Acquisitions of public companies in Canada almost always take the form of either a take-over bid or court-approved plan of arrangement. Choosing between the two is highly dependent on the facts of each case. It's not uncommon for bidders to start with one structure and then to flip over to the other as the deal evolves. I've set out below the top ten considerations for a bidder when it makes this important decision:
- Hostile/Friendly. If the offer is not supported by the target's board, the bidder will almost always choose to proceed by way of take-over bid. Although there is one recent example of a hostile plan of arrangement, the mechanics of forcing the target company to call a shareholders' meeting and apply for a court order usually make a plan of arrangement impractical in this scenario. Advantage → Take-over Bid
- Flexibility of Structure. A plan of arrangement enables the bidder to be creative in structuring the transaction in order to realize any commercial and tax objectives of the deal. Courts are capable of dealing with complex acquisition structures and have affirmed that a central purpose of the arrangement provisions in the corporate statute is to enable this. In contrast, a take-over bid permits only a plain vanilla acquisition of shares. Advantage → Plan of Arrangement
- US Shareholders. If the bidder is offering shares as consideration, and there are shareholders of the target resident in the United States, a plan of arrangement offers a major advantage. Because the arrangement is approved by a court, shares issued pursuant to the arrangement are generally exempt from any registration requirements in the United States. In a take-over bid, there are a couple of options to avoid registration, but they add complexity and may not be available if the US shareholder base is large. Advantage → Plan of Arrangement
- Forum for Disgruntled Stakeholders. A plan of arrangement is ultimately subject to approval by the court. The court will need to determine that the plan is fair and reasonable to the securityholders affected by it. If there are securityholders that oppose the transaction, the court will hear their views before making its determination. Although approval by the shareholders is an important factor in the court's decision, it is by no means determinative. The risk that a court will not approve the transaction can, in some circumstances, inject significant uncertainty into a deal. In contrast, there is no approval required by a court in the context of a take-over bid, and no obvious forum for dissident stakeholders to complain. Advantage → Take-over Bid
- Threshold for Success. A plan of arrangement typically requires approval by 66⅔ per cent of shareholders represented in person or by proxy at a shareholders' meeting. A take-over bid is typically conditional on 66⅔ per cent of the shares being tendered into the bid. So, the threshold of success for a bid is slightly higher, since it requires support from 66⅔ per cent of all of the shares, whereas approval of an arrangement requires only 66⅔ per cent of the shareholders at the meeting. Accordingly, it may be slightly easier to obtain shareholder approval of a plan of arrangement. Advantage → Plan of Arrangement
- Squeeze-out Mechanics. If a plan of arrangement is approved by the court, the offeror will be able to acquire 100 per cent of the target's shares (and squeeze-out any shareholders that did not support the acquisition) in a single step at closing. This may be an important factor in the acquirer's debt financing. With a take-over bid, the offeror will generally be able to squeeze-out the minority shareholders of the target if 66⅔ per cent of its shares are tendered, but the squeeze-out will need to occur in a second-step transaction after the take-over bid is completed and is dependent on no material change occurring between the date of the original transaction and the date of the squeeze out. Advantage → Plan of Arrangement
- Ability to Waive or Extend. In a take-over bid the offeror can waive its minimum tender condition and take-up whatever shares are tendered, which is useful if the offeror is satisfied with acquiring less than 100 per cent of the target. In addition, it is easy to extend a take-over bid in order to continue soliciting tenders if the minimum tender condition is not yet met. In contrast, the adjournment of a shareholders' meeting can be cumbersome, and approval of a plan of arrangement is all-or-nothing – if 66⅔ per cent approval is not obtained, the deal will fail. Advantage → Take-over Bid
- Control by the Bidder. A take-over bid puts control of the disclosure document and the acquisition process squarely in the hands of the bidder and allows it to drive the process forward on its own timeline. In contrast, the target has direct control over the plan of arrangement process – it will call a meeting of its shareholders, seek the requisite orders from the court and send its shareholders an information circular. If the bidder is impatient with the approach of the target and its advisors, this may be an important factor for it. Advantage → Take-over Bid
- Timing. A take-over bid must be left open for at least 35 days. With a plan of arrangement, it takes approximately 30 days to call a meeting of shareholders to approve the transaction; it also takes a week or two to obtain an interim order from the court and another week or so after the shareholders' meeting to obtain the final order of the court. As a result, usually a plan of arrangement takes slightly longer than a takeover bid to complete. However, if regulatory approvals are needed to complete the transaction, the choice of structure may not impact timing. Advantage → Neutral
- Translation. Assuming there are shareholders in Quebec, the takeover bid circular (the main disclosure document for a take-over bid) will need to be translated. This takes extra time and money. In contrast, generally the circular does not need to be translated in the context of a plan of arrangement. Advantage → Plan of Arrangement
In summary, there are numerous advantages and disadvantages of each structure that need to be considered in the circumstances of each deal. These will need to be balanced so that you can settle on the deal structure that makes the most sense for your objectives.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
