In assessing a change of control transaction, the directors of the target company have a fiduciary duty to act in the best interests of the company. Generally, the board of directors is required to seek the best value reasonably available in the circumstances, but the board does not need to conduct an auction or “market check” in every change of control transaction. The definitive acquisition agreement will provide for, among other things, the technical steps to implement the transaction and the support of the target company’s board of directors for the acquisition. The definitive agreement would generally contain provisions preventing the target company from soliciting, or responding to, alternative acquisition proposals from third parties. However, it would be customary for there to be a “fiduciary out” permitting the target company’s board of directors to respond to an unsolicited proposal that is superior to the agreed transaction and to terminate the definitive agreement in order to accept the superior proposal, subject to the target company paying a break- up fee to the acquirer (typically in the range of 2% to 4% of the transaction value). In certain circumstances, there may be a “go shop” provision allowing the target company to actively seek alternative proposals for a limited period of time after entering into the definitive acquisition agreement. It is also typical for the acquirer to have the right to match any superior proposal in order to preserve its transaction. The acquirer may also enter into irrevocable (or “hard”) and/or revocable (or “soft”) lockup agreements with major and management shareholders of the target company in order to obtain their commitment to support the transaction. In limited circumstances, other forms of “deal protection” may be available, such as the granting of an option to the acquirer to purchase an asset of the target company or the issuance of shares of the target company to the acquirer concurrent with the execution of the definitive agreement.
Prior to approving the entering into of the definitive acquisition agreement, the target company’s board of directors would typically receive an opinion from its financial advisers that the consideration offered in the transaction is fair to the shareholders of the company from a financial point of view. The general approach taken to disclosure of an acquisition transaction is that disclosure must be made when the parties have agreed on the price and structure of the transaction. Practically speaking, this generally coincides with the time that the parties enter into the definitive acquisition agreement. There have been examples of target companies making earlier disclosure, but this has not become the norm. However, the Toronto Stock Exchange may require the target company to disclose the existence of merger negotiations if market activity indicates that trading is being unduly influenced by rumours.
Disclosure of an acquisition transaction must be made when the parties have agreed on the price and structure of the transaction, which generally coincides with when the parties enter into the definitive acquisition agreement.
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