Days ago, the Supreme Court of the State of Delaware issued an order succinctly affirming the Delaware Court of Chancery’s judgment from October this year that found Fresenius Kabi AG had no obligation to close its proposed merger with Akorn, Inc. and Fresenius properly terminated the merger agreement on April 22, 2018 largely as
On March 15, 2018, the Ontario Securities Commission (OSC) and the Financial and Consumer Affairs Authority of Saskatchewan (FCAAS) released highly anticipated reasons for a combined decision relating to Aurora Cannabis Inc.’s (Aurora) unsolicited take-over bid to acquire CanniMed Therapeutics Inc. (CanniMed). The reasons followed a December 21, 2017 decision in which the OSC and FCAAS, among other things:
- Permitted Aurora’s use of “hard” lock-up agreements with other CanniMed shareholders to build support for its bid (finding that the locked-up shareholders were not “acting jointly or in concert” with Aurora).
- Cease traded a tactical shareholder rights plan (poison pill) implemented by the CanniMed board in the face of the Aurora bid.
- Declined to grant Aurora exemptive relief from the 105-day minimum deposit period.
- Declined to restrict Aurora’s ability to rely on the exemption from the general restriction on purchases by a bidder to purchase up to 5% of the target company’s shares during the currency of its bid.
Financial advisors are often critical to the success of an M&A transaction. Often, but perhaps not always. Should the fees payable to a financial advisor be denied if, through no fault of its own, an M&A transaction is completed without any involvement of the advisor? This question is the subject matter of Crew Gold a decision of the Ontario Superior Court which was recently affirmed by the Ontario Court of Appeal.
In M&A sell-side roles, financial advisors are typically retained to advise boards on strategy, as well as perform a number of related tasks, including: preparing a timetable, identifying prospective purchasers, preparing a confidential information memorandum (CIM) and standstill agreement, providing a market check on any offers received, assisting in the due diligence process, providing an opinion as to the financial fairness of any offers, reviewing various deal documents and assisting with communications to, and at times interacting with, the public, key stakeholders, rating agencies and proxy advisory firms.
M&A advisory fees for sell-side roles are typically success-based, payable on completion of a transaction. Prior to completion, the advisor may receive a fee for the delivery of an opinion relating to financial fairness and periodic work fees, all of which are usually credited against the success fee. Work fees are typically modest compared to the success fee, as most issuers prefer not to run up huge advisory costs if no transaction is ultimately completed. Besides, it is often argued, any success fee is effectively for the account of the acquirer.
On March 7, 2017, 1891868 Alberta Ltd., a wholly-owned indirect subsidiary of Sprott Inc. (Sprott, and together with its wholly-owned subsidiaries, Sprott Group), filed an originating application (Application) in the Court of Queen’s Bench of Alberta (Court) for an order approving a proposed plan of arrangement (Arrangement) with Central Fund of Canada Limited (Target), Sprott Physical Gold and Silver Trust (to be formed and managed by Sprott Asset Management LP (Trust)), the holders of class A non-voting shares (Class A Shares) of the Target and, as applicable, the holders of common shares (Common Shares) of the Target pursuant to Section 193(2) of the Business Corporations Act (Alberta) (Act). The Application has been scheduled to be heard by the Court on September 7, 2017.
The Application seeks an interim order for the calling and holding of a meeting of shareholders (Target Shareholders) of the Target to approve the Arrangement proposed by the Sprott Group. It should be noted that applications for court orders approving arrangements are typically made by target companies. Accordingly, this application, which is not supported by the Target, could be characterized as a “hostile” plan of arrangement. At an application held in April, the Court agreed to set a date in September for the interim application.
According to the Sprott Group, there are a number of qualitative and quantitative benefits to the Target Shareholders which are anticipated to result from the Arrangement and the transactions contemplated thereby, including eliminating the dual-class share structure, continued exposure to the future growth of the Target’s portfolio of assets, the availability of a physical redemption feature, and the potential for the Class A Shares to trade at, near or above their net asset value (instead of at a discount to net asset value, which is currently the case).
According to the Target, the Application is one of numerous steps already taken by the Sprott Group to seek control of the Target. Among other measures taken, the Sprott Group has previously attempted to requisition a meeting of the Target to, among other things, elect a slate of directors (Requisition), commenced a derivative action against the Target and appealed to the Court of Appeal the Court’s finding that the Requisition was invalid. All of these attempts were unsuccessful.
In this context, a take-over bid made directly to the holders of Common Shares and Class A Shares would likely be ineffective since, according to Sprott, at least 75% of the Common Shares are held by directors and officer of the Target and such persons are not expected to tender to the bid.
