Canada: Selected Public M&A Deal Points: A Cross-Border Comparison

The Market Trends Subcommittee of the Mergers and Acquisitions Committee (the ABA Subcommittee) of the Business Law Section of the American Bar Association released in late December 2014 its latest edition of the Strategic Buyer/Public Target M&A Deal Points Study (the US Study) which analyses acquisitions of US publicly-traded targets announced in 2013. This article highlights some of the findings reported by the US Study and compares them to those reported by the most recent Canadian Public Target M&A Deal Points Study prepared by the ABA Subcommittee which analyses acquisitions of Canadian publicly-traded targets announced in 2011 and 2012 (the Canadian Study).

The Study Sample and Type of Consideration

The US and Canadian Studies are similar in terms of the number of deals reviewed, the transaction value range and consideration. However, the US Study specifically excludes acquisition by private equity buyers which may influence some of the deal points it reports.

US Study Canadian Study
Range of Transaction Values US$100M
and over
CAD$100M
and over
Number of deals 106 89
All Cash Consideration 59% 49%
All Stock Consideration 18% 27%
Mixed Consideration 23% 24%

Conditions to Closing – Dissent/Appraisal Rights

The US and Canadian Studies report on a number of closing conditions, one of which is the condition that dissent or appraisal rights not be exercised by shareholders representing more than a specified percentage of the shares of the target. Dissent or appraisal rights allow shareholders to petition a court for an appraisal of the value of their shares of the target where they disagree with the price offered by the transaction.

The US and Canadian Studies show that Canadian deals are far more likely to include a condition to closing regarding the target's shareholders' exercise of dissent or appraisal rights, and especially so in all cash transactions (84% in Canada vs. 3% in the US). The US Study, however, shows an increase in the use of the condition where the consideration offered is part cash/part stock (from 4% in the 2011 edition of the US Study, to 14% in the 2012 edition of the US Study, to 26% in the current edition of the US Study). This increase may be a result of the use of appraisal arbitrage by certain activists.

US Study Canadian Study
All Cash - Includes Condition 3% 84%
All Shares – Includes Condition1 n/a 94%
Part Cash/Part Shares – Includes Condition 26% 100%

Deal Protection and Related Provisions

No-Shop/No-Talk

Public M&A acquisition agreements in the US and Canada usually contain what is known as a "no shop/no talk" provision. A "no shop/no talk" provision prohibits the target from, directly or indirectly, soliciting an acquisition proposal but typically includes an exception providing the target's board with a right to consider a prescribed type of unsolicited acquisition proposal.

The US and Canadian Studies show that most acquisition agreements will, as an exception to the "no shop/no talk", provide the target's board with a right to consider an unsolicited acquisition proposal that is, or is expected to result in, a "superior proposal".

Interestingly, the US and Canadian Studies indicate that US and Canadian practice differ in terms of the percentage of the shares/assets of the target that must be the subject of the acquisition proposal in order for it to be considered a "superior proposal", with US agreements requiring a lower percentage than Canadian agreements and therefore giving more flexibility to the target's board to consider an unsolicited acquisition proposal. More specifically, in most US deals, a "superior proposal" is a written acquisition proposal resulting in the sale of at least 50% or more of the shares/assets of the target, while in most Canadian deals, a "superior proposal" is a written acquisition proposal resulting in the sale of all or substantially all of the shares/assets of target.

US Study Canadian Study
Exception to No-Shop/ No-Talk:2
Mere "Acquisition Proposal" 9% n/a
"Acquisition Proposal Expected to Result in Superior Proposal" 87% 72%
Actual "Superior Proposal" 4% 28%
Percentage of Target Shares that Constitutes a "Superior Proposal":3
Less than 50% 2% 6%
50% or Greater but Less Than All or Substantially 92% 27%
All or Substantially All 6% 67%
Percentage of Target Assets that Constitutes a "Superior Proposal":4
Less than 50% 2% 7%
50% or Greater but Less Than All or Substantially 82% 10%
All or Substantially All 16% 83%

Target's (Superior Proposal) Fiduciary Termination Right (FTR) and Buyer's Match Right

The US and Canadian Studies show that the target typically has the right to terminate the agreement prior to obtaining shareholder approval if its board authorises it to enter into a written agreement with respect to a "superior proposal".

US Study Canadian Study
All Cash - Includes FTR5 97% 100%
All Shares - Includes FTR6 79% 100%
Part Cash/Part Shares- Includes FTR7 75% 100%

This termination right is, however, typically conditioned on the target's compliance with its no-shop/no-talk covenant (discussed above) and the buyer's "match right". A match right will require the target to notify the buyer of an acquisition proposal that constitutes a "superior proposal" and will provide the buyer with a number of days to, at the buyer's discretion, amend the terms of its offer. If after receiving buyer's amended offer, the target's board determines that the acquisition proposal remains a "superior proposal", it can terminate the existing agreement and accept the "superior proposal". The US and Canadian Studies also show that although US and Canadian deals include match rights, the match right period is more likely to be shorter in US deals than in Canadian deals.

