“Golden Leashes”, and by-laws designed to counteract such arrangements, have provoked significant controversy in the 2013 proxy season, and regulators, proxy advisors, and institutional shareholders have yet to take a definitive position in the debate. This post reviews what will certainly continue to be a hot button topic in 2014. Continue Reading
On November 28, 2013, the Toronto Stock Exchange published proposed amendments to the TSX Company Manual that would permit a listed issuer to adopt new security-based compensation arrangements for employees of a target company in the context of an M&A transaction without the need to obtain shareholder approval provided that certain conditions are met.
The TSX Company Manual provides that a listed issuer must obtain shareholder approval to adopt a security-based compensation arrangement unless the arrangement is provided as an inducement for employment to an officer of the listed issuer or the listed issuer assumes the compensation arrangement of a target company in the context of an acquisition (in each case, provided certain conditions are met). The proposed changes to the TSX Company Manual would create an additional exemption from the shareholder approval requirement where the securities issuable under a new compensation arrangement adopted for employees of a target company in conjunction with an acquisition do not exceed 2% of the number of issued and outstanding securities and the securities issuable under the acquisition (including any related compensation arrangement) do not exceed 25% of the number of issued and outstanding securities. The proposed exemption would only be available for compensation arrangements adopted for persons who are employees of the target company (and not for employees of the listed issuer). The TSX notes that it has permitted listed issuers to adopt these sorts of compensation arrangements without shareholder approval in the past on a discretionary basis and that it is now simply formalizing the exemption.
If the proposed rules are ultimately adopted (the comment period expires on January 13, 2014), the TSX Company Manual will expressly permit a listed issuer acquiring a target company to offer up new equity incentives to employees of the target company as a retention tool without being required to obtain approval of the listed issuer’s shareholders.
It is also worthy to note that a listed issuer should pay close attention to the restrictions under applicable securities laws on collateral agreements in a take-over bid and collateral benefits in a business combination transaction if it wishes to adopt a new security-based compensation arrangement for employees of a target company in the context of an acquisition.
The recent settlement in the United States between the Securities and Exchange Commission (SEC) and Revlon highlights the importance of not appearing to obstruct the flow of material information to shareholders.
The SEC settled charges that Revlon misled shareholders during a going private transaction. The SEC’s order found that to avoid a potential disclosure obligation, Revlon engaged in “ring fencing” to avoid knowing that the transaction’s consideration had been deemed inadequate by a third party’s financial advisor.
Check out our new post published on our Retail Consumer and Advisor Blog on Buying Into Beauty, the recent Mergermarket report prepared in association with Michel Dyens & Co. In addition to highlighting some of what we think are the key themes coming out of that report for the retail and consumer products audience in particular, our post also summarizes some of what we think are the key takeaways on M&A activity in the beauty and personal care industry more generally.
Of course there is plenty more exciting news on M&A activity in this space, which you can read about by checking out the full report here.
In a recent ruling in Genesis Land Development Corp. v. Smoothwater Capital Corporation, the Court of Queen’s Bench of Alberta found that a dissident shareholder breached its obligations under securities law when it failed to properly disclose, in an early warning report, that it was acting “jointly or in concert” with other dissident shareholders to gain control of the Genesis board of directors. In its finding, the Court confirmed that, for purposes of disclosure under the early warning reporting system, the concept of acting “jointly or in concert” is relevant not only to take-over bids, but it is also relevant to proxy contests.
The dissident shareholders in question argued that the concept of acting “jointly or in concert” only gives rise to disclosure obligations in the context of a take-over bid. This argument was rejected by the Court which held that, despite the ambiguity arising from the use of the term “offeror” in section 1.9 of Multilateral Instrument 62-104 – Take-Over Bids and Issuer Bids (“MI 62-104”), the early warning requirements must be interpreted to require disclosure of persons acting jointly or in concert if there is any “agreement, commitment or understanding” to exercise voting rights, including in the context of a proxy contest. The Court cited a recent notice of the Canadian Securities Administrators on the rationale for the early warning system: “the objective of early warning disclosure is not only to predict possible take-over bids but also to anticipate proxy-related matters”.
In addition to deciding that the concept of acting “jointly or in concert” is relevant in the context of proxy contests, Genesis also sheds some light on what factors may be relevant to determining whether shareholders have acted “jointly or in concert” in this context. In particular, the Court took the following factors into consideration in reaching its decision:
- the dissidents participated on a conference call during which they discussed the company’s intended board nominees for the upcoming AGM and considered pressuring the board to nominate an alternate slate (and, as conceded by some of the dissidents, there may have been discussion of launching a proxy contest). A proxy solicitation firm was present on the call. The call was followed by several others that included some or all of the dissidents and the proxy solicitation firm;
- although the dissident circular was in the name of only one of the dissidents, an earlier version of that document had been prepared by another member of the dissident group; and
- some of the dissidents entered into a formal voting support agreement.
