Our recent blog post, which summarized the latest editions of the US and Canadian Strategic Buyer/Public Target M&A Deal Points Study indicates that in the context of public M&A transactions, Canadian and US practices are generally fairly consistent and have not changed significantly over the past few years.
One area, however, where the Canadian and US practices are not aligned is with respect to the inclusion of a condition to closing that dissent/appraisal rights not be exercised by shareholders representing more than a specified percentage of the shares of the target. Unlike in US deals where inclusion of such a closing condition is not common, Canadian deals almost always include it (in fact, based on the latest Canadian Strategic Buyer/Public Target M&A Deal Points Study, a dissent rights closing condition was included in 92% of Canadian all cash deals and 100% of share deals1).
It is surprising that a dissent rights closing condition (typically to the exclusive benefit of the buyer) is included in virtually all Canadian transactions. With dissent rights/appraisal arbitrage being more frequently in the news, we can question whether the Canadian practice will start to change by target and buyer reconsidering the need for a dissent rights condition so as to avoid adding unnecessary conditionality and uncertainty to a transaction.
In determining whether such a condition is needed, target and buyer may compare the context and the facts of their transaction against the factors which have been given weight by the courts in determining that the fair value of the target shares (i.e. the value a dissenting shareholder will be entitled to receive) is equal to the transaction price, such as, among others, (i) whether the transaction is the result of an active auction process, (ii) whether there is a controlling shareholder or another potential source of conflict of interest, (iii) whether the target shares are part of an active and liquid market and (iv) whether the market has otherwise been imperfect.
Target and buyer may also consider if, in certain circumstances, providing for a dissent rights closing condition may not attract activists or empowered opposing shareholders by allowing them to leverage this closing condition in their interest. Buyers relying on committed financing for a transaction should also note that the decision to waive a dissent rights closing condition may not be entirely theirs, as committed financing papers usually restrict the ability of a buyer to waive a closing condition without the prior consent of its lenders.
Finally, and as we mentioned in our earlier post, the vast majority of Canadian public M&A deals are structured as plans of arrangement (92% of the deals reviewed in the Canadian study) and such deals provide that dissent rights must be exercised by a certain date before the target shareholders meeting. Although buyer will know before the shareholders meeting if dissent rights have been exercised by shareholders representing a greater percentage of the shares of target than the specified percentage provided by the closing condition, acquisition agreements typically do not provide for an obligation for buyer to either terminate the acquisition agreement or waive the condition before the target's shareholders meeting. Target's shareholders could effectively be in a position where they are asked to approve a transaction for which the buyer benefits from an "option" on the target since its obligation to close the transaction will remain contingent upon the buyer waiving the dissents rights condition. Again, with parties potentially having a greater regard on the inclusion of a dissent rights condition, acquisition agreements that include such a condition may revisit how and until when it is exercisable.
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 at: http://apps.americanbar.org/dch/committee.cfm?com=CL560003
Footnotes
1 The US Strategic Buyer/Public Target M&A Deal Points Study provides that "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." With respect to transactions where the consideration is all cash or part cash/stock, the US study provides that, respectively, 0% and 13% of the deals reviewed included a condition to closing regarding the target's shareholders' exercise of dissent or appraisal rights.
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