The largest real estate deal to close last year morphed from a testy unsolicited take-over by KingSett Capital to a complicated and unexpected M&A sharing circle with H&R REIT and a host of others
EDITOR'S NOTE: Lexpert has covered this transaction before in our Top Ten Deals of 2013 in January 2014. For this issue we invited the lawyers to reflect on the lessons learned, and give us a “behind the scenes” look at the strategic considerations they and their clients needed to make throughout the deal.
Commercial real estate sizzled in Canada in 2012. And Real Estate Investment Trusts (REITs) were the frying pan heating up the market. The public – craving reliable yields – invested more heavily than ever in the favourably taxed, dividend-paying units from a wellspring of REITs that had popped up since their 1993 creation. With the hundreds of millions of dollars REITs raised on the TSX, they went on a tear buying up residential developments, office towers, nursing homes, industrial space and shopping malls around the country.
Then, as Christmas 2012 approached and rain slicked Toronto's Bay Street, veteran real estate executive and investor Jon Love scrambled things up in the Canadian REIT world. On December 4, the wily managing partner of KingSett Capital, the leading Canadian private-equity firm specializing in commercial real estate, called on an old acquaintance, John Morrison, the CEO of Primaris Retail REIT.
Two of the more powerful people in Canadian real estate met at a Tim Hortons. Morrison's antennae were up, according to Graham Gow, a partner in McCarthy Tétrault LLP's Business Law Group in Toronto. Gow had represented Primaris since its 2003 inception. “I don't think John finished his coffee,” says Gow, who got a call from Morrison soon after.
Love had jolted Morrison, declaring that KingSett coveted Primaris's portfolio of 33 shopping malls. “All heck broke loose” at Primaris, says Gow. Primaris, which was also represented in this deal by Cassels Brock & Blackwell LLP with a team led by Frank DeLuca, was a thriving operation: It had given unitholders a 275 per cent return on their investment over its nine years. Love told Morrison that KingSett had put together a consortium that included the Ontario Pension Board (OPB) and RioCan Real Estate Investment Trust and it was going to announce – the very next day – a $4.4-billion unsolicited bid to buy Primaris. The bid amounted to $26 per unit, just under a 13 per cent premium (considered slim by many analysts) to the trading price the day Love and Morrison were eyeballing each other over that coffee.
Canadian M&A practitioners tend to favour the velveteen phrase “unsolicited bid” when a bidder bypasses a target company's board and makes an offer directly to shareholders. But let's not maple-sugar coat things here and call this what it was; what Morrison saw it as that day. A hostile takeover attempt.
Hostiles are relatively rare in Canada compared to the US. To this point, in the nearly two decades they'd been around, no one had ever gone the hostile route in the REIT sector.
“This was not a meeting to say, ‘can we talk?' Or I have been admiring Primaris for a while, could I [meaning Love] do some due diligence to see if anything might be possible?” recounts Gow, who would lead Primaris's legal defence against KingSett and its cohorts in the coming months. Gow estimates 95 per cent of Canadian M&As are friendly.
Yet Gow wasn't entirely shocked at KingSett's move. “I wouldn't underestimate Jon Love for one nanosecond. He's a smart guy. He's well known in real estate circles. He's done a lot of deals and he's been very successful. But that he chose not to try [a friendly acquisition] had implications for what came next.”
PREPARING FOR BATTLE
One implication actually happened months before at the Toronto home of Emmanuel Pressman, Chair of the Mergers & Acquisitions Specialty Group at Osler, Hoskin & Harcourt LLP in Toronto. Osler has long been KingSett's legal firm and Pressman has handled many of its transactions. In the summer of 2012, Love prepared for battle, searching, Game of Thrones-style, for the clans that would help finance his seizure of Primaris. By that September, now knowing he would have a leading legal role in KingSett's plans, Pressman sat down with his wife and two young children. “I warned my family not to make any Christmas vacation plans. I would have to make it up to them in the springtime.”
Love had wrangled the OPB, with $19 billion in assets, which like many pension funds found REITs attractive investment vehicles, into the consortium. RioCan, Canada's largest REIT focused solely on retail real estate, also joined forces. “I knew going into this in October my Christmas vacation would be this take-over bid,” says Pressman, who would lead Osler's legal squadron. “The good news in this regard was I had a lot of warning.”
