Mergers and Acquisitions Simply Explained
“Mergers and Acquisitions Explained…”
Canada today possesses a vibrant market for mergers and acquisition deemed by many in the industry (practitioners, movers, shareholders and owners) as quite active and dynamic. Its current state had been helped out mainly with present straightforward and clear-cut rules which govern these mergers and acquisitions.
Also, the law had been doing its continuous efforts to be developed further with regards to the responsibilities and duties of directors. This is in order that hostile takeovers and acquisitions and the shareholders’ responses can further be fine-tuned in creative structuring of strategies. The main reason is having better transactions that can avoid litigation.
This run-through aims to give a complete beginner a professional summary of the main legal considerations with regards to public company M & A (mergers and acquisitions) in Canada. The purpose is to try to answer the questions from prospective buyers who are considering an M&A business deal.
Two methods of acquisition
There are two methods in getting control of any public company in Canada. The first is the takeover bid, a formal offer to all of the company shareholders. This bid, however, is either hostile or friendly.
The others are plans of arrangements, usually implemented when agreed on by the target and the bidding companies. This brings in many transaction types (or a combination of them), including share purchases, wind-ups, amalgamations, share redemptions, and transfer of assets (or issuance of new shares).
The flexibility of arrangement and its ability to include many transaction goals makes it widely used. This type needs both the court and shareholder approval. Likewise, the deal needs the cooperation of the target and is mostly negotiated.
While it is not common in Mergers and Acquisitions, the statutory amalgamation within the corporate law lets two Canadian companies to directly merge into one company. This type is a straightforward merger by consensus, and avoids the required court proceedings.
Points on take-over bids & arrangements
If there are no rights plans for shareholders, the take-over bid needs 35 days. The bidder needs a 90% acceptance (going into the 100%) within a short time. If there is 90% acceptance, the offeror acquires 100%.
If the bidder gets 66.66% acceptance, a 2nd transaction (becoming an amalgamation) can be utilized to get 100% approval during shareholders’ meeting. This takes another 30 days for notices, and other proxy dissemination processes.
In an arrangement, a 66.66% shareholder approval can get an outright 100% target equity. If there are other plans or options, renegotiations are needed or are left after closing. (Option holders need to agree to end them.) Arrangement can have the option plans terminated by court order.
Arrangement needs 2 court hearings (with additional 30 days or so) for notice and dissemination period for the meeting of shareholders.
Regulations on securities and bids on take-over are conducted mainly at the provinces. Incorporation of companies can be done at federal level or at the provinces, and they may include relevant regulations and requirements for M&A, including meetings of shareholders.
Offer documents by bidders on formal take-over (with the price payable in securities and cash, or a mix of both) do not need a review, or to be receipted and cleared by regulators of securities. This is before bids are made, delivered, or accepted. The regulators, though, can selectively review bids for compliance.
In arrangements, the ruling is similar to a point: There is no need for a review or clearance from regulators before submission to the shareholders of the targeted company. This common in Mergers and Acquisitions.
However, they need prior court approval regarding the procedural aspects of the transaction (calling meetings and distributing proxy materials). The second court hearing checks on whether the deal is still fair and reasonable after being approved by shareholders.
Like the take-over bids, the plans in arrangement are also reviewed (as chosen by regulators) re compliance with laws on disclosure.
M&A regulatory body
Across Canada, there is one set of rules on procedures. The securities regulators in the provinces have put into practice the regulatory initiatives in the governing rules on take-over bids. These regulators have implemented these regulatory methods to harmonize and consolidate the rules governing take-over bids.
In effect, there is only one set of procedural rules across Canada. Decisions to do a selective review on take-over bid are mostly on requests by competing bidders and target companies on allegations of deficiencies in the offer of a competitor.
Both the Toronto Stock Exchange and the TSX Venture Exchange (both are self-regulating organizations), can also enforce requirements on both the take-over bids and arrangement plans. Usually, the exchanges evaluate the sent-in proxy circulars in arrangement plans before they are sent to shareholders of the target company.
Merger agreements are common in transactions where the board of directors of the target company recommends them to the shareholders. These may have different scopes but they carry many similar provisions.
