Canada: The Auction Process In M&A

In the context of M&A transactions, an auction is a process by which multiple buyers simultaneously bid to acquire a target. The term "controlled auction" refers to an auction where there is a carefully sequenced and monitored process involving a selected group of buyers. The main goal of a controlled auction is to realize the best possible price for the target and the most favourable transaction terms for the seller. Unlike in the United States, Canadian law does not require the board of directors of a seller to focus on maximizing shareholder value in a change of control transaction. Instead, Canadian law gives the board of directors of a seller the ability to consider a wider range of factors including taking into account the interests of creditors and employees.

One of the main focuses of an auction process is determining how broad or narrow the select group of buyers should be.  This is typically determined by the seller with the help of its financial advisors. A group of buyers could be limited to buyers picked for financial or strategic reasons. Once the group of buyers is selected, the seller will prepare a due diligence dataroom that includes certain confidential non-public information. Due to the sensitive nature of the information in the dataroom, potential buyers are required to enter into confidentiality agreements or non-disclosure agreements prior to being granted access to the due diligence dataroom. Within a specified time, buyers are asked to submit a non-binding proposal that contains basic terms for the proposed transaction, which typically include the purchase price, and a proposed timeframe for completing the transaction.  Once all of the proposals are received, the board of directors of the seller will review the proposals with its financial and legal advisors with the result that either a smaller subset of the selected  group of buyers are invited to submit revised proposal, or the seller proceeds to the next stage with a single selected buyer.

Generally, the next stage of the auction process may involve providing access to additional confidential information so that the potential buyers can complete their respective due diligence investigations of the target. In some auctions, it is at this stage, and to the seller's advantage, that the seller would provide a draft of the definitive transaction agreement to the remaining buyers and request that the buyers provide any revisions by a specified time. If there is more than one buyer still in the auction process at this stage, once the revisions are received, the seller would consult with its financial and legal advisors and select the "final" buyer.  The selection would typically be based on a number of factors including the proposed purchase price, conditions to completion of the transaction, and other relevant transaction terms, all of which would be reflected in the buyer's revisions to the draft definitive transaction agreement. Once selected, the "final" buyer, along with its financial and legal advisors, would finalize the definitive transaction agreement with the seller and its financial and legal advisors.

An auction process may be a good method for a seller to obtain a better price for a target and more favourable transaction terms.  However, an auction can be a lengthy and costly process, and it provides no guarantee of a sale of the target at the end of the process.   Under the right circumstances, an auction process may be the ideal method for obtain top dollar for a target.

Norton Rose Fulbright Canada LLP

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Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members ('the Norton Rose Fulbright members') of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients.

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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