Introduction
You have asked me to prepare a memorandum that compares a plan of arrangement and a takeover bid, and outline the advantages and disadvantages of each to Mammoth. I highlight key considerations that further determine what is important to the client. I then provide, all things considered, a final recommendation.[1]
Facts
The client, Mammoth Interactive Inc. (“Mammoth”), is looking to acquire Legend Games Inc. (“Legend”) for an asset, Absurd Engine. Others are also interested in acquiring Legend. Mammoth discretely acquired 11M shares (9.27%) of Legend over two months. Mammoth’s shareholders do not want to issue more shares for this transaction.[2]
Legend’s CEO (“Sweeney”) holds 1M shares (0.83%) and controls Sweeney Holdings Corporation holding 9M shares (7.50%). He is looking to retire and has a change of control payment in his employment contract. The other senior officers of Legend (“officers”) hold an aggregate of 10M share options (8.33%), and half are in-the-money; they also hold less than 1% of common shares.
Omega Capital Bank (“Omega”) is willing to loan cash to Mammoth, but this would not be enough cash for Mammoth to acquire Legend. Omega is also willing to acquire a few million shares of Legend in support.
RPG Capital Corp. (“RPG”) holds 10M convertible bonds (8.33%) at a fixed conversion price that is out-of-the-money. They also hold 5M common shares (4.17%) and want to sell their shares before any acquisition is complete. They would also oppose transactions that would leave their bondholder highly leveraged.
8Bit Industries Limited (“8Bit”) holds 21M common shares (17.50%). They are willing to support a transaction if Legend agrees to renew their license for Absurd Engine.
Hyrule Ventures Inc. (“Hyrule”) holds 8M shares (6.67%). Hyrule also holds 20% of Mammoth shares.
Short Conclusion
The main issue here is identifying a transaction structure that has the right balance of maximizing speed, minimizing costs, and ensuring that the transaction is successful. A one-step takeover bid could maximize speed and minimize costs, but there are factors that would make a one-step transaction unfeasible; as such, a second-step, going-private transaction is a likely outcome. A plan of arrangement has a higher chance of success and friendly negotiations can make it a flexible and superior alternative to a second-step hostile bid. Therefore, I would recommend a plan of arrangement.
Analysis
Plan of Arrangement
Advantages
It is a friendly transaction. Friendly negotiations mitigate the risk of a deal falling apart, especially in combination with voting support agreements. There are a number of things that can be built into an arrangement support agreement to further mitigate risk, like diligence, regulatory approvals, no-shops, termination fees, or fiduciary outs.[3] Although friendly offers do not require a significant premium like a hostile bid, costs may increase if they do not like the friendly offer and opt for an auction process, and this is possible since others are interested in Absurd Engine.
It is a one-step acquisition with a lower acceptance threshold. A special resolution vote of 2/3 of the target shareholders is needed to acquire all of the shares.[4] In contrast to the 90% threshold for a takeover bid, a lower threshold eliminates the need for financing and the associated risks that short-term bridging loans may carry. A voting support agreement with significant shareholders can help ensure that the lower threshold is met. However, beyond estimating pre-transaction support, there is still the need for a majority-of-the-minority vote since arrangements are considered business combinations.[5]
There is also the option to offer different consideration among securities, but we should keep the fairness hearing in mind. [6] Moreover, interested parties cannot vote in the majority-of-the-minority vote and collateral benefits would make any party in the voting support agreement an interested party.[7] We should be wary of any possible dissenters who is a significant shareholder.
