The recent Delaware ruling in In Ancestry.com Inc. Shareholder Litigation provides a cautionary tale relating to a target company developing aggressive projections during an auction process.
The Relevant Facts
Following the announcement of a going-private transaction, some shareholders of Ancestry.com filed suit in the Delaware Court of Chancery alleging, among other things, that the board preferred the interests of the winning bidder over shareholders. Previously:
- Ancestry hired Qatalyst Partners LLP as its financial advisor and initiated an auction process.
- Ancestry’s management prepared “bullish” projections for the auction process. Notably, Ancestry does not develop long-term projections in the usual course of business. These aggressive projections were provided to Qatalyst.
- The auction had a promising start with 12 potential bidders entering into confidentiality agreements and conducting due diligence. However, following due diligence, only three bidders remained, including Permira Advisers, LLC.
- Permira indicated that it would make a partial offer for Ancestry in the $32/share range, subject to the participation of other equity sources. Ancestry’s largest shareholder and its management agreed to roll their equity interest into the surviving entity.
- Qatalyst informed Ancestry’s board that it could not provide a fairness opinion at $32/share based on the aggressive projections.
- Permira made a firm partial bid for Ancestry at $32/share.
- Ancestry’s management revised the aggressive projections to, among other things, account for the issues raised by potential bidders during the due diligence process.
- Qatalyst provided a fairness opinion based on the revised projections, thereby enabling the board to recommend the Permira offer to shareholders. The board’s proxy circular provided shareholders with the aggressive projections and the revised projections.
The Canadian government’s Bill C-60 contains proposed amendments to the Investment Canada Act that will significantly impact foreign investors whom the Canadian government considers as state-owned enterprises (SOEs). An investor might be an SOE even if a foreign state only indirectly “influences” the investor. Under these amendments, if the Minister of Industry determines that an investor is an SOE and it is acquiring control of a Canadian business, then the applicable review threshold will be the lower SOE-specific threshold and not the significantly higher threshold for non-SOE investments. A finding by the Minister that an investor is an SOE may also give rise to national security review implications. The proposed amendments introduce potentially broad concepts and elements of uncertainty that will likely, without further clarity from the government, place a burden on parties assessing and addressing regulatory risk should these amendments become law.
Link to full article: http://news.mccarthy.ca/en/news_template.asp?news_code=1941
The Quebec Court of Appeal’s decision in Francoeur v. 4417186 Canada Inc., 2013 QCCA 191, provides a cautionary tale on the dangers of entering into a share purchase agreement and subsequently closing a share purchase transaction, without ample due diligence.
The one-sided apportionment of risk
The Francoeur share purchase agreement (the “SPA”), which was signed by parties the court characterized as “fierce competitors”, contained the following key provisions.
- The purchaser acknowledged that (a) until closing, it did not have access to certain “key documents” held under seal, (b) it had not undertaken any due diligence, and (c) it accepted the risks in the circumstances.
- The material under seal included a list of golden parachute arrangements with key employees.
- The closing was conditional on various terms that could be waived by the purchaser.
- Prior to the closing, the target company’s president had the power to make decisions in the ordinary course of business, but was precluded from signing contracts valued in excess of $100,000.
- The seller’s representations and warranties were limited to those expressly stipulated in the SPA.
- The purchaser had limited indemnification rights in the case of misrepresentations by the seller.
For those who may be interested, McCarthy Tétrault has just launched our sixth blog, the Ontario Employer Advisor. This blog offers the firm’s perspectives on the latest legal developments applicable to the workplace and of interest to our clients, particularly in Ontario. It provides our insights on legislative and regulatory developments, as well as new case law, with practical tips for employers and their human resources professionals when managing the workforce. We welcome you to visit the blog.
In our recent series on corporate-spin off transactions, we focused on why a company should consider a spin-off, and how the spin-off could be implemented. In this post, we briefly outline some of the common risks that a company should be aware of before pursuing the spin-off.
