previous post, I outlined some of the features of a Global
Depositary Receipts (GDRs) program that was utilized by HRT
Participações S.A. (HRT), a Brazilian-based and
listed exploration and production company, in its acquisition of
UNX Energy Corp., a Calgary-based TSXV listed exploration and
production company with oil and gas assets located in offshore
Namibia. GDRs can be a mechanism to overcome a number of issues
that may be encountered in structuring an international public
M&A deal. In this post, I will outline some of the potential
pitfalls in implementing a GDR structure.
GDR structures often involve a company based and listed in an
emerging market listing GDRs on a more established foreign market.
Many emerging markets have investment regimes which tax foreign
investment, and this can be problematic from the point of view of
establishing a GDR program in a pubic M&A deal. In the context
of an acquisition, participants in the acquisition and their
advisors need to have a clear understanding of mechanisms in place
to tax the structure and the net effect that any such taxes can
have on the consideration for the acquisition. The net effect of
these taxes on international investment can have a negative impact
on the net consideration for the acquisition. Accordingly, advisors
should be aware of the possible negative effects of the relevant
tax regime well before the acquisition is announced or a binding
agreement is entered into.
Matching Rights of the GDRs with Those of the Underlying
Another issue with the GDR structure is that regardless of how
closely the parties want the rights of GDR holders to follow the
rights of the underlying security, there can be some friction in
the implementation of these structures which emerges either through
the commercial terms of the deposit agreement governing the terms
of the GDRs, the operation of relevant laws, or a combination
thereof, all of which have the potential to dilute the rights of
the GDR holder versus the holder of the underlying security. For
example, a GDR program will involve a depositary bank which holds
the underlying securities supporting the GDRs. This means that
information, such as meeting materials for a shareholder meeting,
is not distributed directly to the GDR holders, but rather to the
depositary bank to then be distributed to the GDR holders. This has
the potential to create a situation where GDR holders receive the
meeting information from the company only a few days before a
shareholder meeting, which could be past the time when GDR holders
are permitted to vote. This has the potential to dilute the value
of the GDRs as compared to the underlying securities.
Depositary banks, which administer GDR programs, typically
charge fees for their services and will deduct these fees from the
dividends and other distributions. The depositary bank also will
incur expenses, such as for converting foreign currency into
Canadian or U.S. dollars, and usually will pass those expenses on
to GDR holders. The net effect of these fees needs to be clearly
understood by advisors, and be priced into the net value of the
GDRs offered as consideration in the acquisition.
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.
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