By Melissa Inglefield
When considering the acquisition of any company (the ‘Target’) there are several important preliminary matters to be considered. In addition to considering whether the price is right, a purchaser may need to consider whether the acquisition is feasible and worthwhile only if, post acquisition, he is able to exercise control over the Target. This is because the acquisition of only some of the shares in a Target can have a significant consequence on the ability of the purchaser to effectively manage the company and influence or implement new practices or strategies.
When the acquisition of control of the Target is the objective, the structure of the acquisition will need to be tailored to the circumstances of the acquisition. For example, a purchaser seeking to acquire control of a Target which has a small number of shareholders (often referred to as a ‘closely held company’) will typically acquire control through the purchase of the shares held by each shareholder. On the other hand, a purchaser seeking to acquire control of a Target with a wide shareholder base or the shares of which are listed on a stock exchange will not find it practical to negotiate with multiples of shareholders and will therefore need to consider other methods of acquisition.
In this article, we have sought to provide a high-level overview of those methods which are available for the acquisition of control in a Target in Trinidad and Tobago.
Acquisition of Control through a Share Purchase
The process for the purchase of shares in a Target usually begins with the entry into a letter of intent (LOI) establishing the agreement in principle of the selling shareholders to sell and the purchaser to buy the shares in the Target. The LOI will typically set out the key commercial terms of the sale (such as the purchase price) and establish key procedural steps involved for the purchase, such as the completion of due diligence within an agreed timeframe and the entry into a share purchase agreement (SPA) setting out the legally binding agreement between the sellers and the purchaser which will govern the transaction.
In acquiring control through this approach, it is critical that the shareholders who themselves have control over the shares in the Target agree to sell their shares to the purchaser (which would be reflected in both the LOI and the SPA).
In circumstances where one or more minority shareholders do not agree to sell to the purchaser, it may be possible for the majority shareholder(s) to force the sale if a contractual power to do so is contained in either the Articles of the Target or in a shareholders’ agreement among the shareholders of the Target. Where a selling shareholder intends to rely on such a power for the purposes of transferring control of the company to a purchaser, the procedure contained in the Articles or shareholders’ agreement for such a transaction must be closely followed.
With this approach, it would be critical for a purchaser to have enshrined in the LOI and SPA that a condition of its agreement to purchase is that it acquires control over the target company. Such a condition would ensure that the purchaser cannot be compelled to complete the acquisition in circumstances where the percentage of shares which it will acquire as a result of the transaction does not afford the purchaser ultimate control.
Widely Held Shares
In circumstances where the shares of a Target are more widely held (or the Target is a public company), acquiring the shares by virtue of a share purchase transaction may not be suitable or convenient.
In such circumstances, a purchaser will likely look to methods of acquisition which more easily facilitate dealing with many selling shareholders at once. Take-over bids or amalgamation acquisitions are two such methods which can be are permitted under our local legislative framework.
A take-over bid is a method of acquisition which is governed by the Securities Industry (Take-Over) By-Laws, 2005 and generally used where the Target’s shares are listed on the Trinidad and Tobago Stock Exchange.
In such a transaction, the purchaser makes an “offer to acquire” the shares of a Target through an offering circular which is made available to each shareholder of the Target. The offering circular details the terms and conditions of the offer, such as the offer price and any terms and conditions set by the purchaser in connection with its proposed acquisition. It would be typical for such terms and conditions to include a condition that its offer will only be valid, binding and enforceable where sufficient shareholders accept the offer to enable the purchaser to exercise control over a defined percentage of the Target’s shares.
Once all conditions of an offer are satisfied and the period for which the offer was made has expired, the offeror is required to take-up and pay for all deposited shares, upon which the offeror becomes the legal owner of such shares.
One benefit of this method of acquisition is that it creates a pathway that potentially enables a purchaser to acquire 100% of the outstanding shares in a Target, even where not all shareholders of the company accept the purchaser’s offer. In order for this power to be available to a purchaser, shareholders holding at least 90% of the Target’s shares must have accepted the purchaser’s offer. In such circumstances, the Companies Act empowers the purchaser to compulsorily acquire all other shares in the Target (notwithstanding the rejection of the offer by the holders of such shares) and sets out the applicable procedure through which the purchaser may do so.
An amalgamation transaction is governed by the provisions of the Companies Act and involves two or more corporations being combined (or amalgamated) to form a single company. Under the Companies Act, cross-border amalgamations are not permitted and therefore both amalgamating entities must be incorporated in Trinidad and Tobago.
While not as common as share purchase transactions or take-over bids, an amalgamation acquisition is another method available to a purchaser through which a purchaser can acquire control. It can be a cost-effective mechanism (as no stamp duty is payable upon an amalgamation) and is particularly attractive where there is a significant shareholder (or group of shareholders) controlling 75% or more of the shares in the Company who wishes to sell its shares.
In this approach, the purchaser (either directly or through a special purpose vehicle) enters into an amalgamation agreement with the Target which establishes the terms and conditions on which such amalgamation will be effected. By virtue of the amalgamation, and in accordance with the terms of the amalgamation agreement, the shareholders of each amalgamating entity (i.e. the shareholders of the Target and the purchaser) will surrender their shares in exchange for consideration paid by the amalgamated company. The purchaser will typically receive consideration in the form of shares in the amalgamated company while the shareholders of the Target will typically receive cash (or some other payment in kind for their shares).
Once an amalgamation agreement is settled and agreed, the board of directors of the Target would be required to convene a meeting of its shareholders at which the proposed amalgamation will be voted upon. The meeting must be convened and the vote conducted in accordance with the requirements of the Companies Act and the by-laws of the target, and the amalgamation will only be effective where sufficient shareholders (that is, shareholders holding in excess of 75% of the shares of the target company) vote in favour of the amalgamation.
If approved, the amalgamation is effected by the filing of articles of amalgamation at the Companies Registry and the issuance of a certificate of amalgamation.
This approach requires certain procedural steps to be taken in order to comply with the requirements of the Companies Act and is not uncomplicated. However, it can be more cost effective than a share purchase or take-over bid (as it does not attract stamp duty or brokerage fees) and can provide a clear pathway to ultimate control (where a purchaser’s offer is expected to be attractive to a significant majority of the target company’s shareholders).
Of course, no acquisition transaction is alike and, the greater the number of parties involved, the greater the complexity is likely be. It is therefore important that a purchaser have a clear understanding of the shareholder base of a Target and the shareholder appetite for a sale in assessing the method of acquisition to be used.