Canadian Going Private Transactions: Practices and Procedures - Target Board Considerations
Target Board Considerations
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In the event that someone approaches a public company about potentially making an offer to buy it or to merge with it, there are a range of possible responses from the target company management and board of directors. The legal obligation of the board under the Canada Business Corporations Act (and other Canadian corporate statutes are substantially the same in this regard) is to:
– act honestly and in good faith with a view to the best interests of the corporation; and
– exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
One possibility is that the target company board could decline to negotiate with the potential bidder. If the price being proposed is clearly not in the best interests of the target company and its shareholders, the board might decide not to make non-public information available to the bidder and not to waste the company’s time and energy in pursuing a bid that does not represent appropriate value for the target company. A bid can be very disruptive to the day-to-day management of the target company, and just the fact that an approach has been made by some third party does not obligate the target company’s board to put the company up for sale.
If, on the other hand, the interested party is proposing a price that the board considers could be in the interests of the target company and its shareholders, perhaps after some negotiation, the board may decide to pursue negotiations with the interested party. That might be done either exclusively and confidentially for a relatively short period of time, or the board might decide that it should discuss a potential transaction with one or more other parties on a confidential basis or trigger a more public auction by announcing that it is considering a sale or exploring “strategic alternatives”.
It is not mandatory that Canadian public companies be sold by way of an auction. Many companies are sold pursuant to a process whereby the target negotiates confidentially with one or select third parties and then issues a press release after a support agreement has been entered into. At that point, the target company’s board is recommending to its shareholders that they accept the transaction, but whether or not the bidder succeeds will depend upon the reaction of the shareholders. In the case of a take-over bid, the bidder will have to mail its take-over bid circular to target shareholders and its bid must be open for at least 35 days (provided the target company’s board has agreed to reduce the bid period). In the case of a business combination, there is generally a period of nearly one month between the mailing of the target’s management information circular and the holding of its shareholders’ meeting. In either case, during that time, potential competing bidders may come forward. Depending on the terms of the support agreement, there may be large or not so large obstacles to someone else coming forward with a superior proposal. The size of the break fee and whether or not there is a “right to match” in the support agreement (which is almost always the case) will be relevant to other potential bidders. In addition, while it is rare in Canada, some target companies have signed support agreements with “go shop” provisions whereby the target puts the bidder on notice that it intends to actively solicit higher offers from third parties.