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

Preparing for an M&A Transaction

and Other Special Situations

2 Prepared for

The Canadian Society of Corporate Secretaries

16th Annual Corporate Governance Conference

3 Prepared by

GGA is an internationally recognized independent

advisory firm helping organizations with their executive compensation, governance, value enhancement

and risk mitigation.

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 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 1998.

5 Presented by

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

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

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

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!

10

Agenda

Part 4: Conclusion and Questions

4.1 – Concluding Remarks

11

Part 1

Part 1 – 1.1

Types of Transactions

 Initial public offerings (IPOs)  Significant acquisitions

 Significant divestitures  Capital raising

Part 1 – 1.2

Stages of a Transaction

Agreement

 Letter of intent  Due diligence

 Negotiation of definitive transaction documents (Share purchase agreement, etc.)

 Signing  Closing

 Post-closing integration

Part 1 – 1.3

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)

Part 1 – 1.3

Know Who Your Shareholders Are

Do you know where your Options are?

 Buyers may want to acquire 100% of the company

 Option plans often provide for termination of the options at a specified time after the change of control, but not always

15

Part 1 – 1.3

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?

 Check notice requirements for change of control transactions

 Board approval required for changes to vesting schedule?

16

Part 1 – 1.4

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

Part 1 – 1.5

Board and Executive Compensation

for Special Situations

18

Do you know what happens on a

Part 1 – 1.5

Board and Executive Compensation

for Special Situations

19

Can you clearly identify each executive’s

employment arrangements?

 Are the contracts organized in one central location?

 Are there side letters or unwritten agreements?

Part 1 – 1.5

Board and Executive Compensation

for Special Situations

20

Can you clearly identify each executive’s

employment arrangements?

 Have the share and option issuances been approved by the Board and properly

documented?

 Are the employment contracts written in clear and unambiguous language?

Part 1 – 1.5

Board and Executive Compensation

for Special Situations

21

“Single Trigger” versus “Double Trigger”

Equity Vesting

 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?

Part 1 – 1.5

Board and Executive Compensation

for Special Situations

22

“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

Part 1 – 1.5

Board and Executive Compensation

for Special Situations

23

“Single Trigger” versus “Double Trigger”

Equity Vesting

 Modified Approach: Place a floor at the

transaction price so the premium is locked in

Part 1 – 1.5

Board and Executive Compensation

for Special Situations

24 Was a defensible process used to award the executive compensation? (…continued)

Part 1 – 1.5

Board and Executive Compensation

for Special Situations

25

(…continued)

Part 1 – 1.6

Selecting Service Providers

 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

Part 1 – 1.6

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

Part 1 – 1.6

Selecting Service Providers

Finding the Right Advisors – Cross-Border

 Consider government and political issues  Consider PR, community meetings, and

integration issues

28

Part 1 – 1.7

Maintain Corporate Records

Best Practices

 Bring records up-to-date  Enforce the document

retention policy and e-mail retention policy  Scan everything

 Back-up everything

Part 1 – 1.7

Maintain Corporate Records

Track tricky contract provisions

 Use a database to track agreements with:

 change of control  confidentiality  exclusivity  non-competition 30 (…continued)

31

Part 2

Part 2 – 2.1

The Importance of Planning,

Planning, Planning

Time to break out the transaction playbook

Part 2 – 2.1

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

Part 2 – 2.1

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

Part 2 – 2.2

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

Part 2 – 2.2

Board Governance and

Special Committees

 Confirm the Board’s role when approving a

transaction

 Provide advice on exercising fiduciary duty

 Challenge biases

 Encourage unfashionable thinking

36

Part 2 – 2.3

Confidentiality

 Use established protocols for maintaining information confidential

 Use code words

 Information only on a need-to-know basis  Use Non-Disclosure

Agreements

Part 2 – 2.4

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

Part 2 – 2.5

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

Part 2 – 2.6

Task Management

 Use project management principles  Set real deadlines

 Keep a checklist!

