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OSLER GUIDE Reverse Take-Overs in Canada Osler, Hoskin & Harcourt llp Reverse Take-Overs in Canada A reverse take-over structure is often used where a traditional initial public offering is not feasible or practical. This guide is a practical tool to assist directors and officers, potential acquirors and investors in understanding the issues surrounding reverse take-overs. © 2011 Osler, Hoskin & Harcourt llp All rights reserved. Osler, Hoskin & Harcourt llp TABLE OF CONTENTS What is a Reverse Take-Over (RTO)? 2 Why Do an RTO? 4 RTO Options 6 General Steps to Completing an RTO 8 Other Issues 10 How We Can Help 12 Reverse Take-Overs in Canada 1 Osler, Hoskin & Harcourt llp What Is a Reverse Take-Over (RTO)? Companies wishing to access the Typically, the result of an RTO is a Canadian capital markets by listing change of control in the ownership on the Toronto Stock Exchange of Public Co. and in many cases, the (TSX) or the TSX Venture Exchange former shareholders of Private Co. (TSX-V) may become listed through hold a large majority of the shares a number of methods including a of Public Co. which remains listed traditional initial public offering on a stock exchange and which now (IPO), through a special purpose also has assets and/or operations. acquisition vehicle (SPAC) or by completing a reverse take-over (RTO) of an existing listed issuer. Generally, an RTO is a transac- tion whereby a company which is publicly listed on a stock exchange (Public Co.), but which has few if any assets, acquires all of the securities of a private company which has substantial assets and/or operations (Private Co.), resulting in Private Co. indirectly “going public.” Public Co. acquires the securities of Private Co. by issuing to Private Co.’s shareholders a significant number of shares in Public Co. (equivalent in value to the assets or operations of Private Co.). 2 Reverse Take-Overs in Canada Osler, Hoskin & Harcourt llp Figure 1 Pre-RTO Ownership Public Co. Private Co. Shareholders Shareholders Public Co. Private Co. Figure 2 Post-RTO Ownership Public Co. Private Co. Shareholders Shareholders Public Co. Private Co. Reverse Take-Overs in Canada 3 Osler, Hoskin & Harcourt llp Why Do an RTO? The IPO process in Canada is time In such circumstances a company consuming, uncertain and relies can instead acquire a stock market on public market conditions. An listing, liquidity for its shares and RTO structure is often used where access to the public capital markets, a traditional IPO is not feasible or by completing an RTO involving a practical. An RTO does not neces- company which is already listed on sarily include an equity financing an exchange. An RTO transaction is component, so it is often used where generally shorter in duration to com- the principal goal of the transaction plete and is more cost efficient from a is liquidity for shareholders from the professional fees basis than an IPO. stock exchange listing, versus an IPO where capital raising from the public is generally the principal goal. For example, during times of volatility in stock markets an IPO may be dif- ficult to successfully conclude and risky if market conditions change and the offering cannot be completed. 4 Reverse Take-Overs in Canada Osler, Hoskin & Harcourt llp Certain Advantages of Certain Disadvantages of an RTO Compared with an IPO an RTO Compared with an IPO 1. Volatility of stock markets mitigated. 1. Public Co. acquisition increases cost 2. Public Co. may have existing relation- of transaction. ships with investment dealers and 2. Shareholders of Private Co. will investors which can be continued. suffer some dilution. 3. Transaction predominantly regulated 3. Careful due diligence of both Public by a stock exchange rather than Co. and Private Co. must be securities commissions. conducted, potentially adding time 4. Does not create the liabilities and cost to the transaction. associated with filing a prospectus. 4. RTOs becoming subject to increased 5. There is a pre-existing shareholder scrutiny by stock exchanges. base which will make it easier for 5. Corporate structuring issues post- underwriters to effect a distribution closing may be more complicated. and assist with liquidity considerations. 6. In many cases, no additional equity need be raised, avoiding further dilution to existing shareholders. Reverse Take-Overs in Canada 5 Osler, Hoskin & Harcourt llp RTO Options Many public companies in Canada There are multiple forms of RTO are created and maintained for transactions to gain access to the the purpose of engaging in RTO Canadian capital markets including transactions with Private Co.’s the following: seeking to access the Canadian capital markets in situations where an IPO is not the most viable TSX TSX-V alternative. Other Public Co.’s have • Reverse • Reverse wound up or disposed of their prior Take-Over (Back Take- Over business and may have cash or Door Listing) other attributes as their only asset. • Capital Pool Company (CPC) The preferred RTO transaction struc- Qualifying ture is dependent on a number of Transaction (QT) factors including the Private Co. sector and the maturity and sophistication of the Private Co.’s business. Although RTOs have typically been completed predominantly in the oil and gas and mining sectors in Canada, RTOs are not restricted to these sectors and are prevalent in other sectors, including the renewable energy sector and the industrial sector. 