Even for seasoned practitioners, a great deal of planning is required to effectively “spin-out” a part of an existing business and the road to completion is rife with challenges and legal complexities. First and foremost, a failure to adequately address the division of assets and liabilities as between the Parent and Spinco could spell disaster for all parties involved. Advice from counsel is a must to deal with these sorts of issues. The Parent and Spinco should enter into an agreement that comprehensively allocates assets and liabilities between them. An intellectual property licence agreement, a shared facilities agreement and a transitional services agreement (among other agreements) should specify the respective rights of the Parent and Spinco vis-à-vis intellectual property, real estate, and other corporate services.
Boards of directors must also be attuned to compliance with the range of corporate and securities law requirements involved in such transactions. If the Parent assets that are spun-off to Spinco represent “all or substantially all” of the assets of the Parent, for example, then shareholder approval for the spin-off must be obtained (by way of special resolution). Depending on the method used to implement the corporate spin-off, securities legislation may also deem the share transfer to be a “distribution”, which invokes prospectus and registration requirements.
Finally, spin-offs should never simply be used as a means of dumping company debt, bad assets and struggling business lines. In conceiving the package of assets to be allocated to Spinco, boards of directors need to be mindful of the risks involved in sending that company out into the world without the tools it needs to survive. The relative cost-benefit as between the Parent and Spinco, in other words, must not be too wide. Directors may otherwise run the risk of exposing themselves to liability vis-à-vis the adequacy of the spin-off. For an interesting read on some of the pitfalls of spin-offs, we recommend this recent article by Steven M. Davidoff.
Despite these hurdles, pursuing a spin-off is still well worth the challenge – especially in times when financing is not readily available. In the mining and mineral resource sectors in particular, many of the major players have reversed the two-decades long trend of expansion (through the acquisition of new mines around the world) with the logic of “shrinking to grow”. The goal for these companies is to “focus on margins and containing soaring costs, rather than boosting output.”
Some recent examples include Score Media Inc.’s spin-off of its digital assets into theScore, Inc., Mondelez International, Inc.’s (formerly Kraft Foods Inc.) spinoff of its North American grocery business, Petrobank Energy and Resources Ltd.’s spin-off of Petrominerales Ltd., Bankers Petroleum Ltd.’s spin-off of its US assets into BNK Petroleum Inc., and Mansfield Minerals Inc.’s spin-off of Pachamama Resources Inc.
In our last post, we outlined some of the reasons why corporate spin-offs are used. In this post, we address some of the most common methods used to implement the corporate spin-off.
How do I implement it?
In some cases, a Canadian public corporation seeking to distribute shares of Spinco to its shareholders will be able to do so by a reorganization known as a “butterfly transaction”. The advantage of a butterfly transaction is the deferral of Canadian income tax both at the corporate and shareholder level. The tax rules governing butterflies are highly complex and various restrictions, including prohibitions on certain pre and post-butterfly transactions, may preclude the Parent from using this method.
Depending on the circumstances, other options for a Canadian public corporation to effect a spin-off of Spinco shares are (a) as a dividend-in-kind, (b) a distribution of property as part of a share-for-share exchange, and (c) a distribution of property on a corresponding reduction of stated capital as part of the reorganization of the distributing corporation’s business. Engaging tax counsel is a must.
“Independent directors who step into these situations involving essentially the fiduciary oversight of assets in other parts of the world have a duty not to be dummy directors.” p. 21 of transcript, In re Puda Coal Stockholders Litigation, Del. Ch. C.A. 6476-CS (February 6, 2013).
A recent Delaware bench ruling considers some of the issues highlighted by fraud allegations against emerging market issuers like Sino-Forest Corporation and Zungui Haixi Corporation, and the Ontario Securities Commission’s recently issued Staff Notice 51-720 – Issuer Guide for Companies Operating in Emerging Markets.
In re Puda, shareholders sued the directors of the NYSE Amex-listed Puda Coal Inc. after an audit committee investigation uncovered that two China-based directors had misappropriated all of the company’s corporate assets. Among other things, shareholders alleged that the directors (even the three directors who investigated the fraud) had acted in bad faith by failing to adequately monitor the company. The fraud was uncovered 18 months and 2 public offerings after it occurred when it was discovered that Puda’s sole producing asset in China had been sold to a subsidiary controlled by the chairman. Continue Reading
It is quite common that an existing credit facility has to be paid out in connection with the completion of an M&A transaction, as a result of, for example, a new credit facility being put in place to finance the acquisition which replaces the purchaser’s existing credit facility, or as a result of both the purchaser and the target having separate credit facilities in place prior to the transaction, only one of which will be required going forward.