 Regular internal and external team

updates

Part 2 – 2.7

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

Part 2 – 2.7

Due Diligence Issues

42

 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.

Executive Compensation

Part 2 – 2.7

Due Diligence Issues

43

Executive Compensation - LTIP

Grant Date Vesting Date Exercise Date Expiration (Term) Holding Period

Vesting Period Exercise Period

Yrs

Part 2 – 2.7

Due Diligence Issues

44

Calculating Stock Options

(Current Share Price - Exercise Share Price)

No. of Stock Options Granted

100,000

Exercise Share Price

$Y

Final Payout at Exercise

=

Current Share Price

$X

No. Of Stock Options Granted X ¼ Vest ¼ Vest ¼ Vest ¼

Vest _HOLD Exercise

Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 - 10

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

Part 2 – 2.7

Due Diligence Issues

45

Advantages/Disadvantages of Stock Options

Advantages Disadvantages

 Leveraged pay potential

 Simple

 Can align with long-term success (i.e. 10yr term)

 Align with future shareholder gains

 Fixed accounting

 Employee tax advantage

 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

Part 2 – 2.7

Due Diligence Issues

46

Calculating RSUs

=

Target No. of Restricted Share Units $X

Target No. of Restricted Share Units

50,000 Units

Stock Price at Vesting Date

X

Stock Price at Vesting Date

Final Payout at Vesting

1/3 Vest 1/3 Vest 1/3 Vest

Yr. 1 Yr. 2 Yr. 3

1/3 Vest 1/3 Vest 1/3 Vest 1/3 Vest 1/3 Vest 1/3 Vest 1 2 3

Sum Sum Sum

Part 2 – 2.7

Due Diligence Issues

47

Advantages/Disadvantages of RSUs

Advantages Disadvantages

 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

 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

Part 2 – 2.7

Due Diligence Issues

48

Calculating PSUs

Vest

Yr. 1 Yr. 2 Yr. 3 1

2

3

Illustration assumes cliff vesting

Performance Period

Yr. 4 Yr. 5 Yr. 6

Vest Performance Period Vest Performance Period Performance Level Performance Multiplier Maximum 150% Target 100% Threshold 50% Target # PSUs x Performance Multiplier x Stock Price at Vesting Date (…continued)

Part 2 – 2.7

Due Diligence Issues

49

Advantages/Disadvantages of PSUs

Advantages Disadvantages

 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

 Potential for significant payouts for sub-par performance

 Pre-revenue, financing

arrangements required to settle in cash

 Defining performance may be challenging

Part 2 – 2.7

Due Diligence Issues

50 Valuation Stock Options RSUs PSUs DSUs

Publicly Traded Privately Held

Share Price Function of: • Profit, • Growth Metric, • Valuation Methodology (…continued)

Part 2 – 2.8

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

Part 2 – 2.9

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

53

Part 3

Integration After Closing a

Special Situation

Part 3 – 3.1

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

Part 3 – 3.1

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

Part 3 – 3.2

Update Plans and Policies

Have a compensation advisor work with you

to update the employment plans and policies

Part 3 – 3.3

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

58

Part 4

Part 4 – 4.1

Concluding Remarks

 Plan, plan, plan.

 Get the right advisors in place early.

 Organize your documents now.

 Review your transaction playbook regularly.

Part 4 – 4.2

Question & Answer Period

60 Paul Gryglewicz

Managing Partner,

Global Governance Advisors Tel: 647.286.0626

E-mail: [email protected]

LinkedIn:

www.linkedin.com/in/paulgryglewicz

If you have any further questions, please feel free to contact:

Kevin West

Founder,

SkyLaw Professional Corporation Tel: 416.644.3190

E-mail: [email protected] LinkedIn:

www.linkedin.com/in/kevinrobert west

The Canadian Society of Corporate Secretaries

16th Annual Corporate Governance Conference

Banff Springs Hotel | Banff, AB | August 25, 2014

Preparing for an M&A Transaction

and Other Special Situations