It is possible to get close to the 662/3% threshold using a voting support agreement. Sweeney and his holding company account for ~8.3%, and he is incentivised by retirement and the change of control payment in his contract. 8Bit accounts for ~17.5%, and, since this is a friendly transaction, we may negotiate with the board of Legend to agree to renew their license for 8Bit’s support. Hyrule accounts for ~6.8%, and they may be incentivised to support this arrangement since it can increase the value of their 20% holding in Mammoth. Along with Mammoth’s ~9.2%, this puts us at ~41.8%. Additionally, the senior officers hold 10M in share options, and it is possible to give these options voting rights, whether it is as a part of common shareholders or as a separate class. Similarly, if RPG’s bonds are given voting rights (~8.3%), and we choose to purchase their ~4.2% common shares ahead of the acquisition, this accounts for another ~12.5%. This can potentially push us up to ~62.6%, and we still have the support of Omega to purchase additional shares. Nevertheless, we should remember there is a public interest power to act is the spirit of the law and that there can be no benefit to vote in favor of a plan of arrangement if it does not benefit the entire corporation.[8]
Pre-transaction purchases, or attaining a “toehold” on the target, are excluded from the majority-of-the-minority vote.[9] The 11M common shares acquired by Legend over two months falls under this exclusion since they are an interested party. Additionally, RPG wants to sell their shares before the acquisition, which means their ~4.2% would also be excluded. Nevertheless, toehold purchases can have advantages: it might provide leverage when negotiating with Legend’s board, it can deter third-parties, and it can give more certainty for the acceptance threshold. It is possible to acquire up to 19.9% without triggering a takeover bid, but at 10% a press release and early warning report are required.[10] I would advise limiting any further toeholds to ensure the success of the majority-of-the-minority vote.
There is flexibility with structuring the transaction. There are no prohibitions against financing conditions, differential treatment of shareholders, or collateral benefits. This opens the opportunity to offer a benefit to significant shareholders in order to incentivise their support of the arrangement—still, there are business combination requirements we should be wary about.[11]
Even if we cannot fund the entire purchase price with a loan from Omega, we can still move forward with an offer of cash as consideration and try to secure more funding later from other creditors. Since we can issue shares below 25% without shareholder approval, we can offer a mix of shares and cash.[12] Since Mammoth’s market capital doubles Legend, shares of Mammoth can be an attractive incentive for Legend’s outstanding shareholders.
There is also flexibility when it comes to convertible securities. If convertible securities are in-the-money, we should allow them to be exercised for the underlying common share, exchanged for the cash value, or exchanged for Mammoth’s convertible securities.[13] This is applicable for RPG and the senior officers who have unvested options, and we use their underlying shares to count towards the vote.
The flexibility also allows for more tax planning. The forms of consideration are often informed by tax consequences. Cash or combinations of cash would mean no rollover, so share consideration can be preferable; to defer capital gains, we should offer common shares through a subsidiary.[14] The target shareholders should get choices of considerations for tax objectives. If they want a rollover, shareholders would take common shares. If they want cash, which is taxable, and they should get preferred share of the resulting corporation which are redeemable for share after closing.[15]
If shares are being offered as considered, we must account for the outstanding shareholders in the US/ We can rely on the registration exemption which allows us to offer our new shares as consideration to US shareholders without having to register them with the SEC. [16]
Disadvantages
It requires the target board’s cooperation. The circular is controlled by the target and the target largely drives the deal; unlike a takeover bid, it is not possible to proceed without the board’s consent and go directly to shareholders. Negotiations can drag on and the timing is less within our control, especially with respect to court and shareholder approval. The proxy solicitation and court proceedings can be especially cumbersome and time-consuming. The entire process—from announcement to closing—can take over two months. This can lead to increased costs.
It requires a fairness hearing. An interim order establishes the procedural aspects of the arrangement, but the final order scrutinizes the substantive aspects of the arrangement to the standard of it being “fair and reasonable.”[17] The test for this standard is (1) whether the arrangement has a valid business purpose, and (2) the objections of those whose legal rights are being arrange are resolved in a fair and balanced way.[18] The first part of the test is fact-driven and depends on the positive value the arrangement has to the corporation as a whole in relation to the impacted rights.
For the fair and balanced part of the test, we should assess some of the following factors: level of approval by securityholders, proportionality of the comprise between securityholders, the securityholder’s positions before the arrangement, the reputation of the directors endorsing the arrangement, the endorsement of a special committee, a fairness opinion from an expect, and dissent or appraisal remedies.[19] This fairness hearing also gives securityholders a chance to voice their objections. There is nothing particularly worrisome about this transaction, but I would advise getting a fairness opinion anyway—it can be expensive but sometimes crucial, and courts have rejected applications for a plan of arrangement due to a lack of a fairness opinion.[20] More generally, it is difficult to speculate on the current facts if this transaction would be problematic.
