The Canadian market has seen take-private transactions outpace initial public offerings recently, with public companies having an aggregate market capitalization of approximately C$12.5 billion "going private" in 2023 alone. A significant portion of these take-private transactions, particularly those led by private equity sponsors, have included an equity rollover component. Equity rollover transactions are attractive for many reasons, including providing rollover shareholders an opportunity to continue to participate in the future upside of the business, helping to ensure alignment between target management and the purchaser and reducing the financing needs of the purchaser.
The following highlights certain key considerations for take-private rollover transactions in Canada.
Minority Protection Rules
Take-private transactions involving an equity rollover component will generally engage the minority protection rules of Canadian securities laws under Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (MI 61-101). In addition to enhanced disclosure requirements, MI 61-101 will require, unless an exemption is available, "majority of the minority" shareholder approval to be obtained. The "majority of the minority" shareholder approval is in addition to any shareholder approvals required under applicable Canadian corporate law. It requires approval by a simple majority (50% plus one) of votes cast by shareholders, excluding votes cast by the rolling shareholders and any other interested parties, of every class of affected securities voting separately as a class. In addition, depending on the structure of the transaction, MI 61-101 may require a formal valuation.
Role of Special Committees
Canadian securities regulators have recommended that, subject to limited exceptions, a special committee comprised of independent directors of the target company's board be constituted in connection with any material conflict of interest transactions to which MI 61-101 applies. The purpose of a special committee is to, among other things, ensure that the interests of minority securityholders are fairly considered in the negotiation and review of such a transaction and thereby serve as the primary means of managing the conflicts inherent in take-private transactions that involve the differential treatment of shareholders (such as when some shareholders participate in an equity rollover and others receive cash consideration). In their guidance on the effectiveness of special committees, staff (Staff) of the applicable Canadian securities regulators (Canadian Regulators) noted, among other things, that special committees should be formed before a proposed transaction is substantially negotiated and that the role and process of special committees should generally include a robust mandate, the engagement of independent advisors, involvement in or supervision over negotiations, accurate record keeping and non-coercive conduct by interested parties. Staff also cautioned that the special committee should consider the fairness of a proposed transaction from a broader perspective than just from a financial point of view, as provided in the fairness opinion, and that the special committee cannot substitute a fairness opinion for its own judgment as to whether a transaction is in the best interests of the target company.
Voting Support and Rollover Agreements with the Rolling Shareholders
The purchaser and the rolling shareholders will generally enter into (1) rollover agreements, which contain the mechanics by which the rolling shareholder will transfer some or all of their equity interests in the target company to the purchaser for equity interests in the take-private vehicle, and (2) voting support or "lock-up" agreements containing the terms and conditions on which the rolling shareholders agree, among other things, to vote their shares in favour of the take-private transaction. A key provision of these agreements relates to the ability of the rolling shareholders to respond to and assist with other acquisition proposals received by the target company and whether the agreements automatically terminate in certain circumstances, such as in connection with the target company approving an alternative transaction that is viewed as superior. Even in situations where the rolling shareholders are willing to sign lock-ups which survive following termination of the related purchase agreement in connection with a superior proposal (e.g., a "hard" lock-up), the special committee or the board of the target company may indicate an unwillingness to support and approve a transaction with such lock-ups in certain circumstances given the potential chilling effect on competing bids, thereby significantly diminishing the usefulness of the "fiduciary out" provisions of such purchase agreement.
Shareholder Engagement
Where MI 61-101 requires "majority of the minority" shareholder approval, it is of utmost importance for the parties to understand the composition of the shareholders entitled to vote for the purposes of such approval. With the votes attached to shares held by the rolling shareholders and other interested parties excluded, certain shareholders may hold disproportionate influence on the outcome of the "majority of the minority" vote relative to their overall economic interest in the company. In recent years, there have been several well-publicized examples of minority shareholders seeking to disrupt announced take-private transactions through various means, including via media campaigns and petitions to the applicable Canadian Regulators and courts. This underscores the importance of developing a strong shareholder engagement strategy and, where possible, securing the requisite shareholder approvals in advance of the announcement of the transaction by obtaining lock-up agreements from shareholders eligible to vote in the "majority of the minority" approval.
Post-Closing Arrangements
The purchaser and rolling shareholders will generally also enter into a shareholders' agreement (or similar agreement depending on the post-closing entity selected by the parties) that will govern the post-closing rights among the parties. Most typically, the rolling shareholders, who are often part of management, will hold a minority interest in the post-closing entity and will negotiate for various minority protections in the post-closing entity. The most commonly negotiated provisions in these agreements include (1) board rights, (2) special approval and/or veto rights, including, for example, whether such rights should extend to the appointment of executive management or the incurrence of indebtedness, and (3) the rights and processes applicable to the issuance of new equity interests or the sale or other transfer of equity interests post-closing, including the circumstances in which a shareholder is entitled or required to participate in a future sale of equity interests (i.e., tag-along rights and drag-along rights). In agreeing to the transaction, the parties will also want to consider the post-closing capital structure of the take-private entity, particularly where the purchaser is relying on significant debt and/or preferred equity financing to fund the transaction or where the purchaser holds a different class of equity from the rolling shareholders.
Tax Considerations
Tax planning is of critical importance to implementing a successful equity rollover take-private. For equity rollovers, where a Canadian shareholder exchanges its equity interest in a Canadian target for equity of a Canadian corporation, there will typically be a tax deferral available to the Canadian shareholder. There is generally no tax deferral available for equity rollovers where a Canadian shareholder will receive an interest in a foreign acquisition vehicle; however, in such cases, it may be possible to use an exchangeable share structure to achieve a tax deferral.
Blakes has extensive experience advising acquirers, targets and rolling shareholders in equity rollover take-privates.
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