Pacific Rubiales Energy Corp. recently announced that it will be acquiring Petrominerales Ltd. for approximately C$1.6 billion. The transaction will be completed pursuant to a plan of arrangement and is expected to close in the Q4 of 2013.
Plans of arrangement, such as in the Pacific Rubiales transaction, have recently outpaced traditional takeover mechanisms as the preferred approach in Canada to effect the takeover of a company. Since January 1, 2012, approximately 65% of M&A transactions in Canada have proceeded by way of a plan of arrangement. By contrast, approximately 70% of M&A transactions in Canada were completed by way of a traditional takeover just 10 years earlier.
So what exactly is a plan of arrangement? And why has it become so popular?
A plan of arrangement is a statutory procedure used, among other things, to effect a friendly takeover of a public company without having to go through the formal takeover bid requirements pursuant to securities legislation. The outstanding securities of a target company are exchanged, amended or reorganized resulting in an acquisition by the acquiring company. Plans of arrangement are court supervised and approved, and are governed by the corporate statute under which one of companies applying to the court is organized, such as the Canadian Business Corporations Act or its provincial equivalent.
There are many advantages to using a plan of arrangement, but the key advantage is flexibility. Unlike traditional takeover mechanisms, plans of arrangement offer parties a great deal of flexibility with respect to the changes that can be effected, thereby facilitating the completion of complex, multi-step transactions. For example, under a plan of arrangement, changes such as amalgamations and amendments to a corporation’s articles can be completed, as can share exchanges and asset transfers which allow for numerous classes of securities to be dealt with at the same time. Through a plan of arrangement, applicant companies can therefore implement fundamental changes that affect not only their shareholders, but multiple classes of stakeholders. Plans of arrangement can also be used to facilitate tax planning associated with the transaction.