preparing for an m&a transaction and other special situations€¦ · time to break out the...

The Canadian Society of Corporate Secretaries

16th Annual Corporate Governance Conference Banff Springs Hotel | Banff, AB | August 25, 2014

Preparing for an M&A Transaction and Other Special Situations

Workshop D | 2:45 pm – 4:45 pm

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Prepared for


16th Annual Corporate Governance Conference Banff Springs Hotel | Banff, AB | August 24 - 27, 2014

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Prepared by

GGA is an internationally recognized independent

advisory firm helping organizations with their

executive compensation, governance, value enhancement

and risk mitigation.

www.GGAinc.com

Paul Gryglewicz Managing Partner, Global Governance Advisors

• Paul Gryglewicz is the Managing Partner at GGA.

• He engages with Boards and senior management advising them in the areas of Executive Compensation, Human Resource Strategy and Corporate Governance.

• Co-designed and teaches the graduate level York University course Governance of Executive Compensation and Shareholder Accountability.

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Presented by

Kevin R. West Founder, SkyLaw Professional Corporation

• Kevin West is the founder of SkyLaw, an innovative boutique corporate law firm in Toronto.

• After clerking for Justice Binnie at the Supreme Court of Canada, Kevin practiced with Sullivan & Cromwell in New York and Australia and as a partner at Davies in Toronto.

• Kevin obtained his LLB from Dalhousie University in 1998.

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Presented by

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Agenda

Part 1: Preparation for a Special Situation

1.1 – Types of Transactions

1.2 – Stages of a Transaction

1.3 – Know Who Your Shareholders Are

1.4 – Have a Board Plan

1.5 – Board and Executive Compensation for

Special Situations

1.6 – Selecting Service Providers

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Agenda

Part 1: Preparing for a Special Situation

1.7 – Maintain Corporate Records

Part 2: During a Special Situation

2.1 – The Importance of Planning, Planning,

Planning

2.2 – Board Governance and Special Committees

2.3 – Confidentiality

Agenda

Part 2: During a Special Situation

2.4 – Disclosure Issues

2.5 – Document Management

2.6 – Task Management

2.7 – Due Diligence Issues

2.8 – Negotiations

2.9 – Closing the Deal

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Agenda

Part 3: Integration After Closing a Special

Situation

3.1 – Closing Books and Records

3.2 – Update Plans and Policies

3.3 – Plan for the Next Special Situation!

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Agenda

Part 4: Conclusion and Questions

4.1 – Concluding Remarks

4.2 – Question & Answer Period

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Part 1

Preparation for a Special Situation

Part 1 – 1.1

Types of Transactions

Change of control transactions

Initial public offerings (IPOs)

Significant acquisitions

Significant divestitures

Capital raising

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Part 1 – 1.2

Stages of a Transaction

Initial discussions and Non-Disclosure

Agreement

Letter of intent

Due diligence

Negotiation of definitive transaction documents

(Share purchase agreement, etc.)

Signing

Closing

Post-closing integration

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Part 1 – 1.3

Know Who Your Shareholders Are

Engage a reputable transfer agent

Ensure minute book is up-to-date

Determine shareholder approval requirements for the transaction

Understand share terms (e.g. conversion features)

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Part 1 – 1.3


Do you know where your Options are?

Buyers may want to acquire 100% of the company

Option plans often provide for termination of the options at a specified time after the change of control, but not always

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(…continued)

Part 1 – 1.3


Do you know where your Options are?

Can the optionholders exercise their options early and deposit to a take-over bid?

Check notice requirements for change of control transactions

Board approval required for changes to vesting schedule?

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(…continued)

Part 1 – 1.4

Have a Board Plan

Be prepared to move quickly

Ensure the right expertise and advisors are available

Know how to contact all board members

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Part 1 – 1.5

Board and Executive Compensation

for Special Situations

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Do you know what

happens on a

change of control?

Part 1 – 1.5



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Can you clearly identify each executive’s employment arrangements?

Are the contracts organized in one central location?

Are there side letters or unwritten agreements?

(…continued)

Part 1 – 1.5



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Can you clearly identify each executive’s employment arrangements?

Have the share and option issuances been approved by the Board and properly documented?

Are the employment contracts written in clear and unambiguous language?

(…continued)

Part 1 – 1.5



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“Single Trigger” versus “Double Trigger”

Equity Vesting

An executive who has immediate vesting on a change of control has a single trigger

Allows executive to participate in premium Executive in a stronger personal negotiating

position with new owners Shorter term focus?