The American Bar Association has published its Canadian Private Target Mergers & Acquisitions Deal Point Study (Study) analyzing transactions that involved Canadian private targets that were acquired or sold by public companies in 2014 and 2015. The Study included a sample of 101 transactions and excluded transactions with a value less than C$5 million,…
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.
The views expressed in this post, as in all of my posts, are mine alone and should not be taken to represent the views of Fasken Martineau DuMoulin LLP or any of my partners or associates.
A little over five years have passed since the U.K. Takeover Code was reformed on September 19, 2011 in order to prohibit deal protection provisions — including lock-ups, “no shop/no talk” covenants and termination or “break” fees — in M&A deals involving the acquisition of publicly-listed U.K. companies. Seizing upon a rare and valuable opportunity to conduct some natural experiments into the effect on the U.K. M&A market of this regulatory change, a pair of students from Stanford and Harvard recently published a study on the impact of the 2011 Reforms on U.K. deal volumes, the incidence of competing offers, deal premiums and deal completion rates.[i] The results of their study are both interesting and instructive.
Among other things, they found that:
- the ratio of U.K. deals to non-U.K. deals[ii] decreased by approximately 50% after the 2011 Reforms;
- this reduction in deal volume was not offset by any increase in the incidence of competing offers or deal premiums in the U.K.; and
- as a result, the U.K. M&A market experienced an estimated quarterly loss of approximately US$19.3 billion in deal volume following the 2011 Reforms, implying a quarterly loss, assuming a conservative average deal premium of 20%, of approximately $3.3 billion to shareholders of U.K. public companies since the 2011 Reforms were put in place.
Seagate Technology’s Unusual Alliance with ValueAct Capital: Is There Method in Seagate’s Madness in Inviting an Activist Wolf into the Fold?
Last month, Seagate Technology plc, an $11 billion company in the data-storage business, announced a secondary block trade in which it facilitated the transfer of roughly 9.5 million ordinary shares, representing an approximate 4%…
Nordex Explosives Ltd. (Nordex), a Canadian explosives manufacturer listed on the TSX Venture Exchange, and Société Anonyme d’Explosifs et de Produits Chimiques (EPC) entered into a private placement and subsequent going private transaction on June 15, 2016. EPC was to purchase Nordex shares for $0.12 per share.
However, subsequent to Nordex’s announcement of the EPC…
The views expressed in this post, as in all of my posts, are mine alone and should not be taken to represent the views of Fasken Martineau DuMoulin LLP.
“That’s off market.”
As a deal lawyer, I’ve heard that phrase more times than I care to remember. It’s supposed to be a knock-down argument. We’re supposed to pack up our bags and go home, cease and desist from any further discussion of a deal term once our counterparty claims that it differs from what other contracting parties have customarily agreed upon.
Occasionally there’s even an element of rebuke in the claim that a term is “off market”. The unspoken accusation is that, like neglectful schoolchildren, we simply haven’t done our homework (Tsk. Tsk.). Basketball fans old enough to remember NBA hall-of-fame centre Dikembe Mutombo may recall the finger wag with which he habitually celebrated blocking a shot.[i] “That’s off market” is a bit like one of Mutombo’s finger-wagging blocks: not only is the proposed deal term emphatically rejected; we’re encouraged to draw the conclusion that the proposal should never have been attempted. (Get that weak $#!+ outta here.)
I find this confounding.[ii] Settling a dispute between contracting parties simply by reference to what other contracting parties have agreed upon in the past seems, on its face, a suspect approach to getting the right result. We’re talking about a trend, right? A market trend.[iii] We’re supposed to follow the trend, without question? I’m tempted to call that approach to contract negotiation “lemming-like”, except I’m afraid that doing so would be unfair to lemmings.[iv]
Of course, those who negotiate contracts by reference to market custom are unlikely to view the practice as mindless crowd-following with potentially undesirable consequences. On the contrary, the intended significance of market custom is that it serves as a proxy of sorts for reasonableness. The reasonableness of including or excluding a certain provision (or a certain form of provision) in a contract is supposed to be established by the fact that a whole bunch of other contracting parties in a broad range of circumstances have entered into contracts that include or exclude that provision (or form of provision). By establishing reasonableness in this manner, market custom arguments tacitly appeal to our intuition that there is strength in numbers. Surely all of those people could not have gotten things all wrong? If a majority (in some cases, a substantial majority) of other contracting parties have determined that this or that term should be included in a certain type of agreement, that’s probably sufficient evidence that it’s a reasonable result, no?
It all sounds rather plausible at first blush. A substantial difficulty arises, however, because in attempting to establish reasonableness on the strength of brute numbers, market custom arguments become disconnected from an essential constituent element of reasonableness: namely, reason itself. To say that X is ‘reasonable’ is to say, as the term itself suggests, that X is able to be justified by reason. But, perversely, arguments based upon market custom increasingly surrender any supposed claim to reasonableness the more we focus on reasons and how they might influence the inclusion or exclusion of this or that term in a contract.
