SkyLaw's Kevin West had the pleasure of attending and presenting at the 16th Annual Corporate Governance Conference in Banff, Alberta presented by the Canadian Society of Corporate Secretaries (CSCS). CSCS brings together a high-powered mix of corporate secretaries, general counsel, directors and other professionals involved in corporate governance. The topic of the presentation is “Preparing for an M&A Transaction and Other Special Situations”. It provides insight into the process, along with some stories, to highlight the importance of planning, planning, planning.

1. 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
Workshop D | 2:45 pm – 4:45 pm

2. 2
Prepared for
The
Canadian
Society
of
Corporate
Secretaries
16th
Annual
Corporate
Governance
Conference
Banff
Springs
Hotel
|
Banff,
AB
|
August
24
-­‐
27,
2014

3. 3
SkyLaw is a boutique
corporate law firm offering
sophisticated legal and
strategic advice to public
and private companies.
www.skylaw.ca
Prepared by
GGA
is
an
internaEonally
recognized
independent
advisory
firm
helping
organizaEons
with
their
execuEve
compensaEon,
governance,
value
enhancement
and
risk
miEgaEon.
www.GGAinc.com

4. 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
ExecuEve
CompensaEon,
Human
Resource
Strategy
and
Corporate
Governance.
• Co-­‐designed
and
teaches
the
graduate
level
York
University
course
Governance
of
ExecuEve
CompensaEon
and
Shareholder
Accountability.
4
Presented by

5. Kevin
R.
West
Founder,
SkyLaw
Professional
CorporaEon
• Kevin
West
is
the
founder
of
SkyLaw,
an
innovaEve
bouEque
corporate
law
firm
in
Toronto.
• AZer
clerking
for
JusEce
Binnie
at
the
Supreme
Court
of
Canada,
Kevin
pracEced
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. 6
Kevin R. West
Timeline

7. Kevin R. West
Selected Transactions List
• Acquisition of Corriente Resources Inc. by Tongling Nonferrous Metals
Group Holdings Co. Ltd and China Railway Construction Corporation
Limited for $679 million.
• Acquisition of Northern Peru Copper Corp. by China Minmetals
Nonferrous Co. Inc. and Jiangxi Copper Company for $455 million.
• Xstrata plc hostile take-over of Falconbridge Limited for $24 billion.
• Acquisition of PetroKazakhstan Inc. by China National Petroleum
Corporation for $4.2 billion.
• Royal Bank of Canada’s acquisition of Centura Banks, Inc. for $2.3 billion.
7

8. 8
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
1.6 – Selecting Service Providers

9. 9
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

10. 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
10

11. 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!
11

12. 12
Agenda
Part 4: Conclusion and Questions
4.1 – Concluding Remarks
4.2 – Question & Answer Period

13. 13
Part 1
Preparation for a Special Situation

14. Part 1 – 1.1
Types of Transactions
§ Change of control transactions
§ Initial public offerings (IPOs)
§ Significant acquisitions
§ Significant divestitures
§ Capital raising
14

15. Part 1 – 1.2
Stages of a Transaction
§ Initial discussions and Non-Disclosure
Agreement
§ Letter of intent
§ Due diligence
§ Negotiation of definitive transaction documents
(Share purchase agreement, etc.)
§ Signing
§ Closing
§ Post-closing integration
15

16. 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)
16

17. 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
17
(…continued)

18. 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?
18
(…continued)

19. 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
19

20. Part 1 – 1.5
Board and Executive Compensation
for Special Situations
20
Do you know what
happens on a
change of control?

21. Part 1 – 1.5
Board and Executive Compensation
for Special Situations
21
Can you clearly identify each executive’s
employment arrangements?
§ Are the contracts organized in one central
location?
§ Are there side letters or unwritten agreements?
(…continued)

22. Part 1 – 1.5
Board and Executive Compensation
for Special Situations
22
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?
(…continued)

23. Part 1 – 1.5
Board and Executive Compensation
for Special Situations
23
“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?
(…continued)

24. Part 1 – 1.5
Board and Executive Compensation
for Special Situations
24
“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
(…continued)

25. Part 1 – 1.5
Board and Executive Compensation
for Special Situations
25
“Single Trigger” versus “Double Trigger”
Equity Vesting
§ Modified Approach: Place a floor at the
transaction price so the premium is locked in
(…continued)

26. Part 1 – 1.5
Board and Executive Compensation
for Special Situations
26
Was a defensible
process used to
award the
executive
compensation?
(…continued)

27. Part 1 – 1.5
Board and Executive Compensation
for Special Situations
27
(…continued)
A defensible process is a balancing act

28. Part 1 – 1.6
Selecting Service Providers
§ Get a referral from a reputable source
§ 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
28

29. 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)
29
(…continued)

30. 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
30
(…continued)

31. 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
31

32. 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
32
(…continued)

33. 33
Part 2
During a Special Situation

34. Part 2 – 2.1
The Importance of Planning,
Planning, Planning
Time to break out the transaction playbook
34

35. 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
35
(…continued)

36. 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
36
(…continued)

37. 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
37

38. 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
38
(…continued)