(…continued)

Part 1 – 1.5



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Equity Vesting

If an executive must be terminated (actually or constructively) after the change of control before vesting occurs, there is a double trigger

May reduce cost to company to retain executive

(…continued)

Part 1 – 1.5



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Equity Vesting Modified Approach: Place a floor at the

transaction price so the premium is locked in

(…continued)

Part 1 – 1.5



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Was a defensible

process used to

award the

executive

compensation?

(…continued)

Part 1 – 1.5



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(…continued)

A defensible process is a balancing act

Part 1 – 1.6

Selecting Service Providers

Get a referral from a reputable source

Google search firm and specific lawyers

Check websites

Have a call or meet in person

In foreign jurisdictions, prefer counsel trained in

New York, London or similar common law

jurisdiction

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Part 1 – 1.6


Finding the Right Advisors – Cross-Border

Confirm your advisors have cross-border

experience

Always consider tax

There can be significant legal differences

(e.g. how employees are treated, how

approvals are obtained)

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(…continued)

Part 1 – 1.6


Finding the Right Advisors – Cross-Border

Consider government and political issues

Consider PR, community meetings, and

integration issues

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(…continued)

Part 1 – 1.7

Maintain Corporate Records

Best Practices

Bring records up-to-date

Enforce the document

retention policy and

e-mail retention policy

Scan everything

Back-up everything

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Part 1 – 1.7

Maintain Corporate Records

Track tricky contract provisions

Use a database to track agreements with:

change of control

confidentiality

exclusivity

non-competition

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(…continued)

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Part 2

During a Special Situation

Part 2 – 2.1

The Importance of Planning,

Planning, Planning

Time to break out the transaction playbook

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Part 2 – 2.1


Planning, Planning

Arrange a kick-off meeting with advisors and key

executives

Time zones and travel require careful planning

Translators or interpreters required?

Use project management tools

Build in time to incorporate comments and work

product from various jurisdictions and advisors

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(…continued)

Part 2 – 2.1


Planning, Planning

Confirm internal approvals required and timing

Confirm government and regulatory approvals

required: TSX? Investment Canada Act?

Competition Act?

Review transaction checklists

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(…continued)

Part 2 – 2.2

Board Governance and

Special Committees

Use established Board protocols

Is a special committee required or advisable?

Are independent advisors required?

Plan when to invite advisors to meetings

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Part 2 – 2.2

Board Governance and

Special Committees

Confirm the Board’s role when approving a

transaction

Provide advice on exercising

fiduciary duty

Challenge biases

Encourage unfashionable thinking

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(…continued)

Part 2 – 2.3

Confidentiality

Use established protocols for maintaining

information confidential

Use code words

Information only on a

need-to-know basis

Use Non-Disclosure

Agreements

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Part 2 – 2.4

Disclosure Issues

Determine when the transaction needs to be

disclosed to the Board, shareholders, employees

or the public

Consider a blackout period for trading

Delay option grants

Have press release and securities filings ready

and vetted

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Part 2 – 2.5

Document Management

Use online data room

Keep sensitive data out of the data room

Require in-person review of sensitive documents,

minute books, etc.

Avoid disclosing personal information

Consider confidentiality obligations to third

parties

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Part 2 – 2.6

Task Management

Use project management principles

Set real deadlines

Keep a checklist!

Regular internal and

external team

updates

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Part 2 – 2.7

Due Diligence Issues

Identify change of control provisions

Confirm share and asset ownership

Search government databases (litigation,

PPSA, etc.)

Get compensation, financial, tax and IP

specialists in early

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Part 2 – 2.7


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Publicly traded companies use long-term incentives to align executives with shareholders.

Equity based long-term incentives link pay to future equity value and therefore to shareholder return.

Focus executives on multi-year objectives.

Executive Compensation

(…continued)

Part 2 – 2.7


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Executive Compensation - LTIP

Grant Date Vesting Date Exercise Date Expiration (Term)

Holding Period Vesting Period Exercise Period

Yrs

(…continued)

Part 2 – 2.7


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Calculating Stock Options

(Current Share Price - Exercise Share Price)

No. of Stock Options

Granted

100,000

Exercise Share Price

$Y

Final Payout at Exercise

=

Current Share Price

$X

No. Of Stock Options Granted

X

¼ Vest

¼ Vest

¼ Vest

¼ Vest

Exercise HOLD

Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 - 10

Used in private and public companies

Junior to intermediate Market Cap Option Terms 5-10 years

Intermediate to Mature Market Cap Option Terms 7-10 years

(…continued)

Part 2 – 2.7


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Advantages/Disadvantages of Stock Options

Advantages Disadvantages

Leveraged pay potential

Simple

Can align with long-term success (i.e. 10yr term)

