In Canada, a bidder interested in launching a takeover bid to acquire parts, or the whole, of a business will publish its intention either by posting a newspaper ad, delivering a bid circular appealing directly to the security holders, or, more typically, will send a “bear hug letter” to the CEO (and/or the chairman). In the latter case, if the letter is rebuffed, its only way forward is to launch a takeover bid directly to the target’s security holders.
At each of the aforementioned points the company has essentially been put into play, and a change-in-control transaction will occur. Opposition by the target’s board to an unsolicited bid usually amounts to seeking a superior alternative transaction in the best interests of the stakeholders.
Takeover bids are immensely strategic, and this is especially the case where the takeover target is Canadian. Unlike the United States (where the target typically has 18 months to locate a white knight or remain independent), in Canada the timeline is compressed and the process is heavily slanted in favour of the acquirer.
Canadian law requires a bidder have made adequate arrangements to cover all of the cash consideration (i.e. its offer will be fully funded), whereas a white knight will often need to scramble for financing. The bidder will typically have conducted extensive due diligence on the target and will only need confirmatory due diligence to close on an acquisition (sometimes only 24 hours), whereas a white knight may very well need 30 to 60 days to do so and obtain board approval to proceed.
The timing of the launch of the bid will have been strategically plotted, often requiring the target to beat the bushes for white knights over the summer or Christmas holidays.
Ideally you will have prepared for this scenario and your role will be to guide, orchestrate, and execute on your takeover preparedness plan when the approach is made.
The board’s role
Ideally the board will have identified a list of white knights, have contemplated which of its members will form a special committee and have carefully delineated its role, and have established an informed takeover team (comprising key management, financial and legal advisers, a public relations firm, and a proxy solicitation firm).
Poison pill
Rights plans (i.e. poison pills) usually provide that in the event of a hostile bid all security holders (except for the bidder) are entitled to purchase additional shares at a deep discount.
In Canada poison pills are only a temporary salve because they are typically invalidated by the securities regulators within 45 to 60 days of coming into effect. This may change in future since legislative proposals are currently being considered to provide shareholders with the right to decide how long poison pills will remain in effect, and the regulators would intervene only in extraordinary circumstances.
Canadian shareholder rights plans come in two forms: “pre-approved plans” and “tactical plans” and the board should have given consideration to approving the appropriate plan for the company. It behooves a corporation to give consideration in advance to providing its senior management and key contributors with change in control agreements and other incentives to ensure their objectivity throughout the process, since once a bid has been launched there are certain disclosure requirements and other limitations with regard to entering into such arrangements.
Virtual dataroom
In anticipation of a takeover bid it is prudent to establish a virtual dataroom. Contractual assignment and change-in-control clauses as well as potential impediments to a bid, such as loan covenants, regulatory requirements, and competition and foreign investment issues, should be highlighted.
Comprehensive datarooms take a considerable time to establish. Your staff should be intimately familiar with regard to their use. The investment in time you will make in creating the room will pay significant dividends and place the legal department well ahead of the curve.
Shareholders list
The likelihood is shortly after the bid is announced your stock will have turned over several times. Be aware the process of obtaining a list of your current security holders (which you will need to deliver your management proxy to the security holders and submit to the bidder so it can deliver its bid circular to the holders) is aggravatingly slow, and the information you obtain will be nebulous at best since shares are often held through various intermediaries.
In terms of preparation, in advance of a bid, have a proxy solicitation firm walk you through the process and understand the limitations and timelines. In truth, once the strategic review process is underway the most current snapshot of your security holders will come from your chief financial officer and investor relations department, which will be in daily contact with your new security holders (likely to comprise hedge funds and private equity investors) once the bid is announced.
Playbook
If appropriate during quiet times prepare a takeover defence playbook with your advisers, including a list of potential buyers, a draft confidentiality agreement containing a standstill and other precedent disclosure documents, and very importantly a timeline with correlated action items.
Summary
Counsel plays a critical role in ensuring the board and the company are well prepared to act in the best interests of its stakeholders. Anticipate that the bidder will attempt to monopolize the board’s and the company’s time and resources, and leverage its first-mover advantage. This is where your advance planning will kick in and, despite Canada’s current bid-friendly Canadian laws, play an important role in assisting your board to fairly evaluate competing offers with a view to maximizing shareholder value.
With this month’s article, Renato Pontello takes over the Practising In-house column from Cheryl Foy. Pontello is legal counsel to Solantro Semiconductor Corp. and was formerly vice president legal, general counsel, and corporate secretary to Zarlink Semiconductor Inc. His column will appear monthly.
