The document provides a summary of the top 10 tips for a successful mergers and acquisitions (M&A) deal. The tips include: 1) using confidentiality agreements to protect information; 2) establishing an effective special committee; 3) financing deal costs; 4) responding to unsolicited offers; 5) properly structuring the deal; 6) understanding the pros and cons of shares versus cash deals; 7) minimizing non-completion risks; 8) determining when to pay or not pay a break fee; 9) protecting directors and officers; and 10) maintaining proper disclosure practices to avoid regulatory issues.
4. 2. Effective Use of a Special Committee
• Make effective use of a Special Committee
– To fulfill regulatory requirements.
– To protect directors from liability, through the application of the
business judgment rule.
– To establish an efficient process.
• When
– If the transaction is, or may be, with a related party
(MI 61‐101; TSX‐V Policy 5.9).
– If there are any real or perceived conflicts of interest on the part of
management or any of the directors.
– If it is difficult to convene Board meetings on short notice.
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5. 2. Effective Use of a Special Committee
• Things to remember
– Form the Special Committee early.
– Special Committee should select and instruct a financial advisor.
– Special Committee should establish the parameters and process for doing a
transaction, and monitor its implementation, but Management should
negotiate and implement the deal.
– Special Committee must assess and evaluate the proposed transaction and any
alternatives, and make recommendations to the Board.
– While independent counsel to the Special Committee is desirable, it is not
essential unless a conflict arises.
– While management can attend Special Committee meetings, they shouldn’t do
so if they have an interest in any of the matters under discussion.
– Absent special circumstances, members of the Special Committee should be
compensated for their efforts.
– Members of the Special Committee should be properly indemnified and
insured.
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6. 3. Financing the Deal Costs
Prepare a budget and funding plan for Transaction costs before initiating the
sale process.
• Anticipate all Transaction costs, including:
– Financial advisor (including fairness opinion/valuation)
– Legal (may include independent counsel to the Special Committee and U.S.
legal advice as well)
– Tax (will be greater if the Transaction includes a restructuring or spin‐off)
– Audit / Accounting (will be greater if the Transaction is structured as a share
for share exchange)
– Transfer Agent
– Proxy Solicitation (Buyer should pay)
– Printing (Directors Circular or Information Circular)
– French translation (depends on reporting status or shareholder numbers in
Quebec)
– Special Committee fees
– Extended D&O insurance coverage
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7. 3. Financing the Deal Costs
• Funding arrangements may include one or more of the
following:
– Undertaking a financing before starting the process.
– Requesting the Buyer to provide interim financing to the Company
– Undertaking a financing after announcement of a possible Transaction,
provided that the Company is not in possession of material undisclosed
information (New Island Resources)
– Funding expenses through the exercise of outstanding options or
warrants immediately prior to Closing
– Requiring the Buyer to pay the expenses after Closing
– Negotiating an expense reimbursement clause in the event that the
Buyer defaults
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9. 5. Structuring the Deal
Structure the Transaction to achieve your key objectives, keeping in mind the
following:
• Take‐Over Bid
– Advantages
• Speed and Cost
– Disadvantages
• Shareholder tender requirement – usually
66 ⅔% of all issued shares (fully‐diluted).
• If 90% of the shares are not tendered under the Bid, a second step transaction will
be required to acquire 100%.
• Lack of flexibility.
– No effective way to deal with options/warrants under the Bid, if they are to be cancelled or
exchanged.
– Prohibition against collateral benefits.
• Securities law restrictions on issuing shares to U.S. shareholders.
• Valuation requirement for insider bids.
• French translation requirement in Quebec.
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10. 5. Structuring the Deal
• Plan of Arrangement
– Advantages
• Flexibility
– Can provide for termination or exchange of options/warrants
– Can provide for different treatment of shareholders
– Can accommodate a spin‐off of non‐core assets
• Shareholder approval requirement ‐ 66⅔% of shares voted at the meeting;
no second‐step transaction required.
• Provides Target with greater control over the process.
• Court approval provides comfort to directors.
• Court approval provides an exemption from U.S. securities laws for shares issued to
U.S. Shareholders (section 3(a)(10) exemption).
– Disadvantages
• Cost and Timing
• Dissent rights
• Court hearing provides a forum for dissident shareholders to oppose the Transaction
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12. 6. Pros and Cons of Shares vs. Cash
• Shares
– Advantages
• Target shareholders continue to participate in the Company’s properties
• Target shareholders are usually able to defer tax until they sell the shares received in
the Transaction
– Disadvantages
• Valuation issues
• Prospectus level disclosure
• Financial statement review
• If the Transaction is a significant acquisition – pro forma financial statements
• If any material change – an updated 43‐101 report
• If the Company has U.S. shareholders – a U.S. securities exemption
• If the Buyer is listed on the TSX, and if the number of shares issued in the
Transaction exceed 25% of the number of shares of the Buyer outstanding
– approval of the Buyer’s shareholders
• Increased cost and time
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14. 8. When to Pay (or Not to Pay) a Break Fee
Know when a break fee or termination fee is properly payable, and when
it isn’t.
• When To Pay
– If the Company accepts a Superior Proposal prior to the expiry of the
Bid or the Shareholders Meeting.
– If an Acquisition Proposal is terminated before the expiry of the Bid or
Shareholders Meeting and an Acquisition Proposal with the same
person is completed within 12 months.
– If the Company breaches the exclusivity or non‐solicit provisions of the
Agreement.
– If the Company withdraws or adversely modifies its recommendation
regarding the Transaction.
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15. 8. When to Pay (or Not to Pay) a Break Fee
• When Not to Pay
– If the Company’s shareholders fail to approve or tender the required
number of shares to the Transaction (except in the circumstances
referred to in the preceding slide)
– If the Transaction doesn’t complete by an outside date, or the meeting
is not held by a specified date.
– If the Company is in default under any of its other covenants, or the
Company makes any misrepresentation, in the Definitive Agreement.
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