Working Capital in Public M&A – Is Varying Cash Consideration the Solution?
Dealing with a target company’s working capital in the context of a public M&A transaction is often a challenge because the buyer has no recourse against the target’s former shareholders after closing if working capital is not at an agreed-upon level. It’s impracticable to implement a post-closing working capital adjustment mechanism where there’s no one to “true up” with after closing. Traditionally, a buyer in a friendly public M&A transaction must rely on the target’s interim operating covenants and the accuracy of the target’s representations and warranties in a support agreement to get comfortable on appropriate levels of working capital.
We noticed an interesting solution to this dilemma recently in a take-over bid circular filed by Insception Biosciences Inc. in connection with its friendly offer to acquire all of the outstanding common shares of Lifebank Corp. for cash. Instead of setting a fixed cash offer price for its bid, Insception provides that the $0.48 price per share will be increased or decreased by $0.005 for each $56,500 that the amount of cash (net of unpaid transaction costs) held by Lifebank shortly before expiry of the bid is greater or less than certain specified target amounts. This means that Insception will pay less than $0.48 to Lifebank’s shareholders if net cash is lower than the floor amount and more than $0.48 if net cash is higher than the cap amount. Insception and Lifebank have effectively built a working capital adjustment right into the bid price itself. The parties propose to announce the exact amount of the offer price by press release a few days before expiry of the bid.
A buyer using this structure would need to be mindful of the pre-bid integration requirements of applicable securities laws. The buyer would be precluded from paying less to the target’s shareholders than it did to any other shareholders in private off-exchange acquisitions in the 90 days leading up to its bid. Establishing a floor on the offer price in the bid could deal with this issue.