Mod 5 - Other Topics Flashcards
Family law issues dealt with by CBV
1) Equalization payments - in dissolution of a marriage, calculated by determining the degree to which the net worth of each spouse grew during the marriage and the spouse whose net worth grew more must pay the other spouse one-half of the difference. CBV often used if business interests are being valued.
2) Child support payments - on dissolution of marriage, one spouse will be required to contribute to the costs of raising any child by paying child support payments. Payments are based on the payers earnings and the number of children. CBVs are involved in determining the earnings, called guideline income”, particularly for spouses that are entrepreneurs.
3) Spousal Support - Unlike child support, which is based on income, spousal support payments is to set at amount that would allow the receiving person to continue to live, for a period of time, in the manner in which he/she had become accustomed to until such time that she/she can generate sufficient income to do so on her/his own. Challenges arise in determine the amount of support, as it may be difficult for one party to support two households on one income, and the time period support payments must be made, which is based on how long it is expected for the person to be able tp provide for them self.
4) Measurement of income - CBVs will look to determine ones income. This is a look at True Earnings that normalizes tax planning strategies and irregular investment strategies (buying and holding artwork and claiming no income rather than investing in GIC and having cash flow).
What are the two special quantification areas?
1) Personal Injury / Wrongful Death - Treated like a Tort case (need to prove duty of care, reliance, damages, onus on plaintiff), CBVs are to determine the economic loss of future earnings. For cases of personal injury, this looks are the income losses of the individual, in cases of death, it looks at the economic losses of the dependants.
2) Wrongful Dismissal - If terminated without cause, employees are typically awarded Damages for a period of time it should take for them to find another job, called a Notice Period. Each province has a minimum notice period. CBVs look at the losses from wages, portion of bonuses that would have likely been earned, value of benefits packages available, lost pension benefits, and income tax considerations.
Benefits of Going Private
1) cost savings associated with reporting deadlines, dealing with analysts, etc.
2) potential for increased ownership by the management team, aligning their interests with those of the company.
3) Greater ability of management to more readily make key strategic decisions focusing on long term rather than short term.
4) Opportunity for public shareholders to receive Fair Value for their shares in a liquidity event, generally without transaction costs.
Characteristics of a typical company to Go Private
1) Market Cap of $100mm or less - with limited opportunities of growing the company and limited needs for growth capital.
2) P/E ratio is low (typically 6X or less) with a low daily trading volume.
3) Compliance and reporting requirements make up a significant percentage of operating costs
4) Liquidation or break-up value is greater than market cap
5) Company’s shares have no real value. For ex, they would not be used to make acquisitions if needed
6) Shareholder’s interest would be best serviced by privatization.
What is the process of Going Private
If a takeover bid for 100% of a company is able to secure 90% of the outstanding shares being bid on, the remaining 10% automatically sell (called a statutory squeeze-out).
If the acquirer falls short of acquiring 90%, they will still typically be majority shareholders and can trigger an Amalgamation Squeeze Out - which is amalgamating the company with another company in which they own 100% of the shares to dilute the remaining shareholders in the original company and allow them to get over the 90% threshold to trigger the Statutory Squeeze Out.
What is MI 61-101
Multilateral Instrument 61-101
MI 61-101 is intended to prevent persons with substantial information and other advantages from taking advantage of minority shareholders. This is accomplished by requiring disclosure, independent valuations, majority approvals in certain cases, and by encouraging the use of independent directors.
MI 61-101 is applied in cases of
1) Insider Bids - takeover bids by an insider of the issuer (director, officer, etc). As part of this process, a formal and independent valuation must be conducted and included in the take-over bid circular.
2) Issuer Bids - When an issuer offers to acquire its own securities. As part of this process, a formal and independent valuation must be conducted and included in the take-over bid circular.
3) Business Combinations - Amalgamations, arrangements, consolidations, and other transactions where an interest
of a shareholder may be terminated without consent, other than acquisitions, are business combinations. Independent valuations are required if Business Combinations if there is a squeeze out by a related party of in the case of a connected transaction (which are transactions having one party in common and that are negotiated or completed at approximately the same time or are condition on the completion of each other).
4) Related Party Transactions - transactions between an issuer and persons related to it. Independent valuation.
what is a Fairness Opinion and what should it include under CICBV Standard 510
Fairness opinions are generally statements by an independent financial advisor that a proposed transaction is fair, from a financial point of view, to the security holders (or to a special group of security holders) of a company.
Should include:
- to whom the fairness opinion is being provided
- description of the proposed transaction and the consideration being offered to the security holders
- purpose of the fairness opinion
- description of past, present, or anticipated relationship between reviewer and parties of interest to the fairness opinions.
- effective date of fairness opinion
- statement of independence
- description of factors taken into consideration for the reader to understand rationale behind opinion
- statement that issuers compensation is not contingent on action
- statement that fairness opinion has been prepared in conformity with the Praice Standards of CICBV
- Description of the scope of review conducted
- statement of key assumptions made
discussion of factors considered important in the analysis
What things are considered when determining a range of fairness in a fairness opinion?
fairness is a subjective evaluation, to a certain extent, as the following points illustrate:
• Deals are negotiated based upon relative strengths and desires of the negotiators.
• There may be a range of outcomes at which a deal can be “fair”, that is, some deals are “more fair” than others.
• Fairness is normally judged from the viewpoint of one side only in a deal (i.e., the other side has to concern itself with fairness from its viewpoint).
• Because an actual transaction is occurring, any relevant synergies should be considered when appropriate.
• Some deals are very fair, while some deals are not fair and others are “close calls”. The valuator may be called upon to make significant judgments for deals and to inform the board of directors of the relatively weak terms of a deal that may be approved.
• A fairness opinion is no guarantee for a board of directors or a company’s security holders that the proposed deal is the best possible deal.
what questions/process should a CBV use in a fairness opinion
- Was the transaction shopped? If not, what procedures were followed to help “cure” the lack of shopping? If so, who did the shopping and how? What documentation was provided? Was the same information given to all parties?
- Who initiated the transaction? Who performed the pricing analysis? Was a financial advisor retained? Was legal counsel involved? Who negotiated the transaction?
- Were all major terms, including financial and non-financial issues, agreed to at the time the price was settled?
- What is the value of the deal?
- Are there termination fees, lock-up options or crown jewel options in the deal? If so, was legal counsel involved or consulted prior to finalization?
- Was the board of directors fully apprised of the process while it was underway?
- Are there non-competition agreements or employment contracts with key owners that could be interpreted as shifting value away from the remaining shareholders?
- If management is perceived as having a potential lack of objectivity, was a special committee of the board of directors established to handle negotiations? If not, was legal counsel and/or a financial advisor involved in the negotiations and did they report back to the board?
Earn-out Strucutres
- The entire price can be dependent on the future production or use of the assets.
- The price may be a fixed amount plus a portion based on production or use.
- The price may be for a fixed amount plus an amount based on production or use if a set limit is exceeded.
- The price may be based on production or use but has a minimum amount that must be paid.
Types of ESOPs
- Leveraged — in a leveraged ESOP, money is borrowed to acquire employer securities. The loan is guaranteed by the sponsoring employer, which contributes annually to the ESOP in amounts required to amortize the loan.
- Non-leveraged ESOP — does not use debt to purchase employer securities. It acquires employer securities through tax deductible stock contributions or tax deductible cash contributions that are used to purchase employer securities.
