Background
On November 23, 2016, Total Energy Services Inc. (Offeror) disclosed its intention to make an offer (Offer) to purchase all of the issued and outstanding common shares (Target Shares) of Savanna Energy Services Corp. (Target) for consideration consisting of common shares of the Offeror (Offeror Shares).
The Target responded in two press releases, dated November 24, 2016 and November 28, 2016, in which the Target indicated that any change of control on or before June 13, 2017 would result in all amounts (approximately $105 million) outstanding under a recently implemented term loan (Term Loan) becoming immediately due and payable plus a change of control fee in the amount of 3% of the $200 million commitment amount (approximately $6 million) (Loan Fee).
The Offeror filed its take-over bid circular (Bid Circular) outlining the Offer on December 9, 2016 and filed support agreements from significant shareholders of the Target representing approximately 43% of total number of issued and outstanding Target Shares.
Offer
The consideration for the Offer is 0.1300 of an Offeror Share per Target Share tendered during the deposit period which, unless shortened in accordance with applicable law, will continue until 11:59 (Pacific Time) on March 24, 2017. The Offeror included as conditions to the Offer (which may be waived by the Offeror) among others, that: (i) the Target shall not have adopted or implemented a shareholder rights plan (SRP Condition); and (ii) the terms and conditions of the Term Loan are consistent with the Target’s disclosure and do not give rise to obligations or liabilities of the Target that would constitute a Material Adverse Change (as such term is defined in the Bid Circular).
Subsequent Correspondence
On December 15, 2016, the Target appointed a special committee of independent directors to oversee the Target’s response with respect to a recommendation to the Target Shareholders and announced that discussions with third parties had commenced regarding potential alternative transactions. On December 23, 2016, the Target filed its directors’ circular (Directors’ Circular) recommending that holders of Target Shares reject the Offer.
On January 10, 2016, the Target and the Offeror simultaneously disseminated press releases. The Offeror’s press release responded to the statements made in the Directors’ Circular and indicated that the Offeror intended to discuss with the lender under the Term Loan whether the lender would waive the Loan Fee. Failing such consent, the Offeror indicated that if the Offer was successful, it would be required to arrange financing to fund repayment by the Target of the Loan Fee and other unrelated payments payable upon a change of control of the Target. The Target’s press release noted that it was continuing to review potential alternative transactions, including opening a data room for qualified parties.
Considerations
The Offeror has numerous defensive mechanisms at its disposal, including the Term Loan and its pursuit of an alternative transaction. Another defensive tactic might be the adoption of a shareholder rights plan (Rights Plan).
Term Loan
The Offeror’s market capitalization as at January 11, 2016 was approximately $466.6 million. If the Loan Fee is not waived and the Offer is successful, it will result in an immediate liability of approximately $111 million to the Offeror, representing approximately 23.8% of the Offeror’s market capitalization.
The consideration for the Offer is Offeror Shares. If the Offer is successful, the Target Shareholders will become equity holders in the Offeror. This may affect their willingness to deposit their Target Shares to the Offer, knowing of the consequences of a change in control under the Term Loan.
The use of the Term Loan as a defensive mechanism is a potential tactic that can be used when companies are negotiating material loan documents and do not wish to become targets of a take-over bid.
Shareholder Rights Plans
Prior to the amendments (Amendments) to National Instrument 62-104 Take-Over Bids and Issuer Bids (Amended NI 62-104) which took effect on May 9, 2015, the market-accepted form of Rights Plan typically contained a definition of “permitted bid” which, among other things, included 60 to 120 day tendering periods and 50% minimum take up thresholds.
The Amended NI 62-104 includes a 50% minimum take up threshold and extended the tendering period from 35 to 105 days. Given the increased tendering period under the Amended NI 62-104, there may be limited benefit to the Target adopting a tactical Rights Plan. The Target may wish to adopt a tactical Rights Plan with a definition of “permitted bid” that includes a tendering period in excess of 105 days; however, it should be noted that tactical Rights Plans which are implemented by a target’s board of directors in response to a take-over bid need to ultimately be approved by shareholders. It should also be noted that the guidelines published by both ISS and Glass Lewis recommend that shareholders vote against Rights Plans that require offers to remain open for more than 105 days which may inform shareholders voting against such a tactical Rights Plan.
Alternative Transactions
The disclosure by the Target indicates that it is taking steps towards an alternative transaction. If the Target is successful in soliciting an alternative transaction, this likely would result in the bid period for the Offer being shortened.