World Kinect Corp V.INT

RTO Voting

[MilitaryMan]

https://www.osler.com/NewsResources/Default.aspx?id=2507

• Reverse Take-Overs: An Alternative Entrance to Canadian Capital Markets

  By David Hanick

  Over the last few months the European debt crisis, the general lack of liquidity in the credit markets and volatile stock markets have caused significant concerns for companies attempting to go public by way of an initial public offering (IPO). A number of recent IPOs have been cancelled or delayed, or if completed, experienced a sharp decline in the market value of their securities following completion of the IPO. An attractive alternative to an IPO is the reverse take-over (RTO). Generally, an RTO is a share exchange transaction whereby a publicly listed entity (often a shell or an entity with few assets) acquires all of the securities of a target entity (which typically has substantial operations) in exchange for the issuance of securities by the acquiring entity to the security holders of the target entity. Following the RTO security holders of the target entity typically hold a significant majority of the securities of the acquiring entity. In the context of an RTO involving a Toronto Stock Exchange (TSX) or a TSX Venture Exchange (TSXV) (together, the Exchanges) listed company as the acquirer, a private placement of securities is often completed concurrently with the RTO to ensure that the acquiring entity is able to meet all requisite listing requirements and to carry out its business strategies following the RTO.

  Many publicly listed companies were created and maintained for the purpose of attracting RTO opportunities for companies seeking to gain access to the Canadian capital markets in situations where an IPO is not the most viable option. Although RTOs have historically been completed predominantly in the oil and gas and mining sectors, opportunities are not limited to these industries and are increasingly becoming prevalent in other industries, including the renewable energy sector.

  There are many steps involved in the successful completion of an RTO transaction, including:

  • Negotiation of the transaction agreement – An RTO may be implemented in one of a number of ways; including by way of a share exchange, an arrangement, or an amalgamation, and the parties involved should carefully consider the tax and other implications of each possible structure in the context of the transaction. The parties should also consider the application of the corporate, securities and other applicable laws in each jurisdiction in the context of the transaction.
  • Due diligence – Each party to the RTO should conduct a detailed review of the other party(s) to the RTO to ensure that all material issues and concerns are addressed. If a private placement is being conducted in connection with the RTO, then the investment bank(s) involved in the private placement will also be required to conduct due diligence on both the acquirer and target entities. Failure to conduct adequate due diligence could expose the parties to unnecessary risks.
  • Preparation of the disclosure document – Each of the Exchanges requires that an RTO be approved by shareholders of the publicly listed company and that a disclosure document, such as a Management Information Circular, be prepared by the acquiring entity in a prescribed format in order to provide shareholders with all relevant material facts to adequately consider and vote on the transaction. The disclosure document must contain prospectus level disclosure to ensure that investors are fully informed about the acquiring entity, the target entity and the resulting issuer. It is also likely that both the acquiring entity and the target entity will be required to provide executive compensation disclosure for the three most recently completed years in accordance with Form 51-102F6 – Statement of Executive Compensation, including a general discussion of the company’s compensation practices and the disclosure of specific amounts paid to certain officers and directors.
  • Review and approval by the Exchanges – The RTO and the disclosure document will be thoroughly reviewed by the applicable Exchange to ensure that the transaction accords with the policies of the respective Exchange, that the disclosure document contains full, true and plain disclosure and that the resulting issuer will satisfy the applicable minimum listing requirements of the Exchange.This review is in addition to ensuring that all applicable securities laws have been satisfied.
  • Shareholder meeting – It is likely that both the acquiring entity and the target entity will be required to hold a shareholder meeting to approve the RTO and related matters. The threshold of shareholder approval required will depend on the structure of the transaction and the nature of any related matters but could be a simple majority or a special majority (in some cases, together with a majority of the minority shareholders).

  RTO transactions generally take between three and six months to complete. There are however a number of issues and considerations which can significantly impact the timing of completion of the transaction including:

  • Financial statement reconciliation – The disclosure document will likely be required to include audited annual financial statements and corresponding management’s discussion and analysis of each of the acquiring entity and the target entity as well as pro forma financial statements of the resulting issuer. This disclosure often requires significant amounts of time and input from various sources, including the auditors of the parties involved. Depending on the jurisdictions of the entities involved, reconciliation of financial information may be required in order to align the accounting standards of each jurisdiction. Reconciliation of financial statements may present the opportunity to apply to the applicable securities regulator for early adoption of International Financial Reporting Standards.
  • Managing relationships with the Exchanges – Because an RTO transaction involves considerable involvement by the Exchanges, it is critical to manage the review process to ensure an expeditious result. In addition, an entity wishing to complete an RTO must take into consideration the minimum listing requirements of the applicable Exchange which include among other things, the value of the company’s assets, the amount of working capital in the resulting entity, market capitalization and prior operating activity expenditures.
  • Sponsorship and Private Placements – The Exchanges require that an approved sponsor participate in the RTO, and entities wishing to complete an RTO should engage a sponsor or apply for an exemption from the sponsorship requirements (if an exemption is available) well before commencing negotiation. A possible exemption from the sponsorship requirements exists if a private placement is completed concurrently with the RTO.
  • Escrowed Securities – Securities held by persons such as officers, directors, promoters and other insiders of the resulting issuer will be subject to the escrow policies of the Exchanges and will be released from escrow on an incremental basis. The timing and the securities that are the subject of each release will depend on prescribed value tests proscribed by the policies of the appropriate Exchanges. If no value can be demonstrated, escrowed securities will be held for a longer period of time and the amounts released at each increment will be back-end loaded. For example, the TSXV allows securities to be valued pursuant to a recently conducted private placement but only in the case where the securities issued amount to at least 20% of the issued and outstanding securities of that entity.
  • Corporate Governance – It is important for companies to consider the composition of management and the board of directors of the resulting issuer, and their corporate governance practices. Such considerations include the independence and residency of the directors and officers.
  • Continuous Disclosure Obligations – The resulting issuer will be a reporting issuer in Canada and will be subject to continuous disclosure obligations going forward. Considerations regarding the costs and implications of having to file documents such as quarterly and annual financial statements and other disclosure documents such as an Annual Information Form must be considered.
  • Stock halt – The acquiring entity in an RTO will have its stock halted upon the announcement of the RTO transaction. The halt will remain in place until Personal Information Forms of the officers and directors of both the acquiring entity and the target entity have been reviewed by the Exchanges and other requirements are met.
  • Technical Report – In that event that the RTO target is a mining copy, compliance with National Instrument 43-101 – Standards of Disclosure for Mineral Projects (NI 43-101) is required. This may include filing a NI 43-101 compliant technical report for any mineral resource properties held by the RTO target entity together with necessary consents.
  • Foreign Jurisdictions – It is not uncommon for a foreign company to gain access to the Canadian capital markets through an RTO. In such cases there can be many challenges in reconciling the laws of the foreign jurisdiction with the laws of Canada. Disclosure requirements can differ significantly from country to country and this could impact the timing of any disclosure document and the overall transaction.

  In the event that general global economic instability continues, an RTO will continue to be a viable alternative for companies seeking access to capital markets in Canada. There are many issues which must be considered, however these obstacles can be overcome through proper planning, foresight and consultation with legal, tax and financial professionals.