Tussle for control of Tyro Payments could get tricky

Mike Cannon-Brookes’ Grok Ventures has backed Potentia Capital’s bid for Tyro Payments.

The arm-wrestle for control of Tyro Payments has just started and already has all the high-stakes ingredients to make for fascinating viewing.

As reported by The Australian’s DataRoom column, while the $658m offer from private equity firm Potentia Capital was immediately rejected by the Tyro board as “highly opportunistic”, the company’s largest shareholder, Grok Ventures, has backed the deal by entering into a pre-bid agreement with Potentia.

Grok, the private investment company of Atlassian co-founder Mike Cannon-Brookes, is an invaluable ally for Potentia. But unusual features of their pre-bid agreement may be open to attack by rival bidders, and provide the catalyst for legal action around whether such arrangements fairly represent the interests of all shareholders. As a refresher, a “pre-bid agreement” is an arrangement between a potential bidder and a target shareholder which, in effect, commits the target shareholder to accept the bidder’s offer.

The terms and structure of these increasingly popular pre-bid agreements vary greatly and will often depend on whether the acquisition occurs by way of a takeover or a scheme of arrangement.

Pre-bid agreements can provide a bidder with a clear tactical advantage in seeking to acquire an ASX-listed company because they allow the bidder to build a strategic position in the target while deterring competing bids.

But bidders beware: pre-bid agreements need to be carefully structured lest their apparent tactical advantage becomes an “own goal”. For example, in the context of a scheme, a bidder should avoid acquiring an outright pre-bid shareholding in the target (usually picked up from a shareholder who is supportive of the proposal), as any direct shareholding held by the bidder will be excluded from voting on the scheme.

As a result, the shareholders entitled to vote will have a higher proportion of votes than they would otherwise have had. A misstep like this could mean the difference between success and failure for the hot-to-trot early bidder.

More commonly, though, the bidder will seek an irrevocable commitment from a target shareholder that it will vote in favour of a scheme of arrangement.

In the context of Tyro Payments (where it is not yet known if a deal will proceed at all or how it would be structured), Potentia and Grok have entered into a “Voting and Acceptance Deed” which requires Grok to either accept its 12.5 per cent shareholding into a takeover bid made by Potentia or vote in favour of a scheme of arrangement proposed by Potentia at the offer price.

But there are two twists. First, unless a rival bidder offers the princely sum of at least $125m above Potentia’s offer, Grok has committed to stick with Potentia. Put simply, even if Tyro shareholders were being offered $100m over Potentia’s offer, Grok would still be prohibited from voting to accept that offer.

It is far more common for pre-bid agreements to include a termination right for the shareholder if any “superior” proposal – no matter how superior – is made and not then matched by the original bidder.

The second twist is that Grok has agreed to pay Potentia a “reimbursement fee” of $5m if a rival bidder successfully acquires Tyro.

While such arrangements are par for the course between a target and a bidder, it is rarely offered by a target shareholder. It raises the thorny question of what happens if a rival bidder emerges who is prepared to pay $100m more than Potentia?

Australian courts have been reluctant to find pre-bid agreements with target shareholders present obstacle to implementing a scheme of ­arrangement.

General consensus is that a target shareholder entering into a pre-bid agreement is not excluded from voting on the scheme or placed in a separate class of shareholders for voting purposes. The rationale is that the committed shareholder is being treated no differently to other shareholders.

The unusual features of Grok’s pre-bid agreement clearly means it has extraneous commercial interests, which differ from the interests of other shareholders.  But the courts have yet to directly consider whether the votes of a shareholder should be disregarded if that shareholder has irrevocably agreed to vote for a scheme, irrespective of whether or not a superior proposal emerges, or to vote against a scheme involving a superior proposal.

Consider this: if a rival bidder offered Tyro shareholders $100m more than Potentia’s offer (and the offer isn’t then matched by Potentia) and Grok is contractually committed and incentivised to reject that offer, would it be fair for Tyro shareholders to be deprived of that better offer? Ultimately, a court will want to be satisfied that any scheme vote fairly represented all shareholders.

While still early days for Tyro shareholders, Potentia has put Tyro well and truly into play. With Tyro’s share price trading at a premium to Potentia’s offer, Tyro’s shareholders clearly expect Potentia to sweeten its offer and/or for a rival bidder to emerge.

If it’s the latter, expect public M&A lawyers and advisers across the country to be paying close attention to what happens next.

Jason van Grieken is a partner in Arnold Bloch Leibler’s corporate and M&A practice.