Others weren't so lucky. Love's intention to gulp down Primaris would, pretty much, fray holiday season plans for 84 lawyers at nine major Canadian law firms as they plunged into what the Globe and Mail dubbed “The Mall Brawl.” That was an apt title in the beginning. But in a curiously Canadian way, by the time it was all over on April 4, 2013, what started as a hostile bid had by then included a rescue effort by a white knight – H&R REIT – and then morphed into a friendly five-way deal few imagined could happen.
It was a highly complex, at times tense, affair that would, among other things, feature a controversial break fee. That fee, in all likelihood, fomented a horse-trading huddle between KingSett, H&R, OPB, RioCan and Primaris that dramatically changed the final shape of the deal. In the end, the $5-billion deal ranked as Canada's fifth-biggest transaction in 2013.
Osler, also representing the OPB, would pitch in 17 lawyers and articling students, with specialists in corporate securities, pensions, banking and finance, tax and competition. Pressman's partner Doug Bryce would lead the team handling RioCan's interests. Meanwhile, Bennett Jones LLP was also working for KingSett, focusing on the related real estate and banking matters. Paul Mantini and Simon Crawford, both in Toronto, would lead a team of 11 Bennett Jones lawyers.
BULLET-PROOFING
“A hostile take-over requires that you have to have a bullet-proof financing package,” says Crawford. He's acted on some of Canada's largest commercial real estate transactions, including the 78-storey Aura condominium project in Toronto, Canada's tallest residential development.
Pressman of Osler and Crawford of Bennett Jones have known each other for years. And they got to know each other even better. “There are times when two firms, especially when you are representing the same community of clients, have to effectively work as one,” says Crawford. “There can be no secrets, no gamesmanship, no one-upmanship …”
Although they didn't share office space, Crawford and Pressman had so many nearly daily conference calls with each other, “it felt like it at times,” laughs Crawford. “I know Manny from this transaction better than I know some of my own partners.”
Bullet-proofing KingSett's hostile bid before it launched would require some educated crystal-ball gazing on Osler's part. What would Primaris and its formidable lead lawyer Gow – with 18 McCarthys lawyers to help him – do to fend off the KingSett consortium? No doubt, all he could.
Primaris promptly rejected KingSett's bid as too low, saying their unitholders deserved more than $26 a unit. At this point it was up to McCarthys to buy Primaris time so it could figure out how to get them more. A take-over bidder has 35 calendar days from the time it issues its bid circular to make a deal happen. But there are ways to stretch that.
KingSett's investment bankers, says Pressman, “were very concerned about the defensive tactics that might significantly complicate the transaction for us or potentially bust up the deal.” Could Primaris issue a large amount of its stock to a so-called “white squire,” putting that stock – in a highly dilutive move – into the friendly hands of a strategic investor? That would make a subsequent bid by KingSett much more expensive. Might it – though it seemed unlikely at the time – even find a white knight, another company that would top KingSett's bid for Primaris?
Take-over bid rules have been designed by securities commissions to protect the interests of shareholders. They require careful navigation before a bidder makes its move, because, notes Pressman, “any failure to comply with the rules strictly is the easiest way your bid can be attacked by the target.”
Though Pressman insists it was not intentional, the timing of KingSett's bid announcement a few weeks before Christmas gave it an advantage over Primaris's counsel. It's a common take-over tactic; the timing eats up more of those 35 days with holiday time. Finding a white knight is that much harder. And with KingSett having cleverly tied up several of the most likely competitors for its own bid by engaging them as co-bidders, few thought Primaris could come up with a white knight.
BACK-END FINANCING
What made this bid dicier than most for the firms representing the KingSett consortium was the unusual, complicated, multi-party back-end financing it had cobbled together with OPB and RioCan. That was where Osler figured Gow would likely probe for a weak link. “There was nothing boilerplate in this one,” says Pressman.
It went like this: Prior to launch, KingSett entered into conditional asset sale agreements withOPB and RioCan to secure their financial support. As soon as KingSett could convince Primaris unitholders to accept an offer, that would immediately trigger the sale of some Primaris properties to OPB and RioCan, while KingSett kept others for itself. It would be the proceeds of those sales to OPB and RioCan that would actually fund much of the $4.4 billion that comprised KingSett's initial bid. But one depended on the other and vice versa. Primaris, it should be noted, knew nothing of the intricacies of these arrangements.
IT'S LETTER TIME
The day after Love sprang his news on Morrison, Gow was in the Primaris boardroom addressing the company's directors. He often attended Primaris board meetings, but never one like this. “There is some anxiety at Primaris. Lots of uncertainty,” he says. “Suddenly people who thought they had a career at Primaris for the next 20 years are worried that things are going to change.”
