Private Equity Considerations
Declining markets prompt foreign strategic buyers, like private-equity (PE) funds, to seek acquisition opportunities where a target’s market value misaligns with its perceived value. PE funds view going private as an opportunity to lower costs, enhance operational strategies, shield from market pressures, and reduce regulatory obligations. Enhanced operational flexibility and the freedom to enact changes without immediate market scrutiny increase the perceived value of going private. PE funds typically structure transactions as a leveraged buy-out (LBO) with debt backed by the target’s assets to maximize returns, securing control with minimal capital investment.
In some cases, insiders initiate going-private transactions. Target management (a Management Buyout) or existing security holders may seek to take the company private. For Management Buyouts, often backed by a PE fund, the board must manage potential conflicts.
A. Structuring the Transaction
Structuring a going-private transaction requires diligent planning and analysis. The three common structures are take-over bids followed by second-step transactions, amalgamations, or court-sanctioned arrangements. Each approach has benefits, challenges, and regulatory requirements.
A take-over bid refers to an offer aimed at acquiring a target company’s outstanding voting or equity securities within a Canadian jurisdiction. This offer is directed at one or more security holders. If the securities involved, combined with those already owned or controlled by the offeror, equal 20 percent or more of the class, it qualifies as a take-over bid. The rules and disclosure obligations are primarily outlined in Part 2 of National Instrument 62-104 – Take-Over Bids and Issuer Bids (NI 62-104).
For a take-over bid, NI 62-104 mandates creating and distributing a written offer to purchase and a take-over bid circular to all eligible security holders of the target company. In response, the directors of the target company are required to produce their own circular, endorsing or opposing the bid. The nature of this recommendation depends on whether the bid is negotiated or unsolicited. A negotiated take-over bid (a friendly bid) garners endorsement of the target company and often is facilitated through a definitive acquisition agreement adhering to relevant securities laws. Unsolicited bids (hostile bids) involve direct offers to security holders, potentially circumventing the target company’s board.
The conclusion of a take-over bid occurs upon the bid’s expiration and the successful acquisition and payment for the securities tendered by security holders. Considering the possibility of incomplete tendering, a second-step transaction (statutory squeeze-out or business combination) is often necessary to secure the remaining securities. The structure of the second step will depend on the percentage of controlled securities by the offeror after the bid expires. If over 90% of the class’s outstanding securities are tendered in the bid, the offeror can effect the acquisition of the remaining securities through a statutory squeeze-out. If the threshold is not met, a business combination may be used to force out the remaining security holders of the target company at the same price and under the same terms that were offered under the initial bid.
Another option is through an amalgamation. The foreign buyer establishes a wholly owned Canadian subsidiary that amalgamates with the target. Following the amalgamation, security holders of the target company typically receive redeemable securities in the newly formed entity, which are swiftly redeemed for cash. The buyer then has control over the amalgamated entity, which then continues the operations of the former publicly traded company.
Corporate regulations require a shareholder meeting to approve the amalgamation. Approval from security holders who own a minimum of two-thirds of the outstanding voting securities must be secured, either in person or via proxy. Moreover, the applicability of MI 61-101 – Protection of Minority Security Holders in Special Transactions (NI 61-101) could necessitate majority approval from minority security holders, unless an exemption is applicable.
Plan of Arrangement
A plan of arrangement is commonly used for going-private transactions in Canada. This court-approved process involves negotiations between the foreign buyer and the target company’s board or special committee. The parties will negotiate an arrangement agreement to outline terms, followed by two court appearances.
The initial appearance includes the target company’s application for an interim order, which governs procedural aspects such as convening and notifying the special meeting of security holders, as well as stipulating approval thresholds for each class. The subsequent appearance, which follows the special meeting approval, seeks a final order confirming the arrangement’s equity and rationality.
Distinguishing itself from a take-over bid, a plan of arrangement allows the buyer to secure all outstanding voting securities of the target within a single transaction, sidestepping the need for a second-step acquisition or a business combination. This structure offers agility in managing distinct security classes as compared to other methods, providing the potential to encompass asset divestitures, spinouts, or other restructuring matters, facilitating efficient structuring and strategic tax planning.