The Use of Global Depositary Receipts for an Acquisition of a Canadian Public Company - Part 2
In my previous post, I outlined some of the features of a Global Depositary Receipts (GDRs) program that was utilized by HRT Participações S.A. (HRT), a Brazilian-based and listed exploration and production company, in its acquisition of UNX Energy Corp., a Calgary-based TSXV listed exploration and production company with oil and gas assets located in offshore Namibia. GDRs can be a mechanism to overcome a number of issues that may be encountered in structuring an international public M&A deal. In this post, I will outline some of the potential pitfalls in implementing a GDR structure.
Tax Implications
GDR structures often involve a company based and listed in an emerging market listing GDRs on a more established foreign market. Many emerging markets have investment regimes which tax foreign investment, and this can be problematic from the point of view of establishing a GDR program in a public M&A deal. In the context of an acquisition, participants in the acquisition and their advisors need to have a clear understanding of mechanisms in place to tax the structure and the net effect that any such taxes can have on the consideration for the acquisition. The net effect of these taxes on international investment can have a negative impact on the net consideration for the acquisition. Accordingly, advisors should be aware of the possible negative effects of the relevant tax regime well before the acquisition is announced or a binding agreement is entered into.
Matching Rights of the GDRs with Those of the Underlying Securities
Another issue with the GDR structure is that regardless of how closely the parties want the rights of GDR holders to follow the rights of the underlying security, there can be some friction in the implementation of these structures which emerges either through the commercial terms of the deposit agreement governing the terms of the GDRs, the operation of relevant laws, or a combination thereof, all of which have the potential to dilute the rights of the GDR holder versus the holder of the underlying security. For example, a GDR program will involve a depositary bank which holds the underlying securities supporting the GDRs. This means that information, such as meeting materials for a shareholder meeting, is not distributed directly to the GDR holders, but rather to the depositary bank to then be distributed to the GDR holders. This has the potential to create a situation where GDR holders receive the meeting information from the company only a few days before a shareholder meeting, which could be past the time when GDR holders are permitted to vote. This has the potential to dilute the value of the GDRs as compared to the underlying securities.
Another issue with the GDR structure is that regardless of how closely the parties want the rights of GDR holders to follow the rights of the underlying security, there can be some friction in the implementation of these structures which emerges either through the commercial terms of the deposit agreement governing the terms of the GDRs, the operation of relevant laws, or a combination thereof, all of which have the potential to dilute the rights of the GDR holder versus the holder of the underlying security. For example, a GDR program will involve a depositary bank which holds the underlying securities supporting the GDRs. This means that information, such as meeting materials for a shareholder meeting, is not distributed directly to the GDR holders, but rather to the depositary bank to then be distributed to the GDR holders. This has the potential to create a situation where GDR holders receive the meeting information from the company only a few days before a shareholder meeting, which could be past the time when GDR holders are permitted to vote. This has the potential to dilute the value of the GDRs as compared to the underlying securities.
Additional Fees
Depositary banks, which administer GDR programs, typically charge fees for their services and will deduct these fees from the dividends and other distributions. The depositary bank also will incur expenses, such as for converting foreign currency into Canadian or U.S. dollars, and usually will pass those expenses on to GDR holders. The net effect of these fees needs to be clearly understood by advisors, and be priced into the net value of the GDRs offered as consideration in the acquisition.
acquisition foreign investment global depositary receipts public M&A