Gow took the trustees through the mechanics and basic rules of an unsolicited take-over. But first, he told them, “Just relax. Don't do anything urgent.”
The next step, taken the following 24 hours, was to find financial advisors to get a precise handle on what Primaris was worth, and then send them on a global mission to find a white knight. They interviewed six firms and hired two: Canaccord Genuity and Evercore Partners. “They immediately had a hard look at Primaris and came back, saying, ‘you know what, we think Primaris is worth more than $26,'” says Gow. Primaris put out a press release urging unit-holders to reject KingSett's offer.
Then the tough question. “Graham, what else can we do?”
Graham Gow replays the moment: “I shrivelled in my chair and said I wish we were sitting in the United States of America. There are not a lot of tools in Canada to hold off a take-over bid.” In both Canada and the US shareholder rights plans exist as a possible defence against a hostile bid. Typically they give existing shareholders of a target (but not the bidder, even if it has shares) the right to buy more shares in that company at a discount. That dilution raises the cost of a bid. Once a rights plan is approved by shareholders and then invoked, it forces a hostile bidder, instead of going directly to shareholders, to deal instead with the target board.
In the US, as Gow explains, a 2011 ruling in a Delaware court case reaffirmedaboard's power to invoke its shareholder rights plans almost indefinitely to prevent an unwanted take-over. Air Products and Chemicals, Inc. had accused the board of Airgas Inc. of improperly and repeatedly invoking its rights plan for nearly a year to prevent its shareholders from tendering their shares to Air Products in a $5.9-billion bid. In bidder-friendly Canada, though, regulators– in this case it would be the Ontario Securities Commission – only permit boards to use a shareholder rights plan for between 45 and 70 days after the start of a hostile bid, believing in the end it's up to shareholders to decide whether to sell or not.
Gow told Primaris's board: “I am pretty darn sure I can use that rights plan to extend 35 days to a somewhat longer period.
“They say to me, ‘Stop with the gobbledegook. How much longer?' And the answer is I don't know exactly. Probably at least 45 days. Probably I can get you 65 days from the time they actually start the take-over bid. But it's going to depend on the circumstance.”
A CHRISTMAS EVE GRENADE
When Primaris put out its directors' circular recommending rejection of KingSett's bid, Osler got a look at it four days before Christmas. Pressman and his team sighed with relief. “It wasn't a heavy-hitting, assaulting directors' circular. It was critical of the bid, but it wasn't a nasty, offensive rejection document.” Seemed it wouldn't terribly complicate KingSett's strategy.
Then, on Christmas Eve, Gow lobbed what Pressman describes as a “grenade.” It was a complaint letter to the OSC. That part was expected: the job for McCarthys was to convince the OSC with that letter there were serious problems with KingSett's bid that it should investigate. That would buy Primaris more time.
For lawyers, the complaint letter needs to be a carefully tuned document. Commissions are on alert for management and directors at target companies who might inappropriately thwart a hostile bid to protect their careers and board seats. “It's M&A Law 101 that you do look at the other guy's documentation and if anything looks even close to being questionable under the [takeover] statutes, you would consider whether to challenge it or not,” says Gow. But “if it's a harmless misstep, then you might say to yourself, ‘I'm going to look silly by raising this. Yes I have a technical point, but nothing turns on it. I'm going to look like I'm making trouble for the sake of making trouble.” It's a judgment call, he says, and you can lose credibility if you go overboard. “My own style is not to do that stuff.”
Gow tackled several things in his letter. First, KingSett's timing. The bid's December launch inhibited Primaris's ability to canvass alternatives. Primaris deserved more time. Gow also complained certain prescribed form requirements weren't complied with. But what got OSC's attention was Gow's suggestion there were problems with what are known as collateral benefit issues in the KingSett consortium's bid.
Though he saw McCarthys' arguments as “a stretch,” that topic, concedes Pressman, “is a very hot-button issue for the OSC.” To make everything fair for shareholders in the middle of a bidding war, the Ontario Securities Commission, like all provincial securities commissions, has a prohibition against any bidder conferring special benefits on some shareholders, but not others. Everyone must get identical consideration.
