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What's Special About "Special Committees"?


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In this presentation, FMC's Catherine Wade discusses "Special Committees", more specifically she covers:
-A historical perspective
-When to put in place
-Choosing Expert

Published in: Economy & Finance
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What's Special About "Special Committees"?

  1. 1. What’s Special About “SpecialCommittees?”Presented by: Catherine Wade January 22, 2013 1
  2. 2. Overview• Historical Perspective• When to put in place• Membership• Mandate/Fees• Duties• Choosing Experts• Process• Deliberations/Recommendation• Closing Remarks• Questions & Answers 2
  3. 3. Historical PerspectiveCorporate LawDirectors’ Responsibilities• Manage/supervise management of the corporation – Choose/approve/monitor senior management – Strategic planning/directionDuties• Fiduciary duty – To act honestly and in good faith with a view to the best interest of the corporation• Duty of care – To exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstancesConflicts• The Board must act in a manner that leaves it free of conflicts – Disclosure/declaration of interest in a material matter – Amount of input on decision making relating to the matter under conflict – Voting 3
  4. 4. Historical Perspective continued…Securities/Regulations• OSC Policy 9.1 – early days securities regulatory involvement• Quebec Policy Q-27• Ontario Rule 61-501 Insider Bids, Issuer Bids, Business Combinations and Related Party Transactions - May 1, 2000• Multinational Instrument 61-101 Protection of Minority Security Holders in Special Transactions - February 2005• National Instrument 58-101 Disclosure of Corporate Governance – June 2005Common Law Foundations• The director’s role as overseer and having responsibility for management and oversight , as set out in the corporate statutes, was inherent in the role of the Board body at common law• The fundamental basis of fiduciary duty and duty of care under corporate law is founded in the common law 4
  5. 5. When to Put in Place• Unusual Circumstances – Related party transactions – Sale of the enterprise – Take-over bid (hostile) – Internal investigations• MI 61-101 independent/special committees – On an insider bid to determine the valuation and supervise the valuation preparation for an “insider bid” – Required disclosure of any deliberations, considerations, recommendations, etc.• Companion Policy to MI 61-101 – Determination of “fairness” of a transaction – normally should include whether the transaction has been reviewed and approved by a special committee 5
  6. 6. When to Put in Place continued… – To safeguard against the potential for an unfair advantage for an interested party. It is “good practice” that a special committee conduct or review and recommend action on the negotiation of a transaction with an interested party – Generally take the view that it is appropriate for every material transaction to which MI 61-101 applies a special committee should be put in place• Better safe than sorry – a special committee oversight and recommendation provides additional “fairness” in the process.• Securities regulations guidance in Companion Policy to MI 61-101 6
  7. 7. Membership• Independence• MI 61-101 – General Rule • independence is a question of fact – Specifically not independent • “interested party”* • employee, insider, associated entity of interested party (current or within 12 months) • adviser of interested party in connection with the proposed transaction or employer (current or within 12 months) • has material financial interest in an interested party • would reasonably be expected to receive a benefit from the transaction not available pro rata to other security holders (could be broader than holders of common shares) and particularly – opportunity to offer a financial interest in – an interested party or an affiliate – the issuer – successor to the issuer 7
  8. 8. Membership continued…*“interested party” - basically anyone having an interest in the proposedtransaction that is different from the general security holder base andpersons who have an interest/relationship with the interested party 8
  9. 9. Mandate/FeesMANDATEBasis• Established by the Board• Must report to the BoardTypical for M & A• Usually provided authority to hire independent advisors (investment bankers, valuators, legal counsel, pension experts)• Consider alternatives presented or available to the corporation• Engage in a market canvass• Review proposals• Negotiate/supervise the negotiation of proposals• Recommend course of action to the Board• Oversee implementation 9
  10. 10. Mandate continued…Typical for “internal investigation”• Usually provided authority to hire independent advisors (investment bankers, valuators, legal counsel, pension experts, forensic professionals)• Authority to obtain all necessary information and documentation of the corporation related to the matter• Direct management to assist in the investigation on a confidential basis• Report to the Board• Recommend a course of action 10
  11. 11. Fees• Established/ratified by the Board• Impact on corporation and its ability to complete a transaction• Perceived conflicts created by structure• Best practice 11
  12. 12. Duties• As per statutory and common law duties discussed earlier• New “duties”: – Review their and other members’ status as independent – Engage in a process that is under the committee’s control and direction – Consider use of independent advisors and solicit advice as appropriate – Consider disclosure issues related to the mandate – Prepare a complete and accurate review of deliberations – how detailed? – Consider all affected parties (i.e. employees, debt holders, other security holders) – Undertake the mandate in a comprehensive and complete manner exercising independent judgment 12
  13. 13. Choosing Experts• Independence• Expertise – Subject matter – Industry sector• Free of conflicts• Cost 13
  14. 14. Process• Mandate – Clearly articulated mandate• Meetings – As often as necessary – can be a very compressed time frame – “In person” preferred to conference calls – “In camera” – Invitees where necessary to obtain information – Confidentiality of information and deliberations pending recommendation – Attendance of experts – Minutes – Notes – Materials 14
  15. 15. Deliberations/Recommendation• Review materials• Consider alternatives/options• Seek and consider advice of experts• Consider views of all members• Consider all stakeholders and impact on the corporation• Discuss with Board• Consider input of the Board• Recommend a course of action*Deliberations and recommendation of special committee must be set out inthe disclosure to shareholders and must include dissenting views within thecommittee 15
  16. 16. Closing RemarksWhat is special?• Independence of the entire committee• Process is subject much more to scrutiny• Documentation of process and deliberations expected to be more detailed so as to provide full disclosure• Provides a level of comfort to the full Board on the “fairness” of a transaction with an interested party• Securities regulators believe special committees play an important procedural role protecting minority shareholders from unfair treatment in a transaction with an interested party• Market participants hold the process and role as important 16
  17. 17. Questions?Catherine Wadecatherine.wade@fmc-law.com604.691.6431 17
  18. 18. The preceding presentation contains examples of the kinds of issues companiesdealing with Preliminary Economic Assessments could face. If you are faced with oneof these issues, please retain professional assistance as each situation is unique. 18