There are additional business combination requirements. This can increase costs and time.
A formal valuation by an independent committee is required if an interested party is acquiring the issuer which applies to us.[21] Also, enhanced disclosure is needed, especially for conflict-of-interest transactions in regards to board’s review and approval process, and an independent committee of directors is also required. [22] Minority approval of business combinations (“majority-of-the-minority vote”) is required, and this calls for a deeper analysis.[23]
Sweeney, as the CEO, is deemed a related party to Legend and his holding company is also deemed to be beneficially owned.[24] His change of control payment is a collateral benefit and the carveout is not available to him because his beneficial ownership in the holding company pushes his ownership of common shares beyond one percent.[25] Since this is a collateral benefit, this makes him an interested party and he cannot participate in the majority-of-the-minority vote.[26]
The senior officers are also deemed a related party.[27] Depending on how their share options are treated, they may be considered an interested party. Notably, half of their share options are out-the-money and it would not be commercially viable; as such, cash payments would be a collateral benefit since they are a consequence of the transaction.[28] Fortunately, we can rely on a carve out since it is a benefit resulting from their employment, they hold less than one percent shares, and the value of the benefit is less than five percent of what they are receiving for their shares.[29] Alternatively, we can purchase them for their Black-Scholes value or give them replacement options. In any case, they can participate in the majority-of-the-minority vote.
We can purchase RPG’s shares ahead of time but they will be excluded from the majority-of-the-minority vote. RPG’s 10M convertible bonds are out-the-money and it would be a collateral benefit to exchange them for a cash payment; since no carveouts apply, they would become an interested party and would not be able to participate in the majority-of-the-minority vote.[30]
Omega would be considered a joint actor since they are a lender to Mammoth.[31] Therefore, any shares they purchase would not be part of the majority-of-the-minority vote.[32]
8Bit holds 21M shares which is above the 10% threshold to make them a related party of Legend.[33] Whether or not they will be a joint party is a question of fact, but an agreement to get their license renewed for a vote would certainly count as a collateral benefit. We certainly do not want them to oppose the transaction since their opposition in a majority-of-the-minority vote could be detrimental. However, it would be better to give them a collateral benefit and have them not participate in the majority-of-the-minority vote than have them participate and dissent to the transaction.
Hyrule’s 20% holding of Mammoth shares does not make them a joint actor. Mammoth is an associate of Hyrule, but Hyrule is not an associate of Mammoth.[34] Since Hyrule is not a joint actor, they can vote in the majority-of-the-minority vote.
Takeover bid[35]
Advantages
It is possible to go directly to shareholders. Takeover bids are triggered by acquiring 20% or more of the target’s securities.[36] If within 120-days of the bid, the bid is accepted by 90% of voting shares other than ones held by the bidder, the bidder can trigger a compulsory acquisition and require the hold-outs to sell at the same price).[37] With a hostile bid, we can go directly to shareholders without negotiating with the board or requiring their consent.[38]
A pre-bid toehold purchase of shares can mitigate the risk of failing the meet the takeover threshold,[39] but this can prematurely disclose the intention for a bid.[40] At 10%, a press release and early warning report are required.[41]A toehold can be useful because there is no premium on these shares.[42] However, any securities acquired 90-days preceding the bid will not count for the 90% compulsory acquisition, or 50% minimum tender condition.[43]
The 11M common shares acquired by Legend over two months would not count towards the compulsory acquisition or minimum tender conditions.[44] We also cannot acquire shares of the employees ahead of the bid due to insider trading prohibitions which applies to the officers.[45] Indirect offer restrictions also apply to holding companies, like Sweeney’s 9M shares or the senior officer’s in-the-money securities.[46] These restrictions further limit our ability to meet the acquisition threshold.
