer from Archer was apparently rejected by the board.
Overall, by failing to disclose the $400,000 offer to the potential bidders, the Court held that V8 Holdings breached its obligations under clause 10.1(b) of the REC to ensure that the price paid was “as commercially advantageous as possible”.
Won the battle – lost the war
Even though the court held that V8 Holdings had breached clause 10.1(b) of the REC, Sanpoint failed to persuade the Court that it had suffered any loss or damage as a result of the breach.
This was mainly because Sanpoint failed to persuade the Court that, on the balance of probabilities, a bid would have been made if the breach had not occurred. The Court held that the evidence on this point “did not rise above speculation” and therefore did not establish that it was more likely than not that such a bid would have occurred. To the contrary, the Court was of the view that the uncertainty around the negotiations with Archer was likely to depress (rather than encourage) the enthusiasm of potential bidders to make a substantial bid, and that the most rational course for a potential bidder was to wait until the negotiations with Archer had concluded.
It should be noted that none of the potential bidders was called to give evidence about whether disclosure of the $400,000 offer would have changed their approach. Nor was there any expert evidence before the Court about the different values that might apply to Sanpoint’s rights depending on the information available to bidders. If there had been evidence on either of these matters the outcome of the case may have been different.
Observations
This case imposes a very high standard of disclosure on the board, especially since the negotiations were still ongoing and particularly because the offer had been rejected. Naturally, a potential bidder would be “interested to know” as much information as possible about the negotiations with Archer. Based on the Court’s relatively brief reasons, it seems that so long as information is “important” or “would have been a relevant consideration for a potential bidder”, then the information must be disclosed in order to discharge an obligation to obtain the most commercially advantageous price possible.
It seems unreasonable to expect the board to have to disclose details of its incomplete negotiations, as this may well have required on ongoing commentary during the tender process and also introduced greater risks for the board in terms of potentially misleading bidders given the uncertainty of the negotiations. Moreover, those negotiations were being conducted with Archer on a confidential basis. It seems likely that the $400,000 offer by Archer would have been subject to a duty of confidentiality requiring V8 Holdings to keep that offer confidential unless Archer agreed to waive that obligation or gave its consent to V8 Holdings making disclosures to specific persons or of specific information. However, the Court did not think this was a problem. It essentially stated that the board should have simply implemented a mechanism requiring the potential bidders to keep the information confidential. This may have worked in this case, but we anticipate many other similar scenarios where this would not work unless consent to disclose was obtained from the third party. We can readily envisage many situations where a third party could legitimately withhold giving its consent to any of its confidential negotiations being disclosed to other persons not directly involved in those negotiations.
Practical Points to Take Away
- Boards should be reluctant to accept broad agency obligations to obtain the “most commercially advantageous price possible” or to use best endeavours to obtain the highest price possible. These types of obligations will likely require the board to conduct a sale process involving disclosures to potential bidders that go beyond the normal level of disclosure that would be required in a typical sale by private tender.
- If Boards accept these agency roles, the relevant contract or other governing documents should ideally set out a clear process and timeframe to be applied by the board. Rather than just conducting a tender process, consideration should be given to obtaining a binding valuation from an expert valuer and then using that valuation as the offer price (or minimum sale price). In this way, the board is not deciding on the value and instead of an aggrieved seller making claims against the board, the seller’s recourse may be limited to challenging the validity of the valuation. Using a binding valuation can also be preferred if the shares or interests carry some special or strategic value or where the market for the shares or interests is highly illiquid.
- Boards should take care to ensure they do not breach their fiduciary duties when acting as agent. These duties can require the board to act in the best interests of the principal, to act with due care and skill and for proper purposes and not to act with a conflict of interest (this is particularly relevant for transactions involving related parries).
- The timing for undertaking a sale process is critical. In this case, Sanpoint argued the board had delayed too long before it started the sale process. On the flipside, in many situations the most prudent path may be to wait until key negotiations have been concluded before conducting a sale process so that the uncertainty is removed.
- It is important to note that the level of disclosure required in this case resulted from an express clause in a contract between the principal seller (Sanpoint) and its agent (V8 Holdings). The obligation was owed to Sanpoint, not the potential bidders. Therefore, absent a contractual requirement like that in clause 10.1(b), sellers my not need to disclose details about confidential and incomplete negotiations to potential bidders, although the general law requirements about not engaging in misleading or deceptive conduct (including by silence or omissions) will still apply.