A recent report by a Canadian investment banking firm predicted that current market conditions will foster an “unprecedented wave of merger and acquisition activity.” This is because junior miners and development companies trade at deep discounts compared to intermediate and senior companies that have cash in the bank and/or positive cash flow.
The legal issues and concerns that a potential acquirer or acquiree should consider prior to and during a takeover or other M&A transaction follow.
A confidentiality agreement (CA) can protect proprietary information and prevent premature public disclosure of negotiations. A CA will often contain a standstill clause and an exclusivity clause. A standstill clause prohibits the interested acquirer from purchasing securities or assets of the acquiree for a period of time (frequently a year or two), unless the target board agrees or another transaction intervenes. The standstill clause also provides an incentive to complete the deal. An exclusivity clause prohibits the acquiree from negotiating a transaction with other potential acquirers, subject to a fiduciary out.
Letter of intent
A letter of intent (LOI) can be useful for solidifying intentions, setting out the terms of a proposed deal and for providing deal protection by way of no shop clauses and break fees. While an LOI is not usually binding, some of its clauses can be. An LOI can offer timing advantages if kept brief, but there may be disadvantages, such as potentially having to negotiate the deal twice.
Directors must exercise their fiduciary duties towards the corporation and act in the best interests of its shareholders as a whole. Directors must avoid conflicts of interest and, when approached by an acquirer with an attractive deal, should examine the best options for the corporation. In some situations, this may involve appointing a special committee of independent directors. In Canada, unlike the United States, there is no outright obligation to trigger an auction. However, where the company is “in play,” directors are required to seek the best value reasonably available to shareholders in the circumstances.
Announcement timing is critical, both for the success of the deal and in order to comply with legal and regulatory requirements. Disclose too soon, and the deal could unravel, or the target share price may exceed the consideration to be offered. Disclose too late, and a breach of securities regulations could result. Reporting issuers have an obligation under the Ontario Securities Act to disclose any material change, including the entering into of a definitive arrangement or amalgamation agreement. In a recent decision, the OSC decided that a potential merger must be disclosed only when the board believes that the parties have committed to the transaction and that completion is substantially likely. Parties should be careful to note that, depending on its specific terms, the execution of an LOI may be a disclosable event.
Directors will have to consider the approvals needed to consummate any deal, including shareholder, regulatory (e.g. Competition Bureau, Investment Canada) and stock exchange approvals. In addition, there may be change of control provisions in material documents that require approvals or waivers from various stakeholders.
The time frame of a deal fluctuates, in part, depending on whether the proposed merger is unsolicited or an agreed deal. If unsolicited, the target may have or invoke a shareholder rights plan, which will frequently require the offeror to extend its offer past the 35-day bid period to approximately 60 days. From start to finish, M&A deals frequently take three to four months to complete. In addition, regulatory approvals and NI 43-101 technical reports are often on the critical path and may extend that period.
John Turner, leader of Fasken Martineau’s Global Mining Group, has been described as “one of the best dirt lawyers in Canada, if not the world.” He has been involved in many of the leading corporate finance and M&A deals in the resources sector.
Greg Ho Yuen is a partner in Fasken Martineau’s Global Mining Group. He advises mining clients on equity financing and M&A transactions. Gregory is a regular speaker on capital markets transactions and NI 43-101 issues.