The principal exemption from takeover bid rules is the private agreements exemption, which can be used to acquire shares without triggering the takeover bid requirements.[47] While there is the possibility of offering a 15% premium through this exemption, there are pre-bid integration rules which would effectively mean that this “premium” must be offered to all shareholders for the bid. Moreover, due to these securities being excluded from the acquisition thresholds, the private agreement exemption is not appropriate for us if we are planning a one-step transaction.[48]
A lock-up agreement with significant shareholders can be used to ensure the takeover threshold.[49] This is the primary device we should be using. Shareholders must be offered identical consideration and there cannot be any collateral benefits or “side-deals” or post-bid benefits.[50] As such, we cannot offer any additional incentive to agree to a lock-up. However, the deal may be too risky to move forward without some of the significant shareholders agreeing to a lock-up—let us analyze each party in turn.
RPG wants to sell their shares now, which can be problematic. This would also mean that if we meet RPG’s demand and RPG’s shares are purchase ahead of time, then they could not be counted for the acquisition threshold. However, this can be more cost effective than purchasing them under a likely premium that comes with the takeover bid.
There are some added rules to note about options.A hostile bid must be for voting shares, but some convertible bonds may count.[51] An acquirer is deemed to own beneficial securities underlying 60-day convertible securities.[52] Acquisition of convertible securities, especially those in-the-money, can be an indirect offer for underlying securities and subject to anti-avoidance rules.[53] RPG hold 10M convertible bonds that are out-of-the-money and the senior officers also have share options that are half out-the-money—I would recommend excluding them out from the bid since converting them would result in a loss.
The bid rules require a tender threshold of a majority excluding the bidder and its joint actors.[54] As such, while it is possible to ask Omega to purchase as many shares up to 19.9% and agree to a lock-up, it is not advisable for this transaction since they are a joint actor in virtue of their lending money to Mammoth.
We also want Hyrule to agree to a lock-up. They are incentivised to assist us since they hold 20% of Mammoth shares, which can increase with a successful acquisition.
We really need 8Bit to agree to a lock-up. We know they would support the transaction if Legend agrees to renew their license for 20 years. However, we cannot promise that we will do this after acquiring Legend because this would be contrary to offering equal consideration to all shareholders. This is problematic for a hostile, one-step transaction because we cannot meet the 90% threshold without their shares. As such, we may need to consider a friendly bid or deliberately planning for a second-step transaction.
It can be faster and less expensive. Nonetheless, speed can sometimes conflict with minimizing costs and having control over the transaction.[55] While Mammoth is worried about others who are interested in Legend, Mammoth also has financial constraints and shareholders of Mammoth likely will not issue more shares. Since Mammoth does not have enough cash for the deal, even with a loan from Omega, a cash bid is doubtful since cash bids have to be fully financed in advance.[56] Offering share consideration for US securityholders will be challenging and expensive because we would have to register an offering with the SEC or find some other exemption.[57]
If the aim is to have a one-step transaction, we should put the minimum tender condition threshold at 90%. But we should assess the feasibility of a one-step transaction. If a second-step transaction is inevitable, we should be plan around the restriction on pre-bid shares for the majority-of-the-minority vote. The shares of the bid can be counted for the going private transaction in the 662/3% vote, but only if it is disclosed in the bid circular.[58] If we do end up with a second-step transaction, we would need to follow the additional rules around a business combination.[59]
There is a fallback of a second-step, going-private transaction. Even if the target of 90% fails, it is still possible to move forward with a takeover bid with 662/3% through a second-step, going-private transaction. This opens the possibility to start friendly negotiations with the intention to go hostile if things do not go our way (or a “bear hug”). However, on the current facts, it is unlikely that the 90% threshold will be met; as such, if a hostile bid is absolutely necessary, I would advise planning for a second-step.[60]
Disadvantages
There is a risk of failing to acquire altogether. The threshold for the one-step transaction is challenging in many circumstances, and a second-step transaction is costly and time-consuming. However, there is a risk of failing to meet the minimum tender for control of 50%—although the risk of this is low, it can result in a loss of time and money.[61] One way to mitigate this risk is through a friendly bid.[62]
There is less flexibility in structuring the transaction. The stringent regulatory restrictions can make planning challenging. Having to offer equal consideration offers little incentive to significant shareholders to enter into a lock-up agreement. Additionally, for a hostile bid, there are little negotiations with the target board and this can add risks, such as the potential lack of diligence review of Absurd Engine.
