Preparing for an M&A Transaction and Other Special Situations

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1 Preparing for an M&A Transaction and Other Special Situations Workshop D 2:45 pm 4:45 pm The Canadian Society of Corporate Secretaries 16th Annual Corporate Governance Conference Banff Springs Hotel Banff, AB August 25, 2014

2 Prepared for The Canadian Society of Corporate Secretaries 16th Annual Corporate Governance Conference Banff Springs Hotel Banff, AB August 24-27,

3 Prepared by GGA is an internationally recognized independent advisory firm helping organizations with their executive compensation, governance, value enhancement and risk mitigation. 3

4 Presented by Paul Gryglewicz Managing Partner, Global Governance Advisors Paul Gryglewicz is the Managing Partner at GGA. He engages with Boards and senior management advising them in the areas of Executive Compensation, Human Resource Strategy and Corporate Governance. Co-designed and teaches the graduate level York University course Governance of Executive Compensation and Shareholder Accountability. 4

5 Presented by Kevin R. West Founder, SkyLaw Professional Corporation Kevin West is the founder of SkyLaw, an innovative boutique corporate law firm in Toronto. After clerking for Justice Binnie at the Supreme Court of Canada, Kevin practiced with Sullivan & Cromwell in New York and Australia and as a partner at Davies in Toronto. Kevin obtained his LLB from Dalhousie University in

6 Agenda Part 1: Preparation for a Special Situation 1.1 Types of Transactions 1.2 Stages of a Transaction 1.3 Know Who Your Shareholders Are 1.4 Have a Board Plan 1.5 Board and Executive Compensation for Special Situations 1.6 Selecting Service Providers 6

7 Agenda Part 1: Preparing for a Special Situation 1.7 Maintain Corporate Records Part 2: During a Special Situation 2.1 The Importance of Planning, Planning, Planning 2.2 Board Governance and Special Committees 2.3 Confidentiality 7

8 Agenda Part 2: During a Special Situation 2.4 Disclosure Issues 2.5 Document Management 2.6 Task Management 2.7 Due Diligence Issues 2.8 Negotiations 2.9 Closing the Deal 8

9 Agenda Part 3: Integration After Closing a Special Situation 3.1 Closing Books and Records 3.2 Update Plans and Policies 3.3 Plan for the Next Special Situation! 9

10 Agenda Part 4: Conclusion and Questions 4.1 Concluding Remarks 4.2 Question & Answer Period 10

11 Part 1 Preparation for a Special Situation 11

12 Part Types of Transactions Change of control transactions Initial public offerings (IPOs) Significant acquisitions Significant divestitures Capital raising 12

13 Part Stages of a Transaction Initial discussions and Non-Disclosure Agreement Letter of intent Due diligence Negotiation of definitive transaction documents (Share purchase agreement, etc.) Signing Closing Post-closing integration 13

14 Part Know Who Your Shareholders Are Engage a reputable transfer agent Ensure minute book is up-to-date Determine shareholder approval requirements for the transaction Understand share terms (e.g. conversion features) 14

15 Part Know Who Your Shareholders Are Do you know where your Options are? Buyers may want to acquire 100% of the company ( continued) Option plans often provide for termination of the options at a specified time after the change of control, but not always 15

16 Part Know Who Your Shareholders Are Do you know where your Options are? Can the optionholders exercise their options early and deposit to a take-over bid? ( continued) Check notice requirements for change of control transactions Board approval required for changes to vesting schedule? 16

17 Part Have a Board Plan Be prepared to move quickly Ensure the right expertise and advisors are available Know how to contact all board members 17

18 Part Board and Executive Compensation for Special Situations Do you know what happens on a change of control? 18

19 Part Board and Executive Compensation for Special Situations Can you clearly identify each executive s employment arrangements? Are the contracts organized in one central location? ( continued) Are there side letters or unwritten agreements? 19

20 Part Board and Executive Compensation for Special Situations Can you clearly identify each executive s employment arrangements? Have the share and option issuances been approved by the Board and properly documented? ( continued) Are the employment contracts written in clear and unambiguous language? 20

21 Part Board and Executive Compensation for Special Situations Single Trigger versus Double Trigger Equity Vesting ( continued) An executive who has immediate vesting on a change of control has a single trigger Allows executive to participate in premium Executive in a stronger personal negotiating position with new owners Shorter term focus? 21