6 Reverse Take-Overs in Canada Osler, Hoskin & Harcourt llp An RTO may be structured on the Each form of transaction involves TSX-V as a QT or structured on the the entering into of an agreement TSX or the TSX-V as a traditional between Private Co. and Public Co. RTO. In the case of a QT, the TSX-V (at a minimum) which, depending listed entity is a CPC and has been on the structure of the transaction, listed for the sole purpose of complet- may be one of the following: a share ing its QT. Generally, both structures exchange, amalgamation, merger, result in the control being held by or other transaction structure. the former shareholders of Private In the case of a traditional RTO, Co. and require that, following the the transaction may include deal transaction, Public Co. meet the Tier protection measures for the benefit 1 or Tier 2 listing requirements of the of Private Co. including break fee TSX-V or the Exempt Issuer or Non- and non-solicit provisions and deal Exempt Issuer standards of the TSX. protection measures for the benefit The decision as to which exchange of Public Co. including shareholder to list on will be partially driven by lock-ups. In each case, the transaction the minimum listing requirements agreement sets out the key terms of of each exchange, which establish the RTO including timing, closing minimum net asset, working capital, conditions, covenants of the parties aggregate market value and float and representations and warranties. requirements which must be met. RTO’s are often completed by way of statutory arrangement or amal- gamation but can be completed in a number of ways including: RTO Structure General Characteristics Amalgamation • Amalgamation of Public Co. (or a subsidiary) and Private Co. 2 • Requires Public Co. shareholder meeting and 66 /3% approval Arrangement • Provides RTO structure flexibility • Requires court approval 2 • Requires Public Co. shareholder meeting and 66 /3% approval Share Exchange • Shareholder approval not required in certain instances including QTs • Each Private Co. shareholder must enter into transaction agreement or second step shareholder meeting would be required Change of • May require take-over bid or meeting circular Control Event Reverse Take-Overs in Canada 7 Osler, Hoskin & Harcourt llp General Steps to Completing an RTO (A) Choose a Structure (C) Private Placement Consider the shareholders, costs, Often a private placement of securities, timing and tax, corporate, securi- whether at Public Co. or at Private ties and other applicable laws Co., is conducted at the same time when determining structure. as the RTO to ensure that following the RTO, Public Co. is able to meet (B) Due Diligence the exchange listing requirements Both Public Co. and Private Co. and have sufficient working capital should conduct thorough due to conduct its business post-closing. diligence of the other early in the If so, the investment bank(s) involved transaction. Typically, Public Co. will in the private placement will also have minimal assets and liabilities conduct due diligence of both but it is important that Private Co. companies. Securities offered in satisfy itself that there are no hidden, connection with a private placement inherent liabilities in Public Co. may be subscription receipts (which automatically exchange into common shares of Public Co. upon completion of the RTO) or shares of Private Co. (which are exchanged for shares of Public Co. upon completion of the RTO). In the event that the private placement is of common equity of Public Co. (the closing of which may be conditional on the closing of the RTO transaction), a hold period (currently four months) would apply. 8 Reverse Take-Overs in Canada Osler, Hoskin & Harcourt llp (D) Preparing a Disclosure (E) Shareholder Meeting Document Typically both companies to the RTO Regardless of whether Public Co. is will be required to hold a shareholder listed on the TSX or TSX-V, Public meeting to approve the RTO. The Co. will be required to prepare a threshold of shareholder approval disclosure document containing required depends upon the structure prospectus-level full, true and plain of the transaction and could be: a disclosure concerning each of the simple majority; a special majority; companies to the proposed RTO, or a special majority together with a management, governance matters majority of the minority sharehold- and other topics.

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