It was up to Pressman and his Osler partner Doug Bryce to answer the OSC complaint. Primaris alleged that certain funds within the KingSett family of funds that were pre-existing unitholders (of Primaris) would, improperly, receive collateral benefits in connection with the KingSett bid. Having already conceded that those funds were “joint actors” in KingSett's bid, Osler successfully argued those particular actors should be better understood as buyers, not sellers (even if they did own Primaris shares). Therefore, Osler successfully argued, those joint actors could not be in a position to confer any collateral benefits on themselves in a potential KingSett deal. “We spent a lot of time whacking that mole,” says Pressman. “Ultimately we whacked it. But it took a lot of time. It was a distraction from our bid.”
Just what Gow wanted. Time. And time would change everything. As Osler dealt with the OSC complaint, Primaris found its white knight. On January 16, 2013, it announced that H&R REIT had entered into an agreement with it. H&R would acquire 100 per cent of the issued and outstanding Primaris units for $28 per unit or an equivalent 1.13 stapled H&R units. That equated to about a $4.6-billion bid; a 21 per cent premium over Primaris's unit price the day before KingSett made its bid.
DON'T GO BREAK FEEING MY HEART
What's more, Primaris and H&R had come up with a controversial $106-million break fee that was a rare mix of cash and assets. If Primaris for some reason accepted a bid from someone other than H&R, it would pay H&R $70 million in cash. It would also fork over several properties – including the Dufferin Mall and some downtown Toronto properties on Yonge Street – at a discount to pegged value. Dubbed “The Crown Jewel Defence” by the press because of those assets, it was an unusual, though not unprecedented, break fee that would ultimately rip some tears in KingSett's sails.
Enter Michael Gans, a Toronto M&A lawyer and partner at Blake, Cassels & Graydon LLP. Gans and co-lead Will Fung, who had long been Blakes' relationship lawyer with Canada's biggest REIT, would – along with 16 other Blakes lawyers – represent H&R. On some US issues H&R also got help from Davies Ward Phillips & Vineberg LLP.
Gans says Blakes, on behalf of H&R, proposed the asset lock-up break fee to Primaris. “When we were brought into the transaction we knew we were behind the eight ball. We knew we were up against very deep pockets; what we perceived was almost unlimited access to cash resources versus our own constrained access to cash.”
H&R CEO Tom Hofstedter and CFO Larry Froom worried they might still get shoved aside by a higher KingSett offer. “We felt there was a very real possibility we wouldn't be successful, that we might just get the break fee,” says Gans. “And that caused us to focus on ensuring that the break fee would very appropriately compensate us for transaction risk and management time.”
Asset lock-ups are rarely used in Canada but precedent has established them as legitimate defence in a take-over war. As it happened, McCarthys' Gow understood the law here better than most. Good news for Primaris. He had been involved in a 1998 Ontario Superior Court case – CW Shareholdings Inc. v. WIC Western International Communications Ltd. – that upheld the use of asset-lockup break fees to ward off hostile bidders. In that case, the directors of WIC, a broadcasting company, promised a break fee to Shaw Communications Inc. that included $30-million cash and the option to purchase some valuable radio assets – all to ward off a hostile take-over by CanWest Global Communications.
With his experience from that case, but the pressure on, Gow was able to help the Primaris board quickly wrap its mind around the implications of H&R's proposed break fee when they asked if it was defensible in court.
Good question. A break fee is a balancing act. It's okay if it gives a big thank-you hug to your white knight and at the same time sends a baton to the knees of a hostile bidder. But it can't knock him out. In other words, you can't make a break fee so punishing it would have an unfair auction-inhibiting effect for KingSett or anyone else still interested in Primaris. The combined value of this break fee represented about 3.5 per cent of the undiluted equity value of Primaris, says Gans, “a quantum we felt was consistent with market norms.” Except the market didn't see it that way. To Gans's surprise, the break fee was criticized by some commentators in the press as excessive.
Meanwhile, Gow told the Primaris board he couldn't say for sure whether KingSett might attack the break fee in court or not. “But my judgment is that if it is attacked, it will prevail.”
A TWIST IN THE JEWELS
Primaris, unlike outside observers, never thought of the Dufferin Mall and those Yonge Street properties as crown jewels. “Nobody ever would have said Dufferin was the best shopping mall in our portfolio,” says Gow. “We had lots of others we liked just as much if not better.” The other properties, partly vacant, were in an “unfashionable” part of Toronto and generating little revenue.
