In good times and bad, whether the economy and markets are up or down, there appears to be no shortage of companies calling for a public timeout. The infamous “strategic review” can be called because the business is running out of money, key shareholders or activists are putting pressure on management or an outright sale is planned. Sometimes they even end well, although TD Securities last year noted that as a result of 26 strategic reviews launched and completed by energy companies over a four-year span, 10 firms were sold, seven either sold assets or raised capital to continue operations, and the other nine led for bankruptcy, receivership or creditor protection.
Northland Power Inc. (TSX:NPI), SunOpta Inc. (TSX:SOY) and Ivanhoe Mines Ltd. (TSX:IVN) recently embarked on strategic reviews and hired outside financial advisers, albeit for different reasons. Northland said it wants to “review options available for the next phase of the company’s growth”; SunOpta has brought in outside financial and legal help after its largest shareholder called on the company to sell itself, and Ivanhoe wants to evaluate “unsolicited interest” in the company and its projects. None will comment until they’re done. But this spate of reviews at major public companies puts a spotlight on the process. Simply put, what does (or should) happen in the time between the announcement of a strategic review and its ultimate conclusion? While lots of meetings are a given, what aspects of the process should boards and management be most concerned with?
Consider the under-pressure scenario. This is one that Dominion Diamond Corp. (TSX:DDC) director Daniel Jarvis lived just over a year ago. With the diamond miner’s stock at low ebb, its attractive assets and a cash-rich balance sheet attracted an unsolicited purchase offer. With the company’s chairman gravely ill, Jarvis acted as lead director, heading up the review for the board and working closely with Dominion Diamond’s chief executive.
“When it became most active, we were setting up weekly calls with the board, and I would to the CEO once or twice during the week in preparation for that call,” says Jarvis. “So it was quite an intensive process at its peak.”
As events played out, Dominion Diamond also managed to attract a second bidder for the company. Ultimately, however, the board was unhappy with both offers, rejected them, and decided instead to focus on expanding its Ekati mine in Northwest Territories.
Heading up the review, Jarvis said a key advantage was the company operated a small board, which meant there was no special committee making decisions that would later require widespread endorsement. In meetings with both financial adviser Rothschild & Co. and legal adviser Stikeman Elliott, he “was very careful to steer the process. I wanted the involvement of the full board to the degree that we were going to give any direction.”
Jarvis, who retired from the company’s board earlier this year, says that a key role that legal counsel played for directors at the start of the process was to explain how the strategic review could play out and “what we should do and what we should not do in terms of our obligations as directors.”
All of that is a familiar scenario to Robert Yalden, co-chair of mergers and acquisitions with Osler, Hoskin & Harcourt LLP in Montreal. His firm is often called in as outside legal adviser by a company before a review, but when a chair or CEO thinks their company may be under outside scrutiny, in order to brief directors on protocol to prevent slips that later could be subject to litigation. “They want their board members to be sensitized to what they could go through potentially and so they ask external counsel to come in and do a kind of board preparedness session with board members to explain to them how things could unfold if someone were to approach them.” He also advises directors to refer any contact with shareholders, activists or other parties to the chair, ensuring they “don’t inadvertently go on the record with comments that may come back to haunt the board.”
During the actual strategic review, outside counsel can play a key role in creating minutes of any meetings of the board or a special committee “because those minutes become evidence in any litigation.” Beyond that, legal counsel is typically involved in ensuring that any arrangements with the board are “properly constructed,” Yalden adds. “Financial advisers at times look for the flexibility to act on different aspects and sides of a deal, and it is very important that counsel be there to advise a board that they don’t get into an awkward situation where an adviser is seeking the ability to play different sides.” Legal counsel’s role could include negotiating non-disclosure agreements, managing the process of due diligence, negotiating deal sheets and working on purchase or sale draft agreements.
Boards working through a strategic review may appoint a special committee or have a few directors and executives functioning as key contacts, but one point person typically works best, says Rick Vernon, managing director and head of investment banking with PI Financial in Toronto. “If you are dealing with two or three board members and they all have agendas, whether they are hidden or not, then you sometimes get pulled in different directions because you are hearing different types of feedback.” As for dealing with legal counsel, “we usually are given the authority, if we have questions, to go directly to the legal counsel.”
While reviews can involve intricate, formal processes and procedures headed up by the board, they can also be largely management-run affairs, as was the case when real estate giant RioCan REIT decided to explore the acquisition of U.S. shopping centre properties in the wake of the financial crisis. With U.S. values plummeting and the U.S. and Canadian currencies near par, it was “a historic opportunity staring us in the face,” says Edward Sonshine, RioCan’s CEO.
After a six-month, management-led review, RioCan secured board approval for an expansion into the U.S., eventually assembling a $1.2-billion portfolio, which the company recently sold for a hefty profit. “We did a lot of homework but we also had to do a lot of legal structuring,” he explains. “It is not like dealing in Canada. You actually have to set up all different companies and you want to make sure it is tax efficient.”
Sonshine also ensured that his board was onside with the U.S. expansion idea even prior to presenting a formal plan. “I have been around long enough as a CEO, before I want to do anything major—what is the phrase?—I socialize it. I make sure long before there is anything on anybody’s desk, like a board package, that I have talked to every single member of the board.”
Photography: Mike Hutchings/Reuters