Plan of Arrangement – A Flexible “Made-in-Canada” Acquisition Structure
Our colleague Matthew Cumming recently discussed some of the most important considerations when choosing between a take-over bid and a plan of arrangement for the acquisition of a Canadian public company. But if you’re like many of our other friends to the South, perhaps you’re wondering, what exactly is a plan of arrangement?
The answer is pretty simple actually. A plan of arrangement is a feature in most Canadian corporate statutes that essentially lets a company carry out a transaction using a process designed by the company, as opposed to following the rather strict rules laid down for an amalgamation or a take-over bid. The company designs the process and the approvals it thinks are appropriate and consistent with past practice and a court grants approval to the process and to the final result.
Once the corporation (often the target corporation in what would otherwise be a merger or take-over bid) has identified what approvals are needed, and who it thinks should be entitled to vote on, and receive notice of, the transaction, the corporation applies for an initial court order directing it to seek the approval of its shareholders or other stake holders (typically not less than two-thirds of the votes cast at the meeting, with similar class vote thresholds), and to fix certain procedural requirements for obtaining such approval. The target company will schedule a second court appearance for shortly after the transaction is approved by those entitled to vote during which the court will consider the substantive fairness of the transaction. At this hearing, any interested party can appear and object to the completion of the transaction. Such objections occur rarely, and most practitioners are of the view that the flexibility advantages of a plan of arrangement outweigh the uncertainty risk imposed by the court process.
As Matthew pointed out, one of the key advantages of a plan of arrangement is that it may allow the parties to rely on the exemption in Section 3(a)(10) of the United States Securities Act of 1933 such that any securities being issued by the acquirer to shareholders of the target who reside in the United States will be exempt from registration in the U.S due to the fact that this is a court supervised process. The flexibility of a plan of arrangement also enables the parties to creatively structure transactions (for example, sequencing multiple transactions or providing for the concurrent completion of some steps) to achieve advantageous tax results.
Want to learn more about what to think about when considering the purchase of a Canadian target? Check out our publication, Doing Business in Canada 2012.