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In brief
- Bidders intending to provide share consideration should consider the potential benefits of the use of caps and collars when formulating their transaction structure.
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Freehills recently advised YM BioSciences Inc, a Canadian biotechnology company with a dual listing on the TSX and NYSE Amex, on its A$14 million acquisition of Cytopia Limited, an ASX listed company. The acquisition was by way of scheme of arrangement for an all share consideration.
Whilst the transaction was small by value, it highlighted an interesting approach to setting the final share exchange ratio.
The market price of YM shares was subject to considerable volatility and daily fluctuation. Very few of these changes were driven by the transaction with Cytopia, most were driven by other factors relating to YM’s prospects and government approvals for its products.
There was a risk that, if the share price of YM dropped significantly, the relevance and attractiveness of the consideration offered under the scheme would diminish and, conversely, that if YM’s share priceappreciated significantly, Cytopia shareholders would receive a windfall gain.
In order to address these two scenarios, the amount of consideration payable under the scheme was subject to a cap and collar arrangement.
There were two elements:
- Cytopia’s shareholders would receive a fixed exchange ratio of 0.0852 new YM shares per Cytopia share if YM’s volume weighted average price over a 20 business day period was between C$1.29 and C$2.39 (a 30 per cent range above and below YM’s share price at the time the transaction was first agreed) with a flexible exchange ratio if YM’s share price was outside this range, and
- there was a cap and floor on the amount of scrip potentially to be issued by YM. If the market value of YM’s shares over the relevant period was lower than C$1.29, there was cap on the number of shares that would be issued (which minimised dilution to existing YM shareholders if the price fell significantly). If the price was higher than C$2.39, there was a minimum number of shares that would be issued (which ensured that Cytopia’s shareholders would get some, but not complete, upside in that event).
These features allowed both parties and Cytopia’s shareholders to evaluate the value and range of the consideration on offer from an early stage.
Where the exact amount of securities to be issued by a bidder is unknown, a mechanism capping the amount of securities to be issued can reduce transaction risk for listed bidders if the listing rules of their home securities exchange require security holder approval for the issue of securities above a certain percentage of their issued capital.
The use of a flexible exchange ratio outside the fixed exchange ratio collar can assist in ensuring that the offer remains attractive even if the price of the bidder’s securities decreases. The cap on the number of securities to be issued also limits the dilution of a bidder’s existing security holders, in the event that there is a material decline in the value of a bidder’s securities and the target’s shareholders still approve the transaction.
Risks with this type of structure include the potential for price manipulation of the bidder’s securities, in a manner analogous to a company issuing shares under a dividend re-investment plan, in order to increase the exchange ratio.
A structure incorporating caps and collars may appeal to bidders whose share price is subject to considerable fluctuations and who are providing non-cash consideration; or to bidders who anticipate that an event unrelated to the transaction may have a material positive impact on the price of their securities that they do not wish to share with the target’s shareholders.
This article was written by Rodd Levy, Partner and Andrew Chan, Solicitor, Melbourne.
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