The world of mergers and acquisitions is fraught with corporate governance concerns, from the acquirer giving the target’s shareholders ample opportunity to weigh an offer, to the selling company ensuring it’s going through proper procedures to get the deal done.
Even more broadly, the M&A market acts as a sort of corporate-governance enforcement mechanism, with companies seen as poorly governed ripe for acquisition. “Takeovers, in a sense, are the ultimate discipline on management,” said Edward Waitzer of Toronto’s Stikeman Elliott LLP.
To get a sense of the governance concerns at each stage of the merger process, the Globe interviewed Mr. Waitzer and a handful of Canada’s top M&A attorneys.
Preparing for an offer
There’s a certain amount of governance-related due diligence necessary before an offer is made. A potential acquirer needs to profile the board and shareholders of its target, determining, for example, whether there is significant insider control that may hamper a takeover, or if the board lacks expertise in M&A.
A company with its sights set on a merger has to consider whether to accomplish the deal through a negotiated plan of arrangement, or make a bid for the target’s outstanding shares.
A plan of arrangement generally requires two-thirds of the votes cast (not two-thirds of the number of shares outstanding). “A small number of angry people can have disproportionate weight,” says Simon Romano, a colleague of Mr. Waitzer’s at Stikeman Elliott.
Alternately, a company may make a tender offer for the target company’s shares. If its offer is for 50 per cent plus one share, it will still have to get a two-thirds shareholder vote, as well as a majority of the minority shareholder votes, to take over the remainder of the company.
Receiving an offer
The company receiving a takeover bid has its own gauntlet of governance concerns, starting with just how it will evaluate the merger offer.
The company will need to decide whether it should form a special committee of the board to review the bid, and it will need to decide who qualifies as independent.
“If they’re an independent director for audit committee purposes, it doesn’t mean they’re independent for the transaction,” Mr. Romano said. “The tests are not necessarily the same.”
Sometimes, says Bill Mackenzie, the former head of Institutional Shareholder Services’ Canadian operations, companies have directors who are employed by investment banks or other financial advisers. They may have to drop out of the evaluation process because their firm is working for the other side. “You can lose a couple of potentially very valuable directors.”
Companies can also run into trouble seeking outside help for the deal. There’s an increasing awareness that a financial adviser who is paid a “success fee” to craft a fairness opinion – an outside view on whether the deal price is fair – is better-paid when a deal goes through, rather than fails, and is arguably conflicted. The Ontario Securities Commission, in an opinion on another matter in a deal involving HudBay Minerals Inc., said as an aside that paying success-fee compensation for a fairness opinion creates a problem for directors who wish to prove they’ve fulfilled their fiduciary duties by soliciting an independent outside opinion.
Dealing with poison pills
Often, a company attempting to make an unsolicited bid for another company finds itself running up against a shareholder-rights plan, known colloquially as a “poison pill” for how difficult it is for a bidder to swallow.
The poison has always been a bit milder in Canada than in the United States and other jurisdictions, where management can rebuff an offer and determine a company is not for sale. The purpose of poison pills in Canada instead has been to give boards of directors time to find a superior offer, but ultimately still sell the company or otherwise enhance shareholder value.