22 Part Board and Executive Compensation for Special Situations Single Trigger versus Double Trigger Equity Vesting If an executive must be terminated (actually or constructively) after the change of control before vesting occurs, there is a double trigger May reduce cost to company to retain executive ( continued) 22

23 Part Board and Executive Compensation for Special Situations Single Trigger versus Double Trigger Equity Vesting ( continued) Modified Approach: Place a floor at the transaction price so the premium is locked in 23

24 Part ( continued) Board and Executive Compensation for Special Situations Was a defensible process used to award the executive compensation? 24

25 Part ( continued) Board and Executive Compensation for Special Situations A defensible process is a balancing act 25

26 Part Selecting Service Providers Get a referral from a reputable source Google search firm and specific lawyers Check websites Have a call or meet in person In foreign jurisdictions, prefer counsel trained in New York, London or similar common law jurisdiction 26

27 Part ( continued) Selecting Service Providers Finding the Right Advisors Cross-Border Confirm your advisors have cross-border experience Always consider tax There can be significant legal differences (e.g. how employees are treated, how approvals are obtained) 27

28 Part ( continued) Selecting Service Providers Finding the Right Advisors Cross-Border Consider government and political issues Consider PR, community meetings, and integration issues 28

29 Part Maintain Corporate Records Best Practices Bring records up-to-date Enforce the document retention policy and retention policy Scan everything Back-up everything 29

30 Part ( continued) Maintain Corporate Records Track tricky contract provisions Use a database to track agreements with: change of control confidentiality exclusivity non-competition 30

31 Part 2 During a Special Situation 31

32 Part The Importance of Planning, Planning, Planning Time to break out the transaction playbook 32

33 Part ( continued) The Importance of Planning, Planning, Planning Arrange a kick-off meeting with advisors and key executives Time zones and travel require careful planning Translators or interpreters required? Use project management tools Build in time to incorporate comments and work product from various jurisdictions and advisors 33

34 Part ( continued) The Importance of Planning, Planning, Planning Confirm internal approvals required and timing Confirm government and regulatory approvals required: TSX? Investment Canada Act? Competition Act? Review transaction checklists 34

35 Part Board Governance and Special Committees Use established Board protocols Is a special committee required or advisable? Are independent advisors required? Plan when to invite advisors to meetings 35

36 Part Board Governance and Special Committees ( continued) Confirm the Board s role when approving a transaction Provide advice on exercising fiduciary duty Challenge biases Encourage unfashionable thinking 36

37 Part Confidentiality Use established protocols for maintaining information confidential Use code words Information only on a need-to-know basis Use Non-Disclosure Agreements 37

38 Part Disclosure Issues Determine when the transaction needs to be disclosed to the Board, shareholders, employees or the public Consider a blackout period for trading Delay option grants Have press release and securities filings ready and vetted 38

39 Part Document Management Use online data room Keep sensitive data out of the data room Require in-person review of sensitive documents, minute books, etc. Avoid disclosing personal information Consider confidentiality obligations to third parties 39

40 Part Task Management Use project management principles Set real deadlines Keep a checklist! Regular internal and external team updates 40

41 Part Due Diligence Issues Identify change of control provisions Confirm share and asset ownership Search government databases (litigation, PPSA, etc.) Get compensation, financial, tax and IP specialists in early 41

42 Part ( continued) Due Diligence Issues Executive Compensation Publicly traded companies use long-term incentives to align executives with shareholders. Equity based long-term incentives link pay to future equity value and therefore to shareholder return. Focus executives on multi-year objectives. 42

43 Part ( continued) Due Diligence Issues Executive Compensation - LTIP Vesting Period Holding Period Exercise Period Yrs Grant Date Vesting Date Exercise Date Expiration (Term) 43

44 Part ( continued) Due Diligence Issues Calculating Stock Options ¼ Vest ¼ Vest ¼ Vest ¼ Vest HOLD Exercise Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr No. of Stock Options Granted Current Share Price Exercise Share Price Final Payout at Exercise 100,000 $X $Y = No. Of Stock Options Granted X (Current Share Price - Exercise Share Price) Used in private and public companies Junior to intermediate Market Cap Option Terms 5-10 years Intermediate to Mature Market Cap Option Terms 7-10 years 44

