Until the third quarter of 2008, mergers and acquisitions (M&A) activity in the mining sector threatened to surpass every other sector. The global commodities boom was in full swing and the sector seemed to be in the consolidation phase of the cycle. Strategic buyers competed furiously for attractive projects, and target company shareholders could expect to receive large premiums for their shares.
A sharp reversal in commodity prices and capital constraints on intermediate and senior players now pose challenges to completing M&A transactions. Without access to capital, some junior companies are seeking M&A transactions as the only remaining means of salvaging value for shareholders. Meanwhile, some buyers have reduced their offer prices as volatility continues to prevail in the capital markets. This article focuses on a few legal issues M&A transactions face in the new environment.
Conditions are a standard component of support agreements and essentially permit a party to terminate the transaction if the other party breaches its representations and warranties, fails to abide by its covenants, or if there is a “material adverse change” (MAC) that relates to the business, operations or financial condition of the other party or which threatens the timely completion of the transaction. Material adverse change conditions have seldom been used to terminate transactions but there is some evidence that MAC clauses will be scrutinized carefully by buyers who may wish to re-evaluate transactions after they have been launched. Target companies should therefore attempt to minimize and circumscribe conditions that could give rise to a material adverse change. In particular, they should ensure that force majeure and other macro factors, such as commodity prices, economic outlook or the condition of the capital markets, do not constitute a material adverse change that would entitle the buyer to terminate the transaction. As well, they should try to negotiate MAC clauses that exclude certain other changes, such as the target’s failure to meet previously announced forecasts and estimates or decreases in its share price or trading volumes, since changes of this sort would result from the impact of macro factors described above.
In several recent transactions, potential buyers have reduced their offer prices after launching their bids. While no specific reasons were given, public disclosure suggests that at least one buyer used a possible material adverse change on the part of the target as reason to amend (rather than terminate) its offer. In the absence of a breach of condition, securities laws would have obliged a buyer seeking to reduce its offer price to terminate its existing offer and incur the delay and expense of making a new offer. While securities regulators do not seem to have intervened where a buyer has reduced its offer price, it remains to be seen whether their position will change if this practice becomes more common.
Where a target company is in desperate need of funds, some buyers have made significant equity investments in it, providing the target with funds during the interim period between entering into the acquisition agreement and closing of the transaction. Such an investment can provide an immediate cash infusion without increasing the cost of the acquisition for the buyer/investor or diluting the consideration to be received by existing shareholders under the offer. These investments need to be structured around the valuation and minority shareholder requirements of “related party” rules under securities laws. Target companies also should note the rules and policies of stock exchanges that relate to the pricing and size of offerings. As well, where an investment will create a significant shareholder and materially increase the cost that a subsequent bidder would have to pay to acquire the target company, directors of the target company need to weigh the company’s immediate need for capital against their fiduciary obligation to maximize shareholder value.
Gregory Ho Yuen is a partner in Fasken Martineau's Global Mining Group. He advises mining clients on equity financing and M&A transactions. Greg is a regular speaker on capital markets transactions and NI 43-101 issues.