The Use of Global Depositary Receipts for an Acquisition of a Canadian Public Company - Part 1

Depositary receipts, which are a type of security that is traded on a stock exchange but which represent an interest in an underlying security that is issued by a publicly traded company in another jurisdiction, have been around since the 1920s in the form of American Depositary Receipts (ADRs), and more recently, in the form of Global Depositary Receipts (GDRs). GDRs are a means for companies to raise their profile with foreign investors, make their shares more easily available to foreign investors and raise new capital outside of a domestic market. Many companies have ADRs listed on the New York Stock Exchange and the American Stock Exchange, and there are a number GDRs listed on exchanges such as the London Stock Exchange.  There have also been a few companies which have listed GDRs on the Toronto Stock Exchange.

Recently, McCarthy Tétrault acted for UNX Energy Corp. in its acquisition by HRT Participações S.A. (HRT) for consideration of $720 million paid in the form of GDRs. This acquisition was significant for a number of reasons, including that it was the first ever acquisition of a Canadian public company using GDRs as consideration. The GDRs of HRT listed on the TSXV represent, among other things, the right to obtain common shares of HRT at a predetermined ratio, vote on matters that holders of HRT’s common shares vote on, participate in dividends and other distributions of HRT and participate in any winding up of HRT.

HRT, a Brazilian-based and listed exploration and production company, and UNX, a Calgary-based TSXV listed exploration and production company with oil and gas assets in offshore Namibia, agreed that the transaction would be completed by utilizing a securities exchange.  This presented significant challenges for the advisory teams, including multiple layers of issues related to Brazilian regulatory matters, taxation, as well as Brazilian corporate law issues. HRT shares only trade on the BM&FBOVESPA, but UNX was a Canadian company with a North-American-based retail shareholder base. Although individuals residing outside Brazil can hold shares traded on the BM&FBOVESPA, doing so involves a registration process that has both administrative and cost implications. Moreover, the shares held by individuals residing outside Brazil must be registered or maintained in deposit accounts or under the custody of a licensed Brazilian entity. To complicate matters further, HRT executed a listing agreement with the BM&FBOVESPA at the time of its IPO, stipulating that HRT shares must trade board lots of not less than 100 shares until October 2011, which meant that the HRT shares would have had to have been traded in increments of approximately $100,000 or more. An investor holding less than 100 HRT shares (which would have included many UNX shareholders based on the agreed deal terms), would therefore be unable to trade their HRT shares prior to October 2011. These restrictions made it impractical for many non-Brazilian retail investors to hold HRT shares. To solve these problems, the advisory teams structured GDRs which now trade on the TSXV.

Each global depository share for HRT represented 1/100th of an HRT share (approximately $10 US at the time of announcement), facilitating greater liquidity for UNX shareholders. These shares also eliminated the need for non-Brazilian investors to go through a registration process.

In my next post, I will outline some of the potential pitfalls of implementing a GDR structure.

acquisition foreign investment global depositary receipts public M&A



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