The general public is pretty familiar with the concept of a take-over bid where one company makes an offer to another company’s shareholders to purchase their shares and each individual shareholder in the target company has the choice to either accept or reject that offer. However, most public company M&A transactions are actually completed using “plans of arrangement” whereby the shareholders of the target company are given the right to vote on a particular transaction and, if the transaction receives the required level of shareholder approval, the transaction is implemented with respect to all shareholders (including both those that voted in favour and those that voted against the transaction). This article summarizes the advantages and disadvantages of both take-over bids and plans of arrangement.
Take-Over Bids
Advantages
- If it is a friendly transaction supported by the target company’s board, the transaction can be completed is as few as 35 days (i.e. the target board can approve a shorter 35 day minimum bid period rather than the mandated 105 day minimum bid period for hostile bids).
- There is no court approval process and therefore there is no formal venue for disgruntled shareholders or other parties to intervene.
Disadvantages
- If the acquiring company wants to acquire 100% of the target company’s shares, a second step transaction is required to acquire any shares not tendered to the original bid.
- The long 105 day minimum bid period (unless target board approves a shorter time of not less than 35 days) increases the risk of completing bids.
Plans of Arrangement
Advantages
- Plans of arrangement are more flexible and can allow the parties to achieve multiple goals (including tax efficiency) in a single transaction.
- Complicated, multi-step reorganization transactions can be completed quickly and efficiently under plans of arrangement (usually in the same day).
- Plans of arrangement allow for the termination of options and other convertible securities (provided the holders of such securities are treated fairly).
- Plans of arrangement have a lower approval threshold in that the transaction only requires the approval of two-thirds of the target company shares that actually vote on the transaction.
- If the requisite shareholder approval is received, the acquiring company can acquire 100% of the target company shares (including from both those that voted in favour and those that voted against the transaction) in a single step transaction.
- The issuance of shares of the acquiring company in exchange for the target company shares pursuant to a court approved plan of arrangement fit within a registration exemption under US securities laws.
Disadvantages
- The shareholder approval process takes longer (typically 60+ days) than the 35 day minimum bid period under a friendly take-over bid.
- The court approval process provides a venue for disgruntled shareholders, and other interested parties, to intervene.
- Courts typically require dissent rights to be given to the target company shareholders (i.e. the right to be paid out the fair value of their shares in cash).
Invitation for Discussion:
At Linmac LLP, we have a wealth of experience as legal advisors on M&A transactions, both large and small, and know how to successfully structure and manage M&A transactions. If you are contemplating buying or selling a business, please do not hesitate to contact one of the lawyers in our business law group. We would be happy to assist you on this exciting journey.
Disclaimer:
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.