39. 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
39

40. 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
40

41. 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
41

42. Part 2 – 2.6
Task Management
§ Use project management principles
§ Set real deadlines
§ Keep a checklist!
§ Regular internal and
external team
updates
42

43. 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
43

44. Part 2 – 2.7
Due Diligence Issues
44
§ 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
(…continued)

45. Part 2 – 2.7
Due Diligence Issues
45
Executive Compensation - LTIP
Grant
Date
VesBng
Date
Exercise
Date
ExpiraBon
(Term)
Holding
Period
VesBng
Period
Exercise
Period
Yrs
(…continued)

46. Part 2 – 2.7
Due Diligence Issues
46
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
Exercise
HOLD
Yr.
1
Yr.
2
Yr.
3
Yr.
4
Yr.
5
-­‐
10
" Used
in
private
and
public
companies
" Junior
to
intermediate
Market
Cap
OpBon
Terms
5-­‐10
years
" Intermediate
to
Mature
Market
Cap
OpBon
Terms
7-­‐10
years
(…continued)

47. Part 2 – 2.7
Due Diligence Issues
47
Advantages/Disadvantages of Stock Options
Advantages
Disadvantages
§ Leveraged
pay
potenEal
§ Simple
§ Can
align
with
long-­‐term
success
(i.e.
10yr
term)
§ Align
with
future
shareholder
gains
§ Fixed
accounEng
§ Employee
tax
advantage
§ Excludes
value
of
any
dividends
being
paid
§ May
put
disproporEonate
focus
on
increase
in
share
price
§ Creates
diluEon
§ PotenEal
for
windfall
gains
§ ConEnuous
underwater
opEons
are
de-­‐moEvaEng
despite
management
doing
a
“good
job”
§ AccounEng
(…continued)

48. Part 2 – 2.7
Due Diligence Issues
48
Calculating RSUs/DSUs
=
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
(…continued)

49. Part 2 – 2.7
Due Diligence Issues
49
Advantages/Disadvantages of RSUs/DSUs
Advantages
Disadvantages
§ Full
value
of
stock
price
§ Less
diluEve
than
opEons
§ Sekle
in
cash
net
of
withholding
tax
(typically)
§ Dividends
addiEve
to
units
§ Easier
to
administer
compared
to
real
shares
§ Perceived
as
a
“give
away”
§ PotenEal
for
significant
payouts
for
sub-­‐par
performance
§ Less
leverage
compared
to
opEons
§ Pre-­‐revenue
companies,
have
to
fund
addiEonal
cash
hit
(…continued)

50. Part 2 – 2.7
Due Diligence Issues
50
Calculating PSUs
Vest
Yr.
1
Yr.
2
Yr.
3
1
2
3
IllustraBon
assumes
cliff
vesBng
Performance
Period
Yr.
4
Yr.
5
Yr.
6
Vest
Performance
Period
Vest
Performance
Period
Performance
Level
Performance
MulBplier
Maximum
150%
Target
100%
Threshold
50%
Target
#
PSUs
x
Performance
MulBplier
x
Stock
Price
at
VesBng
Date
(…continued)

51. Part 2 – 2.7
Due Diligence Issues
51
Advantages/Disadvantages of PSUs
Advantages
Disadvantages
§ Link
pay
stronger
to
performance
§ Full
value
of
stock
price
§ Less
diluEve
than
opEons
§ Sekle
in
cash
net
of
withholding
tax
(typically)
§ Accumulate
dividends
in
addiEonal
units
§ Easier
to
administer
compared
to
real
shares
§ Less
potenEal
for
payouts
for
sub-­‐par
performance
§ PotenEal
for
significant
payouts
for
sub-­‐par
performance
§ Pre-­‐revenue,
financing
arrangements
required
to
sekle
in
cash
§ Defining
performance
may
be
challenging
(…continued)

52. Part 2 – 2.7
Due Diligence Issues
52
Valuation
Stock
OpEons
RSUs
PSUs
DSUs
Publicly
Traded
Privately
Held
Share
Price
FuncEon
of:
• Profit,
• Growth
Metric,
• ValuaEon
Methodology
(…continued)

53. 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
§ Don’t feel pressured to agree on the spot
53

54. 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
54

55. 55
Part 3
Integration After Closing a
Special Situation

56. 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
56

57. 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
57
(…continued)

58. Part 3 – 3.2
Update Plans and Policies
Have a compensation advisor work with you
to update the employment plans and policies
58

59. 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
59

60. 60
Part 4
Conclusion and Questions

61. 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.
61

62. Part 4 – 4.2
Question & Answer Period
62
Paul
Gryglewicz
Managing
Partner,
Global
Governance
Advisors
Tel:
647.286.0626
E-­‐mail:
paul.gryglewicz@GGAinc.com
LinkedIn:
www.linkedin.com/in/
paulgryglewicz
If you have any further questions, please feel free to contact:
Kevin
West
Founder,
SkyLaw
Professional
CorporaEon
Tel:
416.644.3190
E-­‐mail:
kevin.west@skylaw.ca
LinkedIn:
www.linkedin.com/in/
kevinrobertwest

63. 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
Thank you for attending!