preparing for an m&a transaction and other special situations

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


Banff Springs Hotel | Banff, AB | August 24 -‐ 27, 2014

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SkyLaw is a boutique corporate law firm offering

sophisticated legal and strategic advice to public and private companies.

www.skylaw.ca

Prepared by

GGA is an internaEonally recognized independent advisory firm helping organizaEons with their execuEve compensaEon, governance, value enhancement and risk miEgaEon.

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 ExecuEve CompensaEon, Human Resource Strategy and Corporate Governance.

•  Co-‐designed and teaches the graduate level York University course Governance of ExecuEve CompensaEon and Shareholder Accountability.

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Presented by

Kevin R. West Founder, SkyLaw Professional CorporaEon

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

•  AZer clerking for JusEce Binnie at the Supreme Court of Canada, Kevin pracEced 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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Kevin R. West Timeline

Kevin R. West Selected Transactions List

•  Acquisition of Corriente Resources Inc. by Tongling Nonferrous Metals Group Holdings Co. Ltd and China Railway Construction Corporation Limited for $679 million.

•  Acquisition of Northern Peru Copper Corp. by China Minmetals Nonferrous Co. Inc. and Jiangxi Copper Company for $455 million.

•  Xstrata plc hostile take-over of Falconbridge Limited for $24 billion. •  Acquisition of PetroKazakhstan Inc. by China National Petroleum

Corporation for $4.2 billion. •  Royal Bank of Canada’s acquisition of Centura Banks, Inc. for $2.3 billion.

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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 Know Who Your Shareholders Are

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 Know Who Your Shareholders Are

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?



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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)



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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)



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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)



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“Single Trigger” versus “Double Trigger” 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)



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“Single Trigger” versus “Double Trigger” Equity Vesting §  Modified Approach: Place a floor at the

transaction price so the premium is locked in

(…continued)



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Was a defensible

process used to

award the

executive

compensation?

(…continued)



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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 31

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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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 35

(…continued)


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 VesBng Date Exercise Date ExpiraBon (Term)

Holding Period VesBng 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 OpBon Terms 5-‐10 years

"   Intermediate to Mature Market Cap OpBon Terms 7-‐10 years

(…continued)

Part 2 – 2.7


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Advantages/Disadvantages of Stock Options Advantages Disadvantages

§ Leveraged pay potenEal § Simple

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

§ Align with future shareholder gains

§ Fixed accounEng § Employee tax advantage

§  Excludes value of any dividends being paid

§  May put disproporEonate focus on increase in share price

§  Creates diluEon §  PotenEal for windfall gains §  ConEnuous underwater opEons

are de-‐moEvaEng despite management doing a “good job”

§  AccounEng

(…continued)

Part 2 – 2.7


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Calculating RSUs/DSUs

=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/DSUs Advantages Disadvantages

§ Full value of stock price § Less diluEve than opEons

§ Sekle in cash net of withholding tax (typically)

§ Dividends addiEve to units

§ Easier to administer compared to real shares

§  Perceived as a “give away” §  PotenEal for significant payouts

for sub-‐par performance

§  Less leverage compared to opEons

§  Pre-‐revenue companies, have to fund addiEonal cash hit

(…continued)

Part 2 – 2.7


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Calculating PSUs

Vest

Yr. 1 Yr. 2 Yr. 3

1

2

3

IllustraBon assumes cliff vesBng

Performance Period Yr. 4 Yr. 5 Yr. 6

Vest Performance Period

Vest Performance Period

Performance Level

Performance MulBplier

Maximum 150%

Target 100%

Threshold 50%

Target # PSUs x

Performance MulBplier

x Stock Price at VesBng

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 diluEve than opEons §  Sekle in cash net of withholding tax (typically)

§  Accumulate dividends in addiEonal units

§  Easier to administer compared to real shares

§  Less potenEal for payouts for sub-‐par performance

§  PotenEal for significant payouts for sub-‐par performance

§  Pre-‐revenue, financing arrangements required to sekle in cash

§  Defining performance may be challenging

(…continued)

Part 2 – 2.7


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Valuation

Stock OpEons RSUs PSUs DSUs

Publicly Traded Privately Held

Share Price

FuncEon of: •  Profit, •  Growth Metric, •  ValuaEon 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

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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 CorporaEon Tel: 416.644.3190 E-‐mail: [email protected] LinkedIn: www.linkedin.com/in/kevinrobertwest


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

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