Unlike street transactions, corporate deals are bounded by stringent compliance guidelines, mainly to protect the interest of the minority shareholders [ aunties and uncles]. However, as most clients are not familiar with them, my job was to hear, collect and get those KEY deal points clear in plain language and then help him structure the deal in an acceptable 'flow' by standards of corporate finance practice. And it goes something like that in this sample email correspondence:
Dear Mr X,
I assume I hear these. Please correct if wrong:-
1. Listco. buys ‘partial’ target assets from purchaser for $52 mil ( Note : you mentioned not more than 25% post dilution, transaction to be in fully cash since purchaser will buy 25% from Mr T )[ and I presume purchaser will ‘use’ proceeds from asset sale to finance shares purchase from Mr T.]
2. Mr T buys properties for $28mil from listco
3. Purchaser buys shares from Mr T for $40 mil.
4. The Purchaser of Mr T’s stake is the same party who owns target asset.
According to my understanding of above deal structure or methodology, you are suggesting to ‘lump’ them together as one single principal agreement. I, however, foresee major issues in compliance aspects.
These agreements cannot be ‘bundled’ as conditions precedent to Mr T’s and purchaser shares transaction because :
1. Mr T is only a shareholder of listco. [he is not on the board]
2. The purchase of target assets is at listco’s level, whilst shares transaction is private deal.
3. The shares transaction is ONLY between Mr Tand purchaser, and hence this is considered to be ‘special deal’ which offers to buy ONLY Mr T shares at $0.40. You are unlikely to pass the IDs and minorities if the listco is seen to enter agreement to buy target assets being a condition to Mr T’s shares transaction. You will also invite queries from authorities about this ‘arrangement’. You might even fall into a unique case under the code of Takeover whereby you are required to make General Offer for the rest although you are still below 30% threshold if the authority perceives this proposed binding agreement being condition to MR T’s shares sale as ‘preferential’ arrangement for special party.
4. You may seek for waiver of G.O [general offer] from SIC and shareholders, but your chance is slim because your intention is to keep the ultimate plan for future. The ultimate plan is important here because unless shareholders are convinced of the potential of the target assets game plan, they might grant a waiver, otherwise they might think it’s some private arrangement to benefit Mr T preferentially and hence why should they support the deal.
A more palatable way in the eyes of the shareholder would be:
1. the Listco signs the agreement independently and separately.
2. There is no stating in the SPA that the shares transaction is subject to the target assets
3. And the shares transaction is perceived as a subsequent decision by purchaser to buy Mr T’s stake, but not consequence to target assets
BIG question is
1. how will listco buy target assets without any form of guarantee for Mr T’s concern that he will be bailed out@ $0.40? And that is provided that he is agreeable to ‘cooperate’ with your condition of listco entering agreement to buy target assets.
My THOUGHTS:
The listco can only buy a very very very small stake as equities investment with purchase consideration of below $3 million with option to purchase in future.
This way,
1. you can remain below 25% post dilution.
2. This is to ‘inject’ the target assets into listco without even to hold EGM.
3. Mr T may be less concerned with the risks and outfront payment for target assets.
4. You will then progress with the ‘venture’ into target assets upon taking control of the board and
5. by then Mr T will be out of picture and your board can then inject gradually as you fine tune your game plan.
Flipside : You need a bridging loan to finance the shares transaction.
Pls seek third party opinion. Hope it helps. And BTW, pls stop saying I missed your points as we have never really had the chance to work officially on the whiteboard; and I propose we do that soonest in order that I can make a more holistic representation of your intent to the counterpart without any miscommunication/misrepresentation.
Rgds,
Cheng Kuan
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