In this podcast episode, Ouvedi Rama Naiken and Patricia Chehadé, from our Capital Markets & Securities Group, speak with capital markets and securities lawyer, Cynthia Sargeant, on the implications of going private transactions in Canada.
Please note that the following provides only an overview and does not constitute legal advice. Listeners are cautioned against making any decisions based on this material alone. Rather, specific legal advice
Ouvedi Rama Naiken: Hello and welcome to our Capital Markets podcast, a series of episodes where we discuss current issues and topics in capital markets and securities law. My name is Ouvedi Rama Naiken.
Patricia Chehadé: And I am Patricia Chehadé. We are both associates in the Capital Markets Group at McMillan. We will be your co-hosts for today's episode.
Ouvedi Rama Naiken: We're excited to welcome our special guest, Cynthia Sargeant. Cynthia is a partner in our Capital Markets Group. Her practice involves acting for public and private companies, and is proficient in dealing with legal issues in the area of mergers and acquisitions, among other areas. Hey Cynthia, thanks for joining us.
Cynthia Sargeant: Oh, thank you for having me.
Patricia Chehadé: The hot topic for today's episode is going private transactions. In the last year, we all have seen multiple headlines of high profile companies proposing to go private. Recently, The Globe and Mail wrote an interesting piece on why the management of a full service financial service firm, is compelling its shareholders to go private by selling the company to its leaders.
Another highly reported going private transaction was Elon Musk's $44 billion acquisition of Twitter, which resulted in the delisting of Twitter from the New York Stock Exchange, amongst other significant changes.
Ouvedi Rama Naiken: This high profile acquisition by Musk, and his management of Twitter has been and continues to be controversial. It raises many questions, such as why does Musk believe that his visions and goals of Twitter are only achievable as a private company? What advantages do private companies have over public companies, and what sort of risk is Musk exposing to Twitter by going through this transaction?
These questions inspired today's topic, where we will be discussing the implications of going private transactions. So, as a starting point for our discussion today, Cynthia, could you please define for our listeners what a going private transaction is.
Cynthia Sargeant: Sure, a going private transaction typically refers to a transaction that has the effect of converting a company with many shareholders and listed on a stock exchange, typically known as a public company, into an unlisted private company with one or more shareholders. Depending on the transaction, existing management or key shareholders of the company may continue once it has gone private, but that's not always necessary.
Patricia Chehadé: Thanks, Cynthia, for that comprehensive definition. To add to that, can you tell us what are some advantages and disadvantages of going private?
Cynthia Sargeant: Of course, as you said, we'll see some of these things play out in some of these high-profile transactions, although, of course, our session today deals with things more generally. The benefits of going private are the lack of the shareholder reporting or continuous disclosure obligations, as we call them. Many companies that go public often don't take into account how much expense and time management that can be, to constantly do the quarterly reports, the annual reports, and then certain disclosures that are required throughout the year. Once you're a private company, you don't have those obligations anymore. In addition, you can also reduce the threat of a hostile takeover. We're seeing that play out with Teck actually, currently a Canadian example. If it's a private company, obviously it's a lot harder to buy the shares. The shareholders certainly have to agree. There are ways we'll discuss later that if you're a public company, you can buy the company. There's also the advantage of you may be able to buy the company at a cheaper price if there happens to be a slump in the current public market price, you could take advantage of that by going private.
Equally, there are some disadvantages to going private. One reason why some companies initially went public, got listed on exchange, was to raise financing. Once you become a private company, some of those financing opportunities become more limited. It's also expensive to take a company private. You're going to have to engage legal counsel, sometimes financial advisors, and obviously you need the necessary funds to acquire the company.
And then finally, one risk of actually trying to take a company private is you may actually put the company up on the auction block that wasn't previously thought of as being a target to go private. So, if you were management thinking, "oh, I'm going to buy my company out, I think that's great", once you make that offer, you may find that other bidders come out of the woodwork and so you may not end up being the successful bidder and or the price you pay is higher. So those are just some of the benefits and disadvantages that people consider when they think about taking a company private.
Patricia Chehadé: Another main advantage we could also say of going private is so that management can exercise a greater control over business decisions. We recall that when Musk took Twitter private, he explained that the rationale behind this acquisition was that he believed that Twitter had the potential to be the platform of free speech around the globe and that Twitter cannot thrive nor serve this societal imperative as a public company.