To see why this is so, it is helpful to remind ourselves that reasonableness depends largely on context. Taking a crude but ready example, it is generally not reasonable to strike another person, though most would agree that it may be reasonable to do so in self-defence. Similarly, depending upon context — in other words, depending upon the set of background facts and circumstances against which contractual negotiations take place — what might be considered reasonable in a contract negotiation will change.
Perhaps in the specific negotiation of concern to us, the Buyer (say, of a privately-owned operating gold mine) under an Asset Purchase Agreement is paying a bargain basement purchase price, representing a significant discount to what a DCF analysis would suggest is the fair price. It would not be unreasonable in those circumstances for the Seller to expect the Buyer — indeed, the Buyer will be economically motivated (given the value it is getting and the reasonable expectation that there would be other interested purchasers at the discounted price) — to content itself with a less comprehensive set of contractual protections than might be customary. Far from unreasonable, in fact, this makes perfect sense since the risk of value diminution in the asset, which the Buyer might otherwise feel compelled to minimize by contract, has already been minimized by the discounted price being paid (it may even have been accounted for in arriving at the discounted price).
Or maybe price paid is not the salient feature of our fact scenario, but rather the jurisdiction in which the operating mine is located. Let’s say it’s located in an especially high-risk political environment, perhaps a country whose government has a history of expropriating assets or enforcing an investor-hostile foreign exchange regime with significant penalties for non-compliance. In that case, barring a scenario like the one we just considered in which the risk has already been factored into a discounted purchase price (and in many cases the risk, albeit material, may be not be readily quantifiable such that this is not practicable), it would be entirely reasonable for the Buyer to expect, and for the Seller to expect to have to provide, additional contractual protections, over and above those customarily seen in asset purchase transactions, to reflect the amount of political risk the Buyer is prepared to take on, both during the period between signing and closing[v] and during the post-closing period[vi].
As the surrounding context changes, in other words, our reasons for insisting upon/against, or for accepting/rejecting, certain contractual provisions also change.
Arguments based on market custom, however, are typically insensitive to contextual distinctions and the variations they produce in what may be considered reasonable. They typically tell us, not what other contracting parties in circumstances substantially similar to ours have agreed upon but, what has most commonly been agreed upon by a much larger population of contracting parties, many of which were negotiating in contexts quite different from our own.
“67% of all M&A purchase and sale agreements involving privately owned targets[vii]include (or exclude) such and such a provision.” Before reacting to that sort of statement (Oh my! Sounds like a decisive majority…), don’t we first need to know that those agreements were negotiated in circumstances substantially similar to our own such that they reflect a standard of reasonableness appropriate to us? Of what relevance is it to us that most M&A purchase and sale agreements involving privately owned targets do not include specific indemnities for environmental costs, for example, if most of those agreements do not involve the sale of a mine (or another environmentally taxing asset or business)?
You may wonder at this point whether I’m merely identifying a problem with ‘market’ definition. Perhaps we can adjust for the context insensitivity of market custom arguments simply by specifying the relevant market with greater precision. Thus, instead of comparing our Asset Purchase Agreement to all M&A purchase and sale agreements involving a privately-owned target, we might further specify ‘the relevant market’ so that it includes only asset purchase agreements (adding deal structure context) for the purchase and sale of operating mines (adding industry and development stage context) located in high-risk political environments (adding geographic/political context) at a significant discount to fair value (adding pricing context). That certainly provides a fair amount of context and gives us a higher degree of confidence that the agreements from which we are proposing to take guidance were struck in a set of circumstances comparable to our own.
Unfortunately, however, the addition of context sensitivity to a market custom argument comes at the expense of its persuasiveness, attenuating its claim to reasonableness. That’s because the increased focus on context has the result of shrinking the relevant market. There are, logically, fewer asset purchase agreements than M&A purchase agreements of any form whatsoever, and fewer still that relate to the sale of mining assets, and even fewer that relate to the sale of operating mines, and so on. At some point, the addition of context circumscribes the universe of comparable agreements, or ‘the relevant market’, so tightly that a market custom argument loses much, if not all, of its strength in numbers. But, of course, such arguments rely upon strength in numbers for their claim to reasonableness and, consequently, their persuasiveness. Being told that 67% of agreements in the relevant market include (or exclude) this or that provision is far less compelling — it’s far less persuasive; it provides far less evidence of reasonableness — when ‘the relevant market’ comprises only three agreements than when it comprises 50.
This is obviously a quirky result. It demonstrates that …
Continue Reading Market Intelligence? The Limits of Market Custom and Why Market Practice May not be Best Practice