There are also added costs that are not immediately obvious. For example, the lack of flexibility limits tax planning.[63] Moreover, if there are any securityholders in Quebec, the takeover circular must be translated in French, and this is not a requirement for arrangements or amalgamations.[64]
There are restrictions on financing and cash consideration. Fully cash bids must be fully financed in advance.[65] Institutional buyers will generally prefer cash while the insiders of Legend may prefer shares for a tax deferred roll-over. Directors can generally issue shares at their discretion and Mammoth can issue shares below 25% without shareholder approval.[66] Offering a choice between cash or shares might be the only feasible option given the limited cash. Since Mammoth’s market capital doubles Legend, I assume that issuing less than 25% shares will be enough to cover the Legend shareholders who prefer shares.[67]
If a fully cash bid is the only way, we can try to find other creditors for bridge financing, but this brings additional risks and costs. There are other ways to finance this bid, but they are generally not suitable for this transaction. For example, a leveraged buyout is unwanted by RPG because RPG would oppose any transaction that would leave the bondholder highly leverage. If we go around RPG, they would be a dissenter and make the majority-of-the-minority vote difficult. However, if we are confident that we do not need their common shares for the majority-of-the-minority vote and can proceed with their opposition, then it is possible to proceed with a leveraged buyout.
Any proposed transaction of this size should be assessed for compliance with the Competition Act and the Investment Canada Act. We should examine whether the parties of the transaction have assets exceeding $400M and the target’s assets exceed 93M; additionally, we should check if the acquisitions of voting shares have a threshold of 20%. If so, we are required to notify the Competition Bureau.
A worry with the Investment Canada Act is that Absurd Engine may trigger national security concerns. Since it is a technology that can be used for missile tracking in the Canadian Artic, it is possible that the federal government interferes with this transaction for its own assessment, which can take up to 200 days. Moreover, Hyrule, a foreign company, and its 20% holding of Mammoth can further cause scrutiny from the federal government.
Conclusion
While a one-step, takeover bid would be ideal, financial constraints make it unlikely that Mammoth will reach the 90% threshold. This is mostly due to Mammoth’s lack of cash and Mammoth shareholder’s reluctance to issue shares to finance a takeover. Moreover, the fallback of a second-step transaction is not suitable because of the longer timeline, added costs, and legal constraints.
Deliberately planning for a second-step transaction is preferrable to a failed one-step transaction because it adds some more flexibility. Friendly negotiations can also ensure the lock-up of key shareholders, particularly 8Bit—having 8Bit dissent to the majority-of-the-minority vote can be fatal to the transaction.
Nevertheless, a plan of arrangement is the most feasible transaction structure on these facts. It offers flexibility to plan around Mammoth’s financial constraints, and friendly negotiations can also offer opportunities to mitigate risks. Still, the business combination requirements must be carefully navigated to ensure a successful majority-of-the-minority vote, especially with respect to any collateral benefit used to entice significant shareholders into a voting support agreement. Above all, a plan of arrangement provides the right balance of maximizing speed, minimizing costs, and ensuring that the transaction is successful.
[1] I assume that I am writing to a sophisticate audience. Therefore, I will not provide a descriptive outline of the law and assume readers are equipped with a background in transactional law, particularly securities and corporate law. I have tried to minimize redundancies between takeovers and arrangements in this comparative analysis.
[2] The “M” beside the numerical value represents million(s). The percentages are based on Legend’s total of 120 million share.
[3] This can also benefit Legend’s board since shareholder and court approval can protect them from liability going forward. Also, the market capital of Mammoth doubles Legend and this can sometimes give more negotiating power, especially with symmetry of terms in the agreement since this is not a merger of equals.