US Study Canadian Study
Includes Match Right8 99% 100%
If Includes Match Right, Match Right Period:9
5 Business Days 23% 64%
4 Business Days 28% 7%
3 Business Days 30% 11%

Go Shop

A go shop provision allows the target to, directly or indirectly, initiate, solicit and negotiate acquisition proposals for a prescribed period of time beginning on the date of the acquisition agreement. Although the US and Canadian Studies show that go shop provisions are notcommon, the studies indicate that go shop are even more rare in Canada than in the US.

US Study Canadian Study
Includes Go Shop Provision 11% 3%

Change To Board Recommendation

Public target M&A acquisition agreements will typically set out the circumstances under which the target's board may change its recommendation to its shareholders regarding the transaction. The target's board, one the one hand, will want as much flexibility as possible to change its recommendation, and the buyer, on the other hand, will try to limit the circumstances under which the target's board may change its recommendation so as to increase deal certainty.

The US and Canadian Studies show that the US and Canadian practice is noticeably different in respect of this deal point. In the US, the majority of acquisition agreements provide the target's board with the ability to change its recommendation if there is a "superior proposal" or a material development or change in circumstances that arose after the date of the agreement (known as an "intervening event"), while in Canada the majority of acquisition agreements provide the target's board with the ability to change its recommendation only if there is a "superior proposal". Although the Canadian Study indicates that the "intervening event" concept has not yet been adopted in Canada as a trigger to the target's board's right to change its recommendation, it should be noted that public M&A acquisition agreements often expressly acknowledge that target is entitled to comply with its disclosure obligations required by law, including disclosing material information to its shareholders arising or becoming known after the date of the acquisition agreement.

US Study Canadian Study
Target's Board May Change its Recommendation if:10
Its Fiduciary Duties Require 22% 17%
Limited to Intervening Event Only 1% n/a
Limited to Superior Proposal Only 18% 65%
Limited to Superior Proposal or Intervening Event 52% 0%
Buyer MAE n/a 6%
"Back Door Fiduciary Exception"11 7% 12%

*******

For further details on these and other deal points, please consult the US and Canadian Studies, which are all available to ABA members on the Markets Trends Subcommittee of the American Bar Association's Mergers and Acquisitions Committee website.

Footnotes

1. The US Study provides "Stock-for-stock deals are excluded as appraisal rights are generally not available in stock-for-stock deals between two public companies due to the "market out" exception in Section 262 of the Delaware General Corporation Law and other jurisdictions have similar statutory provisions."

2. The US Study excludes one deal that did not include a fiduciary exception to target no-talk provision and the Canadian Study excludes two deals that did not include a fiduciary exception to target no-talk provision.

3. The US Study excludes one deal that did not include a fiduciary exception to target no-talk provision and one deal which did not include a percentage-based standard in defining what constitutes a "Superior Offer".

4. The US Study excludes three deals, one of which did not include a fiduciary exception to target no-talk provision, one of which did not contain an asset test in determining what constitutes a "Superior Offer", and one of which did not include a percentage-based standard in defining what constitutes a "Superior Offer". The Canadian Study excludes six deals, two of which did not contain a fiduciary exception to no-talk, two of which did not contain an asset test and two of which used a combination of standards.

5. The Canadian Study excludes one transaction that did not include a Target Fiduciary (Superior Proposal) Termination Right.

6. The Canadian Study excludes one transaction that did not include a Target Fiduciary (Superior Proposal) Termination Right.

7. The Canadian Study excludes one transaction that did not include a Target Fiduciary (Superior Proposal) Termination Right.

8. Of subset deals that include a Target Fiduciary (Superior Proposal) Termination Right.

9. Of subset deals that include a Target Fiduciary (Superior Proposal) Termination Right.

10. The US Study excludes one deal that did not include a fiduciary exception and the Canadian Study excludes one deal that did not include a fiduciary exception to target board recommendation covenant.

11. The US Study provides that "[a] "back-door" fiduciary exception to the change in recommendation expressly limits the targets board's ability to change its recommendation to Superior Offer or an Intervening Event, but also expressly allows the target board to take any action and/or disclose material information to the target shareholders if required by its fiduciary duties under applicable law". The Canadian Study provides that "[a] "back-door" fiduciary exception to the change in recommendation expressly limits the targets board's ability to change its recommendation to Superior Proposal, but also expressly allows the target board to take any action and/or disclose material information to the target shareholders if required by its fiduciary duties under applicable law".

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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