After the acquisition was complete and Twitter was delisted, Musk was able to make these significant changes to the company, which included most notably firing top executives and introduced certain new functions such as the paid verification option.
Ouvedi Rama Naiken: Thanks, Patricia. This sort of transaction definitely raises a lot of interesting questions, especially in the case of Twitter and Musk. To add to the Twitter example, I think the success story that is often mentioned when talking about going private transaction is another U.S. example, which is with Dell. So Dell, a technology company, went private in 2013 through a transaction valued at around USD$24.9 billion.
So around that time, Dell was not doing very well, given that the rise of smartphones was negatively impacting the sale of its personal computers. So Dell's founder, Michael Dell, believed that it would be essential for the company to shift its long term strategies to focus on providing large organizations with enterprise solutions, rather than focusing primarily on being a PC maker.
Michael Dell explained that this shift in business strategy of the company could not happen as a public company because it would hurt short-term profits, which would create a dip or decrease in share price. And he believed that this in turn would create a loss of trust and confidence in the company and would also damage its reputation. So after a proxy battle and a shareholder vote, the company went private and was delisted from NASDAQ. So in 2018, five years after going private and after implementing Michael Dell's vision and new business plan, Dell went public for a second time by offering a new class of shares. So Cynthia, could you maybe walk us through how a going private transaction in Canada can be structured?
Cynthia Sargeant: Yes, of course. And, you know, I think the points you guys have made are very excellent points. It's clear that when you go private, part of that is that you then have sole control over what you can do. And as we said, you don't have those reporting and short term obligations. How they are structured in Canada, there's really three main ways: a takeover bid, a court-approved plan of arrangement or an amalgamation.
There's obviously advantages and disadvantages to each of them. I will note that if you are making a hostile bid, that is the company that you're trying to acquire doesn't support you buying them, the only option you have is to do a takeover bid, as both the amalgamation and the plan of arrangement will require the consent of the company.
So that's one decision factor that's already out there. There are other factors that you take into consideration, such as the speed and timing of the acquisition, tax implications, approval, regulatory considerations. Those can all lead to a decision or factor into your decision as to what type of structure you will use. I'm happy to explain the different varieties of the transactions if you want.
Patricia Chehadé: Yeah, I think we could go into some detail.
Cynthia Sargeant: Okay, great. You know, generally a takeover bid is when somebody offers to acquire 20% or more of the outstanding securities of a company, and it can be the person acting alone or jointly or in concert. And these terms have very specific meanings in our legal world. So it's always important, as with any of these transactions, to seek legal advice. So I'll just set that out there. We're giving some high level overviews in these responses, but obviously if anybody's considering a transaction, they will need full legal advice.
Some key aspects that are unique to a takeover bid is that under takeover bid, all securityholders have to be offered identical consideration, meaning that, if you offer one shareholder cash, you have to offer all shareholders cash.
You can't make side deals under a takeover bid subject to
certain limited except exceptions. You can't enter into
collateral agreements with particular securityholders that would
allow them to get more consideration than somebody else. If you are
offering cash consideration in a takeover bid as opposed to
offering your own shares, which sometimes if you're a public
company trying to buy another public company, you might offer as
consideration your shares, you have to have the cash available at
the time of entering into your takeover bid. That doesn't mean
it can't be financed, but you have to have the financing
arrangements in place. There's a minimum tender condition. You
have to get at least 50.1% of the securities that you're
offering to buy need to agree to take over your takeover bid and,
you know, the bid has to be open for at least 105 days. So those
are just some considerations that we take into account in a
There's also the factor, if it's a takeover bid, that it's going to be unlikely that you get all the shares under the takeover bid. You know, there's always some grandmother who owns shares who isn't paying attention to the takeover bids or somebody just forgot and they own it or they just don't figure it out. So if you do a takeover bid, you usually have to do what we call a second step transaction. And depending on how many shares you actually acquire under the takeover bid, will determine what your second step transaction is. But that's just another factor of takeover bids to consider.
Under a plan of arrangement, a plan of arrangement is something that is a court-supervised process effected under the public companies governing statute, and it's subject to both securityholder and court approval, where the court makes a determination that the arrangement is fair and reasonable to the affected parties. Typically, we do see most friendly deals occurring through a plan of arrangement these days. To affect a plan of arrangement, you enter into an arrangement agreement with the company, and you then have to get the court to give you an interim order, which sets out how you'll get shareholder approvals and other matters. And then you have to go and get shareholder approval.