45 Part ( continued) Due Diligence Issues Advantages/Disadvantages of Stock Options Advantages Leveraged pay potential Simple Can align with long-term success (i.e. 10yr term) Align with future shareholder gains Fixed accounting Employee tax advantage Disadvantages Excludes value of any dividends being paid May put disproportionate focus on increase in share price Creates dilution Potential for windfall gains Continuous underwater options are de-motivating despite management doing a good job Accounting 45

46 Part ( continued) Due Diligence Issues Calculating RSUs Yr. 1 Yr. 2 Yr. 3 1/3 Vest 1/3 Vest 1/3 Vest 1/3 Vest 1/3 Vest 1/3 Vest Sum Sum Sum 1/3 Vest 1/3 Vest 1/3 Vest Target No. of Restricted Share Units 50,000 Units Stock Price at Vesting Date $X Final Payout at Vesting = Target No. of Restricted Share Units X Stock Price at Vesting Date 46

47 Part ( continued) Due Diligence Issues Advantages/Disadvantages of RSUs Advantages Full value of stock price Less dilutive than options Settle in cash net of withholding tax (typically) Dividends additive to units Easier to administer compared to real shares Disadvantages Perceived as a give away Potential for significant payouts for sub-par performance Less leverage compared to options Pre-revenue companies, have to fund additional cash hit 47

48 Part ( continued) Due Diligence Issues Calculating PSUs Illustration assumes cliff vesting Yr. 1 Yr. 2 Yr. 3 Performance Period Vest Performance Period Vest Yr. 4 Yr. 5 Yr. 6 Performance Period Vest Performance Level Performance Multiplier Maximum 150% Target 100% Threshold 50% Target # PSUs x Performance Multiplier x Stock Price at Vesting Date 48

49 Part ( continued) Due Diligence Issues Advantages/Disadvantages of PSUs Advantages Link pay stronger to performance Full value of stock price Less dilutive than options Settle in cash net of withholding tax (typically) Accumulate dividends in additional units Easier to administer compared to real shares Less potential for payouts for sub-par performance Disadvantages Potential for significant payouts for sub-par performance Pre-revenue, financing arrangements required to settle in cash Defining performance may be challenging 49

50 Part ( continued) Due Diligence Issues Valuation Publicly Traded Privately Held Stock Options RSUs PSUs DSUs Share Price Function of: Profit, Growth Metric, Valuation Methodology 50

51 Part Negotiations Discuss negotiation style and strategy in advance Only one point of contact for negotiations Make clear subject to board approval Use term sheets prepared by counsel Control the process Face-to-face always helps for difficult or nuanced negotiations Don t feel pressured to agree on the spot 51

52 Part Closing the Deal Plan a pre-closing Know the approval process Who is signing documents? Allow for contingencies something always comes up at the last minute Prepare press release and script 52

53 Part 3 Integration After Closing a Special Situation 53

54 Part Closing Books and Records Integration Issues Asset versus share deal: who is the employer? How will decisions be made? Cultural issues: how to merge the egos? Executive titles more important than you might think 54

55 Part ( continued) Closing Books and Records Integration Issues Physical offices and technology: how to bridge the gaps? Be sure to budget for severance costs cash and morale 55

56 Part Update Plans and Policies Have a compensation advisor work with you to update the employment plans and policies 56

57 Part Plan for the Next Special Situation! Insist on getting complete closing books soon after closing Update the transaction playbook Keep organized Revise checklists with knowledge gained 57

58 Part 4 Conclusion and Questions 58

59 Part Concluding Remarks Plan, plan, plan. Get the right advisors in place early. Organize your documents now. Review your transaction playbook regularly. 59

60 Part Question & Answer Period If you have any further questions, please feel free to contact: Paul Gryglewicz Managing Partner, Global Governance Advisors Tel: LinkedIn: Kevin West Founder, SkyLaw Professional Corporation Tel: LinkedIn: west 60

61 Thank you for attending! Preparing for an M&A Transaction and Other Special Situations The Canadian Society of Corporate Secretaries 16th Annual Corporate Governance Conference Banff Springs Hotel Banff, AB August 25, 2014

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