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The almighty plan of arrangement and the magic of court approvals The process is straightforward

Does any one do straight takeovers anymore? Maybe not in Canada, where plans of arrangement have become the M&A tool of choice. The legal manoeuvre offers more flexibility and is in many cases better suited to deal with the complexities of today’s capital markets and global business environment.

“Plans of arrangement are like the general anesthetic of M&A,” said David Reid, a lawyer in Vancouver who is global co-chair of the mining sector practice at international law firm DLA Piper. “They knock out everything. The more complicated the deal, the more problems they solve.”

For example, Reid was involved in crafting a plan of arrangement that resulted in the 2011 merger of Capstone Mining and Far West Mining. In addition to the merger of two public companies, there was a concurrent financing into the merged company on closing as well as a purchasing of the property of the acquired company. Nice and neat and only possible because of the plan of arrangement, says Reid. His firm’s Calgary office recently acted for Tahoe which merged with Rio Alto, a $4 billion gold mining merger that was also conducted by way of a plan of arrangement and closed in April 2015.

In addition to serving as an alternative to a takeover bid, a plan of arrangement can be used to facilitate all kinds of restructuring, amalgamation, amendments to the corporation’s articles, a transfer of property, an exchange of securities, and a compromise with creditors. It can be used to take public companies private, to create spin-off companies, to li- quidate a company, to exchange securities or any combination of the above.

While typically associated with public companies, a plan of arrangement can also be used in private company transactions. You just have to convince a judge you want to reorganize the capital of a corporation and that it’s not practicable to do it any other way. “In the takeover bid context, it hasn’t taken much to convince the courts,” says Jeffery Barnes, a partner with Borden Ladner Gervais LLP in Toronto.

Plans of arrangement have been around since the 1970s, when the Canada Business Corporations Act came into effect. They took hold early in Alberta and their popularity has waxed and waned, depending on the strength of financial markets.

“When markets are strong, as they were during the resource boom, a lot more deals were done as competitive takeovers because people were chasing assets,” says Barnes. “Now, buyers are looking for the right fit to enhance performance.” And deals are friendly, a key aspect of plans of arrangement, which emanate from the target company.

In fact, a plan of arrangement can only happen if the boards of both companies approve it before the shareholders’ meeting occurs. “In a takeover bid, the deal is initiated by the acquirer board,” says Reid. “You’re shooting your gun and very much dependent on the target to tender to the bid or not.”

Another difference: while a takeover bid requires 90 per cent shareholder approval, a plan of arrangement requires only two-thirds’ shareholder approval — a definite plus when dealing with widely held companies. A plan of arrangement is an all-or-nothing proposition. Shareholders either approve 100 per cent or not. If you’re just after a controlling interest, then it has to be a takeover bid.

The process is straightforward. A plain-vanilla transaction takes between 45 and 60 days. An agreement is negotiated, then the target company applies to the court for an interim order prior to mailing the information circular specifying the required shareholder approval. The target calls a shareholders’ meeting to approve the arrangement. Once that approval is obtained, the matter goes to the court for final approval. Done.

Plans of arrangement are particularly attractive on tax grounds. They provide a tax advantage over takeover bids when a share exchange is involved as shareholders’ capital gains are deferred until they sell.

But court involvement may be the biggest reason behind the use of plans of arrangement.

The court approval process ensures fairness to shareholders. That means companies can issue securities in the U.S. on an exempt basis under rule 3(a) (10) of the U.S. Securities Act. Takeover bids do not have the same access to that exemption.

“The court process provides boards an extra level of comfort, another check and balance,” says Allen Garson, a Torontobased partner and co-head of Dentons Canada LLP’s national M&A practice. “Plans of arrangement are even popular when they are not truly necessary because of the high degree of confidence in the process.”