The Market Trends Subcommittee of the Mergers and Acquisitions Committee (the ABA Subcommittee) of the Business Law Section of the American Bar Association recently released its latest edition of (i) the Strategic Buyer/Public Target M&A Deal Points Study which analyses acquisitions of US publicly-traded targets announced in 2014 (the US Study) and (ii) the Canadian Public Target M&A Deal Points Study which analyses acquisitions of Canadian publicly-traded targets announced in 2013 and 2014 (the Canadian Study). This article highlights and compares some of the findings reported by the US Study and the Canadian Study, as well as those reported by the prior editions of the both Studies.

The Study Sample and Type of Consideration

The US and Canadian Studies are similar in terms of number of deals reviewed. There are, however, some differences in the study samples. First, the US Study specifically excludes acquisitions by private equity buyers, which may influence some of the deal points it reports, whereas 8% of the reported transactions in the Canadian Study involve a private equity buyer. Second, for the first time, the Canadian Study includes deals that are smaller than those reported by the US Study: 23% of the transactions reported by the Canadian Study have a transaction value of between $50 and $100 million. Finally, the Canadian Study also indicates that 92% of Canadian deals are structured as plans of arrangement (a one-step transaction involving court approval and resulting in the acquisition of 100% of the shares of the target) while 8% are structured as take-over bids (the equivalent of a tender offer in the US), whereas 22% of the reported deals in the US Study are structured as tender offers.

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Conditions to Closing

An acquisition agreement will typically include a number of conditions to closing and if the conditions in favour of a party are not met, that party will typically have the right to refuse to close the transaction (i.e. a walk right). The US and Canadian Studies report on a number of closing conditions, some of which are discussed below.

Material Adverse Change

The US and Canadian Studies report on the condition that there be no material adverse change (MAC) in the business, financial condition, or results of operation of the target. The Studies indicate that (i) virtually all Canadian and US deals include a MAC walk right (either as an express condition, termination right or as a “back door” condition), (ii) the practice regarding the use of carveouts to the definition of  MAC is fairly consistent on both sides of the border, other than the carveout regarding failure to meet projections which is more frequently found in US deals and (iii) even though most Canadian and US deals do not generally include “prospects” in the definition of MAC, they are more likely to be included in Canadian deals than in US deals.

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Dissent/Appraisal Rights

The US and Canadian Studies also report on the condition to closing that dissent or appraisal rights not be exercised by shareholders representing more than a specified percentage of the shares of the target. Dissent or appraisal rights allow shareholders to petition a court for an appraisal of the value of their shares of the target where they disagree with the price offered.

Interestingly, the US and Canadian Studies show that Canadian deals (even all cash deals) almost always include a condition to closing regarding the target’s shareholders’ exercise of dissent or appraisal rights, whereas US deals remain unlikely to include such a condition.

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No-Shop

Public M&A acquisition agreements in the US and Canada usually contain what is known as a “no shop” provision. A “no shop” provision prohibits the target from, directly or indirectly, soliciting a superior acquisition proposal but typically includes an exception providing the target’s board with a right to consider a prescribed type of unsolicited acquisition proposal.

The US and Canadian Studies show that, like the prior editions of the Studies, most acquisition agreements will, as an exception to the “no shop”, provide the target’s board with a right to consider an unsolicited acquisition proposal that is, or is expected to result in, a “superior proposal”. The Canadian Study also shows a certain alignment with US practice as the latest Canadian Study indicates that 85% of Canadian deals triggered the “no shop” exception if an acquisition proposal is “reasonably expected to result in a superior proposal”.

The US and Canadian Studies, however, indicate that US and Canadian practice still differs substantially in terms of the percentage of the shares/assets of the target that must be the subject of the acquisition proposal in order for it to be considered a “superior proposal”, with US agreements requiring a lower percentage than Canadian agreements and, therefore,  giving more flexibility to the target’s board to consider an unsolicited acquisition proposal. More specifically, in most US deals, a “superior proposal” remains a written acquisition proposal resulting in the sale of at least 50% or more of the shares/assets of the target, while in the majority of Canadian deals, a “superior proposal” remains a written acquisition proposal resulting in the sale of all or substantially all of the shares/assets of target.

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Target’s (Superior Proposal) Fiduciary Termination Right (FTR) and Buyer’s Match Right

The US and Canadian Studies show that, like the prior editions of the Studies, the target typically has the right to terminate the agreement prior to obtaining shareholder approval if its board authorizes it to enter into a written agreement with respect to a “superior proposal”.

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This termination right is, however, typically conditioned on the target’s compliance with its no-shop covenant (discussed above) and the buyer’s “match right”. A match right will require the target to notify the buyer of an acquisition proposal that constitutes a “superior proposal” and will provide the buyer with a number of days to, at the buyer’s discretion, amend the terms of its offer. If after receiving buyer’s amended offer, the target’s board determines that the acquisition proposal remains a “superior proposal”, it can terminate the existing agreement and accept the “superior proposal”. The US and Canadian Studies show that practice on this point remains consistent with the prior editions: although both US and Canadian deals include match rights, the time period within which the match right may be exercised is more likely to be shorter in US deals than in Canadian deals.

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Go Shop

A go shop provision allows the target to, directly or indirectly, initiate, solicit and negotiate acquisition proposals for a prescribed period of time beginning on the date of the acquisition agreement. The US and Canadian Studies confirm that the inclusion of go shop provisions remains an exception and the inclusion of such provisions is considerably lower in the US Study than the prior US Study.

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Change To Board Recommendation

Public target M&A acquisition agreements will typically set out the circumstances in which the target’s board may change its recommendation to its shareholders regarding the transaction. The target’s board, on the one hand, will want as much flexibility as possible to change its recommendation, and the buyer, on the other hand, will try to limit the circumstances under which the target’s board may change its recommendation so as to increase deal certainty.

Although the US and Canadian Studies are not fully comparable on this deal point, the Studies indicate that in the US, the majority of acquisition agreements tie the target’s board’s ability to change its recommendation to a material development or change in circumstances that arose after the date of the agreement (known as an “intervening event”) and/or a superior proposal, while in Canada the majority of acquisition agreements tie the target’s board’s ability to change its recommendation to a “superior proposal” and the “intervening event” concept has still not yet been adopted. As we mentioned last year, although the “intervening event” concept has not yet been adopted in Canada, it should be noted that public M&A acquisition agreements often expressly acknowledge that target is entitled to comply with its disclosure obligations required by law, including disclosing material information to its shareholders arising or becoming known after the date of the acquisition agreement.

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For further details on these and other deal points, please consult the US and Canadian Studies, which are all available to ABA members on the Markets Trends Subcommittee of the American Bar Association’s Mergers and Acquisitions Committee website at: http://apps.americanbar.org/dch/committee.cfm?com=CL560003

The authors would like to thank Valérie Trudeau  for her contribution to this article.