The process of paying out an existing credit facility should be quite straightforward as long as proper consideration is paid to the following five items:
- Payout letter – A payout letter should be obtained from the lender being paid out (or in the case of a syndicated credit facility, from the agent on behalf of the lender). The payout letter should at a minimum state that, upon receipt of a specific payout amount (including applicable per diem amounts should closing be delayed) set out in the letter, the credit facility is repaid in full, and all guarantees and security are released. If the credit facility being paid out includes a revolving facility (and especially a swingline facility), the final payout amount may not be available until the day of payout given the possibility of daily fluctuations, in which case you will need to ensure to follow up with the lender being paid out for the amount on the date of repayment.
- Letters of credit – Letters of credit issued under the existing credit facility will need to either be cancelled and re-issued to the beneficiary under the new facility, deemed to be issued under the new facility (if the prior lender is the same as the new lender or if it is a part of the syndicate of new lenders), cash collateralized (this is the more common approach where the prior lender is not part of the new credit facility, as it avoids the hassle of obtaining back the original letters of credit) or back-stopped by back-to-back letters of credit. If letters of credit are to be cash collateralized, additional security documentation may be required and some of the security registrations will need to stay in place (with a more limited collateral description).
- Bankers’ acceptances – Advances by way of bankers’ acceptances cannot be repaid prior to their maturity, and as a result any outstanding bankers’ acceptances at the time of the payout will need to be cash collateralized by the borrower (triggering the requirement to deliver additional security and maintain existing registrations in place as described above). To avoid this issue, if you are expecting to pay out credit facilities, you should consider converting bankers’ acceptances borrowings to prime borrowings as they mature prior to the date the credit facilities are to be repaid.
- Discharges of security – While security discharges will not be filed until the payout amount has been received, some discharge documents, such as for example real property discharges, require the signature of the lender that is being repaid and therefore it is preferable that such documentation be signed and delivered in escrow for closing of the M&A transaction so that you do not have to approach the lender again for these after it has been paid out.
- Return of pledged collateral – You should ensure that all share certificates and other original collateral pledged to the lenders is returned on payout of the credit facilities. It is quite likely that such collateral will need to be pledged immediately to any new lender on closing. In addition, any notes issued to lenders evidencing the loan should be returned on payout of the facilities, so that they can be cancelled.
Lenders which are to be paid out at closing should be approached early on in the transaction to avoid timing issues. If this is done and the points above are considered in advance of closing, the payout process should then proceed quite smoothly at closing of the deal, permitting the parties to focus on the more substantive and important points of the M&A transaction instead of dealing with last minute hitches relating to a payout of credit facilities.
Last Spring we announced a special series of blog posts aimed at addressing some of the most significant distinctions between Canadian and US law that ought to be considered in the early stages of the proposed acquisition of a Canadian target.
Following the launch of that series our team blogged about important topics like:
With the release of our 2013 publication of Doing Business in Canada, we are excited to update our US followers that this year we have launched a digital edition available for download to your tablet devices (CLICK HERE), which covers a range of topics about establishing or acquiring a business in Canada.
We look forward to continuing to provide you with coverage of cross-border M&A issues, but in the meantime, if there’s a particular topic you want us to blog about (or if you have questions about Canada more generally), we’d be happy to hear from you – just send us an e-mail: firstname.lastname@example.org and email@example.com.
Most M&A contracts contain provisions that confer discretionary contractual powers on one or both parties to the transaction (e.g., the right to withhold consent to an assignment). One of the most pressing questions in modern contract law is whether the party in possession of such a power must exercise it in good faith. In Bhasin v. Hrynew, 2013 ABCA 98, the Alberta Court of Appeal recently addressed this issue, and held that parties are not under a duty of good faith in exercising a right of non-renewal when the term of an evergreen contract comes to an end. While Bhasin did not concern an M&A agreement, it is an important cautionary tale for those who would seek to use the duty of good faith to limit any discretionary contractual right, and may well prove important to future M&A litigation.