Depending on your type of transaction, you may require supsport of 66% and two thirds of all of all the shareholders. You definitely will. That's the base – 66% and two thirds of all shareholders, but there can be situations where there are certain special transactions – if an insider is involved or what we call an interested party, which is somebody who might be considering a collateral benefit. You might also have to get the approval of what we call the majority of the minority, which means that certain shares will be excluded from a vote and you need to get 50.1% of the rest of those shares to approve it. So, for example, if I was a member of management wanting to buy my own company and I own shares, I would be excluded from the vote of the 50.1%.
Then if you get the shareholder approval, you go to the court and you get a final court order. That's where the court makes the determination that it's fair and reasonable, and this is typically supported by a fairness opinion. You know, some differences with the takeover bid, maybe you've heard them in the explanation, is that a plan of arrangement can have different forms of consideration for different shareholders, and that can sometimes be helpful if you do have different classes of shares, or maybe you have founders who you want to give some extra benefits to. Sometimes depending on that structuring, while you can do different considerations, that's usually what will lead to the majority minority vote that we discussed earlier. You do get all the shares in one transaction as opposed to the takeover bid where you need that second step transaction. A plan of arrangement, that's a one step transaction and you get everything. Because it's a friendly transaction, you have the opportunity to do tax planning and do due diligence. You know, if a takeover bid is friendly, I should say, you do have the opportunity to do that as well but if you've done a hostile one, obviously the company is not letting you do those things.
There is, if you are offering share consideration, an exemption under U.S. securities law for that share consideration. You can still offer share consideration under the other structures, but it'll just take a bit more thought. There's kind of a well-designed path for plan of arrangements.
And, it also should be noted, though, that the fairness, the court determining its fairness does allow an opportunity for stakeholders to come forward and dispute at the court hearing that it was fair and try to get the court to say it's not in which case your transaction couldn't go through. That doesn't happen a lot in the Canadian market, to be honest, but it can.
So those are the two main ways. We also have an amalgamation, which you would also do in a friendly transaction. It's not court approved, so it can sometimes be a bit faster than a plan of arrangement. It doesn't have that step. It still requires the 66% and two-thirds approval and usually it's done by the acquirer incorporating a new subsidiary in the same jurisdiction as the target is. So what that means is that if you're trying to acquire an Ontario company, you have to be an Ontario buyer. So then those two companies, once the shareholders approve it, they'll just amalgamate. Those are very high-level overviews of the three structures. Were there any questions you had on those?
Ouvedi Rama Naiken: I was just wondering. So between the plan of arrangement and the amalgamation, what would you say is the most used in Canada as the preferred method?
Cynthia Sargeant: Yeah, definitely the plan of arrangement. And it's just because it allows more structural flexibility in the transactions and different things that you can do. It also some people, you know this, when you're buying public companies, people are comforted by the fact that there's this court approval. That can really be helpful in sort of getting, you know, selling the deal to people. And it's just much more common now, so people are familiar with the process and they tend to go down a plan of arrangement route.
Ouvedi Rama Naiken: Okay. And would you say, have we seen a lot of hostile takeover bids in the Canadian market, or is that something a bit more rare that's used?
Cynthia Sargeant: They're definitely more rare. And I think that goes to usually the buyer wants to be doing some diligence, and usually you can get a higher price because you've done the diligence and the company has a chance to sell and push up the price. So we really haven't seen a lot of hostile bids. And, often a hostile bid will eventually turn friendly because sometimes the target sees the writing on the wall, there's nobody else and they will try, the company will try, and approach the hostile bidder and say, okay, if I open up my doors to you, can you give us a higher price, and try and sell some things that way. And there are certain cases where a hostile bid is quite challenging. If there's significant regulatory approvals acquired, it's hard. It can be harder to get those approvals if the target's not on board.
Ouvedi Rama Naiken: Okay.
Patricia Chehadé: And going back to the plan of arrangement, you mentioned that one of the key features is that it's a court-approved process, has there been many situations where an uncontested plan of arrangement would be refused by the courts? Is that seen often?
