Merger Transactions: Plans of Arrangements versus Take-over Bids
There are typically two main methods for effecting a corporate combination of two public companies: plans of arrangements and take-over bids. This blog will briefly summarize the two and highlight the advantages and disadvantages of each.
Plans of Arrangement
In a typical merger by way of a plan of arrangement, the acquiror incorporates a special purpose company to merge with the target. This structure is referred to as a “triangular amalgamation”. In the transaction, shareholders of the target will have their shares exchanged for shares of the acquiror. Under this transaction structure, the target company is amalgamated with the acquiror’s subsidiary and the target company’s shares are exchanged for shares of the acquiror. As a result, the target company becomes a wholly-owned subsidiary of the acquiror and the target company’s shareholders become shareholders of the acquiror. A plan of arrangement is commonly used to effect a corporate acquisition where the target and acquiror are conducting a friendly negotiated transaction.
Plans of arrangements involved interim and final court approval, the coordinated efforts of the acquiror and target working together to effect the transaction, and a special meeting of the target company’s shareholders to approve the arrangement. Depending on how many shares the acquiring company is issuing, shareholders of the acquiring company may also be required to approve the transaction.
Plans of arrangements are corporate transactions provided for under most Canadian corporate statutes. Plans of arrangements may also be subject to additional securities regulations protecting the interests of minority shareholders in certain types of transactions such as those between related companies. Under Multilateral Instrument 61-101 – Protection of Minority Shareholders (“MI 61-101”) a formal valuation must be obtained in business combinations involving a “related party”. The following are hallmark characteristics of plans of arrangements:
- the coordinated efforts of the acquiror and target working together to effect the transaction;
- a special meeting of the target company’s shareholders to approve the arrangement;
- interim and final court approval that the transaction is fair and reasonable, which may require obtaining a valuation and fairness opinion by an independent, reputable expert (along with fulfilling other factors the court will take into consideration);
- securities of any class of the target may be exchanged for any other securities or property, including cash, and assets (including the target company’s subsidiaries) can be distributed to shareholders or other parties and the order of the steps can be specified; and
- minority shareholders have rights of dissent if they are not happy with the terms of the arrangement.
Plans of arrangements are executed by the target and acquiror companies negotiating and signing an arrangement agreement. After signing an arrangement agreement a proxy information circular is mailed to the holders of the shares of the target company in advance of holding a meeting for the shareholders of the target. At the special meeting, the target shareholders vote on a resolution approving the arrangement which will require a special majority approval (66 2/3% majority). As noted above, shareholder approval may also be required from the shareholders of the acquiring company.
Before the shareholder meeting, interim court approval must be obtained to establish the process to be followed to complete the arrangement. After obtaining the interim court order and holding the shareholder meeting, the proposed transaction requires a final court order approving the arrangement, with the order indicating that the terms of the arrangement are fair and reasonable. If the required shareholder approval is obtained and the final court approval is given, then all shareholders are bound by the transaction, subject to certain dissent rights of minority shareholders. The arrangement is effective when approved by target security holders and by the court, and the articles of arrangement are filed with the applicable corporate registry by the target.
- Arrangements are useful for effecting acquisitions that require multiple steps and transfers of property and the ability to specify the order in which securities or assets will be distributed or exchanged can assist in tax planning.
- Arrangements provide certainty because they involve a court process and ultimately court approval, which will bind all parties involved.
- The exemption in Section 3(a)(10) of the United States Securities Act of 1933 is available which enables any securities being issued by the acquiror to shareholders of the target who reside in the United States to be exempt from registration in the U.S.
- Arrangements may take longer to complete than take-over bids because of the proxy solicitation process, holding a special meeting, and obtaining interim and final court approval.
- The fairness hearing before a court can also be used as a forum of complaint for dissenting minority shareholders and could delay closing of a transaction.
In a take-over bid transaction, the acquiror will make an offer to acquire securities directly to the target company’s security holders. Consideration can be cash or securities (or a combination of both) in exchange for the target securities. Take-over bids can take place in friendly, negotiated transactions. Alternatively, if the target company is not interested in being acquired, the acquiror can also initiate an unsolicited, or hostile, take-over bid transaction (eg. Goldcorp/Osisko).
Take-over bids are regulated provincially but Canadian securities regulators have recently harmonized the take-over bid regime across the country under Multi-lateral Instrument 62-104 – Takeover Bids and Issuers Bids (and National Policy 62-203). The following are hallmark characteristics of take-over bid transactions:
- the acquiror makes an offer to all holders of the class of securities (but may be for less than all securities) and identical consideration must be made to all holders;
- where the acquiror changes the consideration being offered on the bid, the new consideration must be offered to all holders, even where securities have already been deposited to the bid at the initial consideration price;
- restrictions apply on the acquisition of securities outside of the bid within 90 days preceding the bid, unless the acquiror offers the same consideration and acquire the same percentage from each holder as under the bid;
- restrictions apply on the acquisition of securities outside of the bid within 20 days after expiry of the bid, if the transaction is not on identical terms to the bid;
- restrictions apply on the acquiror offering to acquire or enter into any agreement or understanding to acquires securities which are subject to the bid until the bid expires;
- bids may contain any conditions except financing conditions;
- bids typically require deposit by a minimum of (i) two-thirds of outstanding shares, and (ii) majority of the minority;
- deposit period is at least 35 days and securities must not be taken up by the acquiror for a minimum duration; and
- security holders may withdraw any deposited securities prior to the securities being taken up by the acquiror.
Take-over bids are executed by the acquiror mailing (and concurrently advertising) the bid and take-over bid circular to the target security holders. In the event that the bid terms change or important information changes or arises, notification of such changes must be given. In response, the target company must prepare and mail a directors’ circular within 15 days of the bid containing a recommendation from the target’s board of directors to either accept or reject the bid. Where the board of directors is unable to make a recommendation, the directors’ circular must provide reasons for not making a recommendation.
Where a bid is an “insider bid” or a “related party transaction” under applicable corporate or securities laws, a valuation of the target’s securities and non-cash consideration may be required (unless an exemption applies). This would be governed under MI 61-101.
Securities regulators have the power to intervene and halt a take-over bid, even if it complies with applicable rules, if regulators determine that the bid is abusive of the target security holders, the public or capital markets. Similarly, securities regulators can intervene and prohibit target boards of directors from taking inappropriate defensive measures to block a take-over bid (such as cease trading a shareholder rights plan which may have been adopted in the face of a take-over bid).
- Where 90% of the target’s securities are deposited to the offer, the acquiror can quickly compel the sale of the remaining securities.
- Take-over bids are generally the fastest method to complete an acquisition (however it may not be faster if a second-step “squeeze-out” transaction is required).
- Where an acquiror wishes to proceed by way of an unsolicited acquisition, a take-over bid is the only method available.
- Where less than 90% of the target’s securities are deposited, the acquiror can carry out a second-step “squeeze-out” transaction if it wishes to eliminate the remaining minority shareholders (and must provide for the same consideration). The second-step transaction is usually done by way of an amalgamation approved at a shareholder-meeting and takes approximately 60 days to complete.
In the vast majority of “friendly” transactions, companies will proceed by way of plan of arrangement. Costs for the two transactions are not materially different. The documentation and process for plans of arrangement are well known. Although it may be possible to complete a take over bid in slightly less time, most companies will opt for the certainty provided by the arrangement process for “friendly mergers”.
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