[4] CBA s 181, 182, 185, 186.
[5] NI 61-101 s 1.1 “business combination”.
[6] I assume there are no separate class or series of shares, but if there are they would get separate votes if they are affected differently.
[7] NI 61-101 s 8.1(2). E.g., the officers of Legend and 8bit are related parties, and offering them any collateral benefit would exclude them from the minority vote.
[8] NI 61-101 Companion Policy s 2.1(5).
[9] In the case of a negotiated transaction, toehold acquisitions can be restricted under the terms of a standstill provision.
[10] NI 62-103 s 3.1.
[11] See the business combination requirements for each party outlined below.
[12] TSX Company Manual s 611(c); in case the shareholders of Mammoth refuse to issue more shares, we can issue bonds or promissory notes.
[13] The TSX and institutional shareholders usually do not like convertible securityholders to be given a vote; if they are given a vote, they can be lumped in with common shareholders, or allow them to vote separately only on the treatment of convertible securities. We should consider the risk of an oppression remedy being sought by outstanding non-convertible security holders as well.
[14] Income Tax Act s 87.
[15] Income Tax Act s 85. This is used more frequently. Each shareholder (selling and buyer) must jointly elect and fill out form. They can get some cash in addition to share and get a rollover only if it does not exceed adjusted cost base of shares (if it does exceed the adjusted cost base of the share, you realize some gains). Section 85.1 is automatic and generally only applies in all share deal, and offering any cash in the transaction would blow up the rollover.
[16] Securities Act of 1933 s 3(a)(10).
[17] BCE v. 1976 Debentureholders, 2008 SCC 69 [BCE]. The fairness hearing is not just a rubber stamp and there is a fair amount of case law around the approval process.
[18] Ibid.
[19] Ibid.
[20] Re: Interoil Corporation, 2017 YKSC 16.
[21] NI 61-101 s 4.3. Exceptions include business combination carried out on previous arm’s length negotiations, auctions, or second-step transactions (this can be relevant for a second-step takeover bid: NI 61-101 s 4.4).
[22] NI 61-101 s 6.2.
[23] NI 61-101 s 4.5.
[24] MI 61-101 s 1.6(2).
[25] MI 61-101 s 1.1 “collateral benefit” (c).
[26] MI 61-101 s 8.1(2)(b).
[27] MI 61-101 s 1.1 “related party” (e).
[28] MI 61-101 s 1.1 “collateral benefit”.
[29] MI 61-101 s 1.1 “collateral benefit” (c)(iv)(B); NI 62-104 s 2.25; OSA s 97.1(2).
[30] MI 61-101 s 8.1(2). Although, it is not clear if the accelerated options are provided by Mammoth, and if it is not, then it would not be a collateral benefit between us and RPG.
[31] NI 62-104 s 1.9.
[32] MI 61-101 s 8.1(2)(d).
[33] MI 61-101 s 1.1 “related party” (d).
[34] MI 61-101 s 1.1 “associate entity” (a).
[35] I focus on the details around a hostile, one-step transaction. I do not elaborate in any detail on friendly bids or second-step transactions.
[36] NI 62-104 s 1.1; OSA s 89(1).
[37] OBCA s 188; CBCA s 206(2).
[38] This gives us control of the bid circular and we can strategically put pressure on the board.
[39] There are also ordinary course exemptions for open market purchases for up to 5% (NI 62-104 s 4.1). During the bid, we can also purchase up to 5% on a stock exchange, but must state its intention in the takeover bid circular or press release—however, this too will not count for the 90% threshold, so this is not advisable (NI 62-104 s 5.4(1)).
[40] It is possible to combine the option to buy 5% on the stock exchange in the normal course of business as long as it is below 20%, and then exercise the private agreement exemption (NI 62-104 s 2.6). The investment funds, like Omega, can use reporting delay to strategically help us (NI 62-103 s 4). Still, I would not recommend using the ordinary course exemption to purchase more shares of Legend on the stock exchange (NI 62-104 s 2.6; OSA s 93.2). This can increase the costs and risks if this transaction is not completed.
