With increased pressures and scrutiny from shareholders, quarterly reporting and ever-changing regulatory requirements, we have seen an increase in publicly traded companies going private.

In our most recent fireside chat, Dentons’ panellists Bennett Wong, Partner, Andreas Kloppenborg, Partner and Riley Dearden, Partner, were joined by Computershare’s Chester Wlodarczyk, Project Manager, Corporate Actions and Jason Spasaro, Vice President, Business Development, to discuss their experiences and strategies when taking a public company private.

Factors driving privatization

The softening of capital markets in the past 18 months has resulted in many going private transactions, especially in the tech sector. Last year, the tech sector experienced a pronounced sell-off which led to several private-equity backed buy-outs; generally due to the fact private equity can take a longer investment view until market conditions improve and exit opportunities materialize. Other key factors driving privatizations include:

• Private companies can generally restructure more easily and pivot more nimbly;
• Private companies can wait out the soft capital markets more effectively, provided they have a strong balance sheet or access to capital; and
• Elimination of ongoing public company maintenance costs and reporting requirements may improve the company’s bottom line.

Transaction Structure

Choosing a transaction structure requires a robust understanding of the company’s shareholder base, such as how many shares are held by insiders, how many shares are held by US investors and how widely the shares are traded on the market.

A plan of arrangement is often the preferred structure for a going private transaction, which can also involve amalgamations and share consolidations. A plan of arrangement requires a judge to determine the fairness of the transaction, which provides additional comfort to the parties. The transaction may also be done by way of take-over bid with a second-step transaction such as an amalgamation or share consolidation. A take-over bid may avoid negative tax consequences such as partial deemed dividend treatment of the proceeds.

Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101) imposes procedural protections for public shareholders in four types of going private transactions: insider bids (where directors, officers or significant shareholders buy the company), issuer bids (where the company purchases its own shares), business combinations (a transaction that confers a collateral benefit on a related party), and related party transactions (a transaction with a related party). These protections include:

• A formal valuation performed by a qualified and independent valuator for the fair market value of the shares;
• Minority approval of the transaction by a majority of the votes cast by public shareholders at a shareholders meeting called for considering the transaction;
• Creation of a special committee of independent directors without conflict of interest to supervise the transaction; and
• Additional disclosure requirements.

Companies listed on junior exchanges are exempt from the formal valuation requirements under MI 61-101. Often, even when a formal valuation is not required, boards may obtain one to provide more fulsome disclosure to shareholders.

A fairness opinion may also be obtained from an independent and qualified professional which speaks to the overall fairness of the transaction. It is mandatory for material conflict of interest transactions (i.e., issuer bids, insider bids, business combinations, and related party transactions). While a fairness opinion is not a formal valuation, it is customarily obtained by the board even when not required to provide comfort and evidence the board’s discharge of its fiduciary duties when recommending approval of the transaction to shareholders. It may also be useful if the transaction is likely to be challenged.

A supported (friendly) going private transaction is one that is supported by the target’s board and is recommended to the target’s shareholders. A friendly transaction has greater flexibility around structuring and greater deal certainty. Conversely, a hostile (unsolicited) going private transaction is one without support by the target’s board. Though rare in Canada, it may occur in certain circumstances, such as when a friendly transaction deteriorates. Generally, a hostile buyer ends up paying a premium for shares in order to overcome defensive techniques. A hostile buyer also generally does not have access to diligence materials that would enable optimal price discovery.

Role of Directors and Officers

Directors must assess whether a proposed going private transaction is desirable or fair and in the best interests of the company, taking into account the interests of all stakeholders. A committee of independent directors should be formed to supervise the going private transaction and, if needed, select the independent financial advisor and supervise preparation of the valuation. Due consideration must be given early in the process regarding who forms the independent committee. The committee plays a vital role in the entire process, and directors with experience and the ability to participate is imperative. Ownership of shares alone is generally not sufficient to automatically discount the independence of a director. Significant shareholder nominees and management representatives should be excluded from the committee, and any material interest in the transaction outcome must be scrutinized.

The Chief Executive Officer typically continues to act as the company’s prime public communicator, but must exercise discretion when discussing topics such as fairness or the independent committee’s position. The Chief Financial Officer and other senior executives typically collect all necessary information so the financial advisor/valuator can ascertain the value of the company. They should avoid expressing views on the desirability of the transaction, adequacy of the consideration, and overall fairness.

Key considerations

Some key considerations for a company considering a going private transaction include:

• Prior planning is very important. The transaction timeline, potential hiccups, planning the shareholders meeting, accounting for dissent groups, and depositary related issues must all be considered;
• If a critical number of shareholders dissent, deal certainty can be jeopardized. Parties often negotiate a cap (generally 5-10% of the target shares) on dissenting shareholders as a condition to closing to preserve deal certainty;
• Shareholders should be engaged to achieve the highest possible participation;
• Insiders that are not eligible to receive a cash/share consideration in exchange for their shares need to withdraw their shares from CDS/DTC prior to the effective date;
• Preparation and mailing of large information circulars can require a longer time period between record date and mailing date;
• In transactions with a cash component, the wire sent to the depositary must be delivered quickly to prevent delays to closing;
• The mechanics of how holders of options and PSUs/RSUs/DSUs are paid may be different than shareholders, thus prior planning for equity awards is necessary;
• The company must be familiar with the demographic composition of its share register and contact its transfer agent early. If Cede & Co. holds a share position, the company may have significant US institutional or retail presence, requiring a USD currency election in the circular;
• Issuance of CAD cheques into a foreign country can create clearance issues that cause significant delays. CAD cheques should not be mailed abroad to the masses; and
• The company should weigh its options for collecting shareholder payment instructions, as online portals have become more common. Access can be provided via mail or email. Online portals can allow shareholders to: acknowledge terms and conditions of the transaction, confirm their addresses, make a currency election, provide payment instructions and tax certification, and sign electronically.

Key documents

Some key documents potentially needed for a company considering a going private transaction include:

• Confidentiality agreement between the buyer and independent committee: Facilitates the due diligence process;
• Lock-up or voting support agreement: Between the buyer and the directors, officers and major shareholders;
• Definitive acquisition agreement: Key document between buyer and target;
• Management information circular: Prescribed disclosure for impending shareholders meetings; and
• Letter of transmittal: Sent from the depositary agent to registered shareholders to collect acknowledgements and instructions.

To learn more, watch the fireside chat here, visit our Going private in Canada resource centre or reach out to one of our professionals in the Dentons Canada Securities and Corporate Finance Group.