These may include the target party having the merger undergo a shareholders vote aside from the usual representations and warranties from both parties. Other clauses include those on shops, bans on transactions by the target other than the regular business run and other protection measures.
Circulars, break fees, and reverse break fees
In take-over bids, the board of the target is required to produce a recommendation on the circular from the director on whether the bid is accepted or not. If there is no recommendation, it also has to be explained in the circular. (The recommendation by the directors is whether to vote for the transaction or not.)
Target companies sometimes have to pay break fees caused by several grounds. One is the target board’s support withdrawal on the transaction. Other reasons include the emergence of
A superior competing bid which is preferred by the target board over the original bid.
Other causes include breach of the arrangement agreement by the target and the failure to comply a condition controllable by the target board. However, target companies are seldom compelled top pay break fees if their shareholders disapprove the transaction in the first place.
Reverse break fees, on the other hand, is to be paid by the bidders. It had been more common these days when there is potential risk to the target. One culpable ground is the buyer’s failure to get financing as per agreement.
However, there is no limit to amount of break fees. The accepted ranges for break fees are those that are commercially reasonable. This often depends on the transaction size.
The rules on statutory bids specify that the bidder will have to make the necessary conditions before the bid that the component of cash for the required funds are available. These funds are to make the full payment for all the securities that the bidder intends to acquire. These have to be fully disclosed within the documentation of the formal bid.
These arrangements in financing could be subject to conditions. This is, if the bidder believes that at the time when the bid had already started, it might not be able to pay for the securities that were deposited due to some financing conditions that were not satisfied.
In plans of arrangement, there are no rules on financing that are similar or comparable. The target’s board, as a body themselves, will make sure the bidder has satisfactory funding in position and is ready.
In take-over bids, a circular are mailed to the target shareholders (containing data ordered by the regulations on securities). The bid circular is also delivered to the target company after being filed at SEDAR for filing securities to regulation authorities.
This can be published likewise as a newspaper advertisement as a brief summary provided certain requirements are met.
For plans of arrangements, this is followed with a press release from the target publicizing the transaction after agreement with the acquirer. After which, the circular and other proxy materials are mailed to shareholders as filed under SEDAR.
Cash & Securities or post-agreement
For transactions that deal with cash-only consideration, both the take-over bid circular and that of the information are uncomplicated documents with little data on bidder and its plans for the target. After the take-over bid is made, the board at the target sends the bidder and the shareholders a director’s circular inside 15 days after the bid.
After an agreement is reached, the target has to prepare a circular on information together with proxy materials for the meeting of shareholders. The disclosure includes the process that led to the transaction.
After which, it shall make an application to court. This is with regards to the preliminary order that will approve the process for calling and subsequent voting during the meeting with the shareholders. The approval order is printed and provided to intermediaries and to shareholders 25 days before the meeting.
The Competition Bureau requires that it is notified if two thresholds are both exceeded. One is that the two transacting parties have collective assets in Canada (or gross yearly revenues) which exceed $400. (This is size-of-the-parties test.)
Two, the collective asset value in Canada acquired by those assets is over a set threshold. (It is $86 million in 2015.)
The test is fulfilled where both of these conditions are met. One, the collective asset value in Canada owned by the target (and other entities under the control of the target) exceeds $86 million, the 2015 threshold.
On the other hand, the bidder including its affiliates, would own in excess of 20% voting shares of a company that is public or in excess of 35% voting shares of a company that is private, but has control lower than 50%, this shareholder test would be topped by share purchases in the future.
In summary, this will result in the bidder (and affiliates) to own more than 50% of the voting shares of the target.
The test is met in corporate amalgamations where each of the parties (and their affiliates) have assets from or in Canada exceeding the $86 threshold. This also applies to gross revenues from sales.
The bidder (and its affiliates) will own in excess of 20% of shares (voting) of a company that is classified a public and in excess of 35% of the shares that are voting in a private company.
A business owner should always think about every detail thoroughly especially when dealing with mergers and acquisitions. A hasty decision without due diligence would mean that the other party is seeing an opportunity in which you cannot see.