[41] NI 62-104 s 5.2(1); OSA s 102.1(1). There is a purchase moratorium which prevents purchases for another day.
[42] And it can help to mitigate some financial risk by selling the pre-bid shares to the new bidder can help recoup some costs.
[43] MI 61-101 s 8.1(2). There is also an exclusion for the majority-of-the-minority vote in a second-step, going-private transaction.
[44] MI 61-101 s 9. Since they are an interested party, they cannot use these shares for the majority-of-the-minority vote.
[45] Once a person “is considering, evaluating or proposing to make a takeover bid,” any special relationship with target may not trade securities until the transaction is announced (OSA s 76(3)).
[46] NI 62-104 s 1.10.
[47] For five vendors and consideration not exceed 115% of a 20-day average closing price. More specifically, the value of the consideration paid (including brokerage fees and commissions) cannot not exceed 115% of the market price of the securities at the date of the bid. If we intentionally make use of this exemption with a seller who buys the shares to be protected under this exemption from a third party, then we have to include the third party in our limit of five (NI 62-104 s 4.2).
[48] We are limited on cash and we need as many shares to count towards the 90% threshold as possible, but it may be useful if we believe there is a good chance of a second-step, going-private transaction.
[49] They are typically filed with security regulators and could trigger early warning disclosure duties.
[50] NI 62-104 s 2.24; OSA s 97.1.
[51] MI 62-105 s 1.10.
[52] NI 62-104 s 1.8.
[53] NI 62-104 s 1.10.
[54] CSA Staff Notice 62-305.
[55] By offering a significant premium that is undeniably attractive to all of Legend’s shareholders and making concession to the board, a friendly negotiation can speed up the process to around two months. Usually, a hostile bid takes around 120 days, but there is a risk of an additional six to eight weeks if there is a second-step.
[56] NI 62-104 s 2.27(1).
[57] We could try to carve out the US securityholders, but that would lead to less than 100%. There may also be additional MJDS requirements.
[58] MI 61-101 s 8.2.
[59] See business combinations requirements in arrangements below.
[60] In brief, an amalgamation would be the most cost efficient second-step method. This second-step transaction would be considered a business combination and subject to MI 61-101 requirements. A statutory amalgamation can squeeze out the minority shareholders and make the target a wholly own subsidiary of the purchaser. We must incorporate a special-purpose corporation through the target’s governing (i.e., CBCA since two amalgamating corporations must be incorporated under the same statute; alternatively, a continuance is possible but it gives rise to the additional risks of dissent rights) and use it to purchase two-thirds of shares in the target. The board of each corporation proposes the amalgamation, and shareholder approval is a given since the special-purpose corporation holds the majority shares. The minority shareholders can exercise their dissent and appraisal rights, and will cease to be shareholders before the amalgamation.
[61] NI 62-104 s 2.29.1(c).
[62] While it is possible to have a friendly bid and negotiate with the target of the board, this creates a risk of alerting the market and triggering an auction, which could raise the price of the deal. On the other hand, once a hostile bid starts, the board might get on the defensive and subsequent negotiations or alternative deal structures requiring board consent will be nearly impossible; moreover, a hostile bid may increase bidder’s cost and risk if a transaction is not consummated. Since the client did not want to buy more shares to alert the market, I assume they want to be discrete about this transaction and does not want to solicit Legend. And even if negotiations are friendly and discrete, there is a risk of a leak—intentional or not—which can push up the trading price of stocks even before it is officially announced.
[63] Any cash payments to Legend securityholders would mean that they receive no tax rollover and realize an immediate capital gain.
[64] NI 62-104 s 3.1.
[65] NI 62-104 s 2.27.
[66] TSX Company Manual s 611(c).
[67] If the bidder’s shares are offered, the bidder must provide prospectus disclosure for the securities as a part of its take-over bid circular (which can be short-form, if eligible).
Philo-so-fun 