Cynthia Sargeant: Uncontested would be challenging but people have to come to the court with the proper support and is now very typical that what the company will get to support the transaction is called a fairness opinion. And this is done by an independent party that says the consideration being offered to the shareholders is fair and reasonable in the context, and that gives the court a lot of support that this is a good transaction, that it's been well thought out. In addition, if a court is presented with significant shareholder approval, meaning the rate of shareholder approval was, for example, 90% of the shareholders who attended the meeting voted for it. Between that and getting a fairness opinion, the court typically does find that it's fair and reasonable. I will say, the fairness opinions are not required under any statute in Canada, but I think it's just now everybody gets them. It's really common place.
Patricia Chehadé: And so as considerations, we've talked about the fairness opinion, we've talked about for the most part, regardless of the structure needing significant shareholder approval, which does include the majority of the minority shareholder approval. Are there any other considerations that companies considering going private should?
Cynthia Sargeant: Yeah, and I just want to be clear, it's just a little bit of a point, but if you do a takeover bid, it's not necessary shareholder approval you get, it's people tendering to the bid. So there's just a little bit of a distinction, but you still do want, as we talked earlier, at least 50.1% of the shareholders need to tender.
I should say typically that threshold is set higher to 66% and two-thirds, so almost the same "approval rate" as a plan of arrangement, so that you can be assured you can carry out the second step transaction. So just a little clarity there.
But yes, some other considerations are, in Canada we have what's called Multilateral Instrument 61-101, which is in most provinces, so not in all provinces, but most provinces, and that is the statute that governs, as we talked about earlier, when there's interested parties or when there's parties who might be getting some special benefit in the transaction and it's under that type, it's under this instrument, where the majority of the minority vote requirements are laid out. And in addition, it will also add a requirement in certain transactions for when a formal valuation might be required. Typically that's required, for example, when management does want to buy out its own company. It will require an independent third party evaluator, usually an accounting firm or investment bank, to prepare a formal valuation.
And you can see why that is. The idea is that if I'm a member of management, I may know, I have some inside information. I know the real value of this company. How do the shareholders know I'm getting a good price? So the idea is that you get this independent valuator who gives a valuation about what the company can be worth. That is different than a fairness opinion. They're two separate things.
Another consideration is what we call dissent rights. A dissent right is where a shareholder says, under either an amalgamation or plan of arrangement, look, I don't agree with this transaction and I am going to dissent, which means that I would like to be paid the fair value for my shares.
And the fair value may or may not be what has been offered under the transaction. It gets determined through this whole court process. In order to exercise rights of dissent, a shareholder has to tell the company in advance that they, once they get the notice of the transaction, that, hey, I'm going to dissent and so they dissent. It can be quite a lengthy and expensive process to go through a whole dissent procedure. As I said, you eventually usually end up in a court process and each side has to provide experts that really talk about what the fair value is. So we rarely do see dissent rights that are actually fully exercised and carried through to management. So it really has to be a well-funded large shareholder that it's meaningful for.
But they are rights that are considered important to give in the context of an arrangement or amalgamation. I should say that shareholders exercising dissent rights typically don't stop at transaction from going through because you exercise your dissent right, but your shares will still be bought out if the transaction does get the right approvals. It's just you maintain the right to get the fair value for your shares. What companies who are purchasers do is they sometimes put in their agreement that a certain amount, a threshold on the level of dissent rights that can be exercised. So they'll say, yes, we'll close on this transaction provided no more than – it's typically between 5 or 10% of shareholders – exercised dissent rights.
And that's because the purchaser says, look, I'm going to pay X for this deal. They don't want to have 30% of shareholders then fight for a fair value, which somehow a court determines is much higher than what they've offered and they don't know the price. So, they do put a threshold. As I say, typically, it's not an issue in Canadian deals to be to be fully honest.
Patricia Chehadé: Thanks, Cynthia. Thanks for joining us today. It's been incredible to get your perspective and insight on the subject matter. With all of that in mind, going private can definitely be an attractive and viable alternative for public companies, especially perhaps in the current financial market. You know, as discussed, being acquired can create significant financial gain for shareholders and CEOs, allow for fewer regulatory and reporting requirements for private companies, and allow companies to exercise greater control over their business. At the same time, we did mention that it is quite an expensive process.
Ouvedi Rama Naiken: McMillan's Capital Markets Group can provide assistance with any going private transaction questions you may have. This is Ouvedi and Patricia of McMillan, thanks for listening.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2021