Dear Acquireco,

We have detailed in this letter our reasoning for the various key provisions in the Term Sheet.

1. DEAL CERTAINTY

a.      Non-Solicitation

Foremost of the deal protections are the non-solicitation provisions that will significantly limit any potential competing bid. These provisions restrict any discussions or proposals that may lead to an Acquisition Proposal (which we have defined broadly), including those companies that participated in the auction.

We have also taken steps to narrow the fiduciary-out provision. While the Board may decide to recommend and pursue negotiations regarding a different Acquisition Proposal, it must first fall under the circumscribed definition of “Superior Proposal”. Should a Superior Proposal occur, we have included a matching period in which Acquireco has the right to review and match the offer. 

Targetco mey feel strongly that they need to canvass the market to satisfy the Board’s fidcuiary duties. Our goal will be to keep their ability to do so as restricted as possible without limiting it to such an extent that the deal could be challenged. Our position will be that a canvass is unnecessary given that a failed auction took place one year ago; however, Targetco may argue that a recanvassing may be required given the developments in the online streaming business.

If Targetco persists on this point, we are prepared to negotiate a strict go-shop provision, which will allow Targetco to solicit other Superior Proposals. While this may seem counterintuitive as a deal protection, we believe that such a provision would be favourable for Acquireco.

If a go-shop provision is negotiated, we would insist on the following conditions:

1)      There shall not have occurred any market canvass since the previous auction and the date of the Agreement. If such canvassing has taken place, then there should be no reason to concede on a go-shop.

2)      The Board shall not solicit any company other than those companies that the Board believes to be interested only in the online streaming business. The Board’s fiduciary duty is only necessary to canvass companies who would be interested in the part of the business that has changed since the last auction. This will also provide Acquireco the opportunity to negotiate a joint venture to divvy up the theatre and online streaming businesses.

3)      The solicitation period shall close not later than 25 business days following the date of the Agreement. Following the solicitation period, the non-solicitation provisions would begin to apply.

The key benefit with the go-shop is that Targetco is permitted to satisfy its fiduciary duties to canvass the market under restricted terms that are more favourable to Acquireco than a pre-agreement market canvass.

b.      Contractual Restraints

First, we included provisions that will enhance the speed at which the deal is completed. We have provided that Targetco must obtain an interim order and circulate the Targetco Circular as soon as practicable. We want to ensure the timely completion of the deal to reduce the risk of any intervening events between now and closing.

Second, the Board is required to unanimously recommend the Arrangement. Further, the Board will be required to reaffirm their recommendation if an Acquisition Proposal is not a Superior Proposal. These provisions will help deter other bidders and garner support among Targetco Shareholders.

Third, the Board is prohibited from waiving any confidentiality or standstill agreements that currently exist and must enforce them. This will help prevent any interested parties who participated in the auction from submitting a competing bid.

Fourth, we have drafted a force-the-vote provision that requires the Board to submit the Arrangement for a shareholder vote for approval notwithstanding any Superior Proposal. Targetco will be concerned about fulfilling their fiduciary duties with the combination of a force-the-vote and hard lock-up agreements (41% in the aggregate). We argue that the lock-ups do not completely guarantee the success of the transaction, particularly if the Board is given a fiduciary out to recommend a Superior Proposal.

c.       Lock-up Agreements

We have included, and will insist on, a condition precedent that each of the three significant shareholders enter hard lock-up agreements.

d.      Break Fees

The termination fee is currently valued at 5% of equity value as an anchoring point for negotiations. Courts are likely to rule against anything higher than 5% since it could have auction ending potential.We will negotiate for the higher end of normal market practice for a deal this size to limit competing proposals.

The break fee will likely be negotiated in conjunction with a possible asset option to purchase Targetco’s online streaming business at a premium. While we understand that Acquireco is primarily interested in the theatre business, including an asset option is likely to drive competing bidder interest and enhance deal certainty.  

2. REGULATORY APPROVAL

Both parties in negotiations will be sensitive to the fact that Acquireco is controlled by a Russian sovereign wealth fund. To mitigate risk, we have specified that Acquireco only needs to do what is commercially reasonable to seek regulatory approvals. Acquireco will not be required to fundamentally damage the business to obtain approval.

3. CONSIDERATION

We have drafted a consideration provision that allows shareholders to elect either shares or cash (or a combination) as consideration, provided that the issuable Acquireco shares are no more than 25% to avoid the requirement for Acquireco shareholder approval. However, a substantial portion of the roughly $12 billion deal will have to be financed with cash. If Acquireco shares fall before closing, the cash option will be enticing to shareholders. As such, we included a condition precedent on financing.

We are proposing a fixed ratio pricing formula for the shares offering, though Targetco will likely insist on a floating ratio. If this is the case, we will negotiate a collar to mitigate the risk of Acquireco shares falling in value between now and closing. 

The option to select their consideration gives Acquireco and Major Shareholder the opportunity to negotiate the lock-up agreement. Major Shareholder, wanting to avoid capital gains taxation, will prefer to receive no more cash equal to its adjusted cost base, whereas Acquireco prefers to cash-out Major Shareholder. Both parties may predetermine in their lock-up agreement what apportionment is most optimal to address both concerns. 

4. RISK OF COVID-19

We have drafted Material Adverse Effect (MAE) and Conduct of Business provisions to limit the risk of COVID-19. We will ensure that the COVID-19 carveout in the MAE does not apply if an outbreak disproportionately impacts Targetco. 

Further, the Conduct of Business provisions only allow Targetco to conduct its business in the ordinary course. “Ordinary course” will include measures taken by Targetco to preserve its business through previous downturns. To mitigate this for Acquireco, we have also required Targetco to maintain and preserve Targetco’s existing business and is further prohibited from disposing of its assets. 

5. LIMITING COST IF ACQUIRECO HAS A CHANGE OF HEART

We have drafted an asymmetrical Indemnification provision to further ensure deal certainty by giving only Acquireco the ability to seek specific performance to force Targetco to close the deal. We have also added wording to limit liability in case Acquireco does have a change of heart.

We will be in touch regarding the progress of the negotiations.