In our recent post we considered, to what extent, the seller in the context of an M&A transaction should care about legal due diligence, and suggested that there are a number of important reasons why a seller should concern itself with legal due diligence in the face of an acquisition.
In addition to our thoughts on the utility of seller due diligence for the purpose of uncovering potential barriers to the sale of the target business, the seller will also want to ensure that it can actually make the representations and warranties that it has been asked to make in the purchase agreement. At the same time, it will want to instil confidence in the buyer that such representations and warranties are accurate and complete.
Although a great deal of dialogue about the target’s business will likely take place orally at meetings with management, through site visits and formal and informal presentations and discussions among representatives of both parties, the seller will want to provide comfort to the buyer by demonstrating the legitimacy of the statements made in the context of those discussions. This in turn will have a direct impact on the underlying economic considerations of the transaction, including, in many cases, the buyer’s decision of whether to go through with the deal at all, and at what price.
Although when we think of legal due diligence we often envision the buyer and its counsel poring through paper or electronic documents in a data room, sellers should keep in mind that the due diligence process can be used to their advantage, not only to help ensure the completion of the sale, but also at the best possible price.
Legal due diligence is typically a key part of an acquisition, but historically the focus has been on diligence from the perspective of the buyer, and less frequently from the perspective of the seller. Of course, this is natural given it’s the buyer who will want to uncover everything it can about the business it plans to acquire before a definitive agreement is entered into. But does this mean that sellers shouldn’t also care about legal due diligence?
There are a number of important reasons why a seller should concern itself with legal due diligence in the face of a divestiture, a handful of which were canvassed recently by Drew Hasselback in his article in the National Post, A new way to sell (including insight from David Woollcombe here at McCarthy Tétrault – we suggest you check it out).
For example, a seller will be concerned about potential barriers to the sale, or liabilities that it may incur as a result – two things that legal due diligence conducted by the seller during the early stages of a transaction can help to uncover. For instance, if there are prohibitive provisions in one or more of the seller’s contracts with third parties, the seller will want to consider ways of addressing these in order to facilitate the sale.
Along the same lines, the seller will want to confirm any consents that are required to complete the transaction, both in order to ensure that nothing will derail the transaction, and in order to meet any conditions related to consent to the assignment of its agreements to the buyer, or to a change of control that will result from the sale. In connection with the process of making itself aware of required consents, the seller should be mindful of not only the time required for the determination of any required consents, but also the fact that it can sometimes take several weeks (or longer) to obtain what it may need from a third party before the transaction can be completed.
Importantly, a seller will also want to ensure at the outset of the deal that there are no rights of first refusal, pre-emptive rights or other obligations that it must fulfil prior to the completion of the transaction. If both the buyer and the seller are focused on determining and addressing potential barriers to the transaction, the buyer is less likely to uncover surprises that may prevent it from ultimately going through with the deal.
In M&A transactions, the determination of the value of a target company may sometimes give rise to a debate. For example, typical valuation methods may have their limits when it comes to the potential of undeveloped or early-stage assets. The difficulty in predicting the outcome of contingent events (e.g. major litigation involving the target), may also have a material impact on valuation. Contingent Value Rights (CVRs) may be a useful tool to bridge the valuation gap between the buyer and the target while, in certain cases, preserving potential future value of certain assets for the target’s shareholders.
A few days ago we told you about the recent settlement agreement between Anthony Lambert and the Alberta Securities Commission. If you missed that post, you can check it out here for background or read on for our key takeaways on insider trading in the M&A context from the Lambert settlement and other recent decisions by Canadian securities commissions.
Insider Trading in the M&A Context
The timing of public disclosure of a potential M&A transaction has always been a tricky issue, with issuers often giving careful consideration as to the appropriate point at which there is sufficient certainty about a transaction to warrant its public disclosure as a “material change”. Although both public disclosure obligations and the insider trading prohibition are based on the concept of a “material change”, insider trading is also prohibited when a person in a special relationship with an issuer has knowledge of an undisclosed “material fact” and recent decisions by Canadian securities commissions indicate that the commissions are of the view that a different threshold of materiality may apply to the insider trading prohibition than to the public disclosure obligation. In its 2008 AiT decision, the Ontario Securities Commission (“OSC”) stated that:
A recent settlement agreement between Anthony Lambert (“Lambert”) and the Alberta Securities Commission (“ASC”) presents a cautionary tale for directors and officers of public companies who are considering trading in securities during the early stages of M&A activity. We’ll discuss some of the key takeaways from this cautionary tale in our next post, but for now, here’s an overview of the Lambert settlement.
The ASC alleged that Lambert, then President and CEO of Daylight Energy Ltd. (“Daylight”), breached Alberta’s securities laws and acted contrary to the public interest by purchasing Daylight’s securities with knowledge of an undisclosed material fact – that Daylight had received an unsolicited expression of interest from Sinopec International Petroleum Exploration and Production Corporation (“SIPC”) that discussed the possibility of “a major strategic investment transaction” by SIPC.