Align with future shareholder gains

Fixed accounting

Employee tax advantage

Excludes value of any dividends being paid

May put disproportionate focus on increase in share price

Creates dilution

Potential for windfall gains

Continuous underwater options are de-motivating despite management doing a “good job”

Accounting

(…continued)

Part 2 – 2.7


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Calculating RSUs

=

Target No. of Restricted Share Units

$X

Target No. of

Restricted Share Units

50,000 Units

Stock Price at Vesting

Date

X

Stock Price at Vesting Date

Final Payout at Vesting

1/3 Vest

1/3 Vest

1/3 Vest

Yr. 1 Yr. 2 Yr. 3

1/3 Vest

1/3 Vest

1/3 Vest

1/3 Vest

1/3 Vest

1/3 Vest

1

2

3

Sum Sum Sum

(…continued)

Part 2 – 2.7


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Advantages/Disadvantages of RSUs

Advantages Disadvantages

Full value of stock price

Less dilutive than options

Settle in cash net of withholding tax (typically)

Dividends additive to units

Easier to administer compared to real shares

Perceived as a “give away”

Potential for significant payouts for sub-par performance

Less leverage compared to options

Pre-revenue companies, have to fund additional cash hit

(…continued)

Part 2 – 2.7


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Calculating PSUs

Vest

Yr. 1 Yr. 2 Yr. 3

1

2

3

Illustration assumes cliff vesting

Performance Period

Yr. 4 Yr. 5 Yr. 6

Vest

Performance Period

Vest

Performance Period

Performance Level

Performance Multiplier

Maximum 150%

Target 100%

Threshold 50%

Target # PSUs

x Performance

Multiplier x

Stock Price at Vesting

Date

(…continued)

Part 2 – 2.7


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Advantages/Disadvantages of PSUs Advantages Disadvantages

Link pay stronger to performance

Full value of stock price

Less dilutive than options

Settle in cash net of withholding tax (typically)

Accumulate dividends in additional units

Easier to administer compared to real shares

Less potential for payouts for sub-par performance

Potential for significant payouts for sub-par performance

Pre-revenue, financing arrangements required to settle in cash

Defining performance may be challenging

(…continued)

Part 2 – 2.7


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Valuation

Stock Options RSUs PSUs DSUs

Publicly Traded Privately Held

Share Price

Function of: • Profit, • Growth Metric, • Valuation Methodology

(…continued)

Part 2 – 2.8

Negotiations

Discuss negotiation style and strategy in

advance

Only one point of contact for negotiations

Make clear subject to board approval

Use term sheets prepared by counsel

Control the process

Face-to-face always helps for difficult or nuanced

negotiations

Don’t feel pressured to agree on the spot 51

Part 2 – 2.9

Closing the Deal

Plan a pre-closing

Know the approval process

Who is signing documents?

Allow for contingencies –

something always comes

up at the last minute

Prepare press release and script

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Part 3 Integration After Closing a

Special Situation

Part 3 – 3.1

Closing Books and Records

Integration Issues

Asset versus share deal: who is the employer?

How will decisions be made?

Cultural issues: how to merge the egos?

Executive titles – more important than you might think

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Part 3 – 3.1

Closing Books and Records

Integration Issues

Physical offices and technology: how to bridge

the gaps?

Be sure to budget for severance costs – cash and morale

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(…continued)

Part 3 – 3.2

Update Plans and Policies

Have a compensation advisor work with you

to update the employment plans and policies

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Part 3 – 3.3

Plan for the Next Special Situation!

Insist on getting complete closing books soon

after closing

Update the transaction

playbook

Keep organized

Revise checklists with

knowledge gained

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Part 4

Conclusion and Questions

Part 4 – 4.1

Concluding Remarks

Plan, plan, plan.

Get the right advisors in

place early.

Organize your documents now.

Review your transaction

playbook regularly.

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Part 4 – 4.2

Question & Answer Period

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Paul Gryglewicz Managing Partner, Global Governance Advisors

Tel: 647.286.0626

E-mail: [email protected]

LinkedIn: www.linkedin.com/in/paulgryglewicz

If you have any further questions, please feel free to contact:

Kevin West Founder, SkyLaw Professional Corporation

Tel: 416.644.3190

E-mail: [email protected]

LinkedIn: www.linkedin.com/in/kevinrobertwest


16th Annual Corporate Governance Conference Banff Springs Hotel | Banff, AB | August 25, 2014

Preparing for an M&A Transaction and Other Special Situations

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preparing for an m&a transaction and other special situations€¦ · time to break out the...

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