PLANNING FOR A M&A TRANSACTION OR AN IPO:

GENERAL LEGAL CONSIDERATIONS

BC BIOTECH FINANCE FORUMNOVEMBER 27, 2002

JOSEPH GARCIA

CAMPNEY & MURPHY

CAMPNEY & MURPHY

INTRODUCTION

• Before, during and after: the continuum of legal hurdles and issues

• Market conditions may dictate your options• M&A – strategic or forced• IPO – market opportunity

• Effective planning is critical to take advantage of opportunities and to expedite the process

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STRUCTURING M&A

• Structuring a M&A transaction is largely driven by tax and securities considerations

• For this reason, M&A deals can be extremely complicated

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M&A BASIC STRUCTURES

• Share Purchase• Sale proceeds directly to owners of target• Responsible for target obligations and

liabilities

• Asset Purchase• Choice of assets and assumed liabilities• Sale proceeds go to the target company,

not its owners• May need to develop a tax efficient

structure to distribute the proceeds

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M&A BASIC STRUCTURES

• Amalgamation• A statutory amalgamation can be used to

effect an acquisition• Amalgamations are more commonly seen in

a public company context• Amalgamations are often used to:

• Achieve interest deductibility for acquisition financing

• Facilitate a step-up in cost basis for non-depreciable capital property

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M&A BASIC STRUCTURES

• Arrangement• Similar to an amalgamation – two or more

companies combine to continue as a single entity

• A court supervised reorganization:• Typically used to implement a transaction

involving numerous predetermined steps• No single step gets completed without all steps

being completed

• Usually used for complicated transactions involving a public company

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M&A FORMS OF CONSIDERATION

• Cash•Fully taxable except for capital gains

exemption if a share purchase and the target is a qualified small business corporation

• Shares of Buyer•Provides tax deferral if buyer is a

Canadian company

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M&A FORMS OF CONSIDERATION

• Exchangeable Shares•Shares of a Canadian corporation

exchangeable for shares of a non-Canadian buyer•Designed to be the equivalent of the non-

Canadian buyer’s shares

•Provides tax deferral

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PRICE

• M&A structure affects price•A tax efficient structure can increase

value for both buyer and seller•A creative structure can sometimes

help bridge a price gap•Understanding the structural issues

from both sides of a transaction is essential when negotiating price

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IPO: WHY, WHERE, WHEN AND HOW

• Advantages•Access to capital•Use of shares for acquisitions•Liquidity and value•Exposure

• Stock Exchange•Canada vs. U.S.• Junior vs. senior market

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IPO: WHY, WHERE, WHEN AND HOW

• Timing• Management• Technology • Window

• Complicated Process• Due diligence• Underwriters, auditors and lawyers• Prospectus• Listing Requirements

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M&A PLANNING

• Understand•Possible structures•Valuation methods•Tax consequences•Corporate and securities requirements•What, if any, consents are required•How to deal with minority shareholders•Shareholders approval requirements

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M&A PLANNING

• Search for potential buyers• Management or agent or both

• Internal Due Diligence - General• Extensive review of affairs

• Corporate records and resolutions• Intellectual property

• Prepare materials for legal counsel and auditors

• Counsel to review all contracts

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IPO PLANNING

• Start early• Develop business plan

• Critical task – focuses attention• Narrative is useful to draft prospectus

• Complete management team• Attract independent directors• Prepare audited FS• Shareholder approval• Start acting like a public company

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IPO PLANNING

• Assemble Professional Team• Auditors, investment bankers and lawyers

• Internal Due Diligence - General• Extensive review of affairs

• Corporate records and resolutions• Intellectual property

• Prepare materials for legal counsel and auditors

• Counsel to review all contracts

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IPO PLANNING

• Internal Due Diligence – Plus•Conversion rights•Options and warrants•Registration rights•Liability – prospectus must provide

“full, true and plain disclosure”

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M&A vs. IPO

• Planning Makes Perfect