But what Gow and Primaris didn't know then was that Jon Love was particularly interested in those Yonge Street properties. KingSett owned land and buildings around them. Together with those Primaris properties, KingSett could complete a significant redevelopment of that area. “But Jon Love didn't tell us that when he made his hostile take-over bid,” says Gow. “So then we put out a press release and KingSett then said, ‘Holy mackerel, we wanted those properties! Those are particularly attractive for us.'”
KingSett's interest in the properties tied up by the lockup was a stroke of luck and a game changer. It posed a delicate problem for Osler. Its client, Love, now wanted to see if he could broker a new deal between his consortium and H&R to harmoniously carve Primaris up amongst them.
At Osler, Pressman assumed, correctly, there was a confidentiality and standstill agreement between Primaris and H&R. That didn't exactly mean that KingSett couldn't confab with H&R CEO Hofstedter; after all, KingSett wasn't a party to that agreement. But if Love was seen to induce H&R to break its contract with Primaris, he could find himself in trouble with the OSC.
In the end, on January 25, 2013, according to an H&R circular, Love telephoned Hofstedter and essentially said, as Gans recounts it, “enough with the mudslinging. Let's see if we can find a compromise that will be beneficial to all three parties.” Primaris, if reluctantly, gave Hofstedter permission to chat with Love, notwithstanding the standstill agreement.
For Primaris's lead and loyal counsel, Gow, this was all a dramatic turnabout. “It was his job to keep the auction alive and he wouldn't want anything to happen to that that could chill the bidding,” says Pressman.
On the following Sunday, Hofstedter reported to Primaris CEO Morrison that the meeting with Love had been productive. But Primaris didn't like KingSett's first plan and price for carving up its portfolio. Morrison told H&R if it wanted to be released from the standstill, they needed to convince bidders to put more money on the table. And so they did.
FIVE WAYS TO SETTLEMENT
On February 5, Primaris, H&R and the KingSett crowd announced they had entered into an amended arrangement agreement. Under it, KingSett would eventually get 17 Primaris properties, enough to satisfy its hunger. Primaris unitholders could elect to receive $28 per unit or 1.66 H&R units for every one of their units they tendered. H&R would get 27 Primaris properties, making it the largest REIT in the country.
Enter Ray Gelgoot, a partner in Fogler, Rubinoff LLP's Commercial Real Estate Group who has since retired. Along with a team from Stikeman Elliott LLP, led by Joel Binder in Toronto, Fogler, Rubinoff represented RioCan. Gelgoot was used to negotiating conditional real estate sale in his career, but never before one dependent on the hostile take-over of a major property owner. “It was different because you didn't have a deal until there was peace made.”
And it was different because RioCan couldn't do the usual due diligence on the properties it wanted without tipping offPrimaris that a take-over was afoot. “You are buying the properties as is,” says Gelgoot. He wasn't entirely uncomfortable with that prospect. “You have to understand that you are dealing with Primaris REIT, who bought properties with very qualified lawyers over the years. It's not likely that there will be anything majorly wrong from a legal side of things. Very unlikely. So you take your risk. The end game, the big picture, is more important than if you find a $20,000 item that has to be fixed.”
By April 6, all the cash had traded hands, the monopoly pieces were shuffled.
There's a lesson here for those going into corporate law, suggests Paul Mantini, who co-led Bennett Jones's efforts on real estate and banking for KingSett. “The important ‘take-away' from my perspective for this transaction was that all of the lawyers and clients involved found a middle ground to cooperate and restructure the deal so that everyone came away reasonably satisfied rather than following the usual competitive approach on ‘takeovers,' which results in only one winner.” Often, he says, that approach comes at “great cost to the deal, the winner and the other bidders.” Not this time.
DEAL TIME LINE
They went from foes to friends. Or, at least, from a hostile take-over to a friendly deal. A consortium led by king sett capital tried to nab Primaris REIT. But in the end, Primaris found a white knight in H&R REIT and Kingsett decided some horse-trading was in order
Below is the chronology on how the deal evolved:
December 4, 2012: At a Tim Hortons in Toronto, KingSett founder and CEO Jon Love meets with Primaris CEO John Morrison and drops a bomb; KingSett will announce the next day its intention to make a hostile $4.4-billion bid for the REIT's shopping malls and other property holdings.
December 10, 2012: KingSett, via KS Acquisition II LP, formally offer to all issued and outstanding trust units of Primaris for $26 cash per unit, about a 13 per cent premium over the unit price on Dec. 4.
December 19, 2012: In a directors' circular, Primaris recommends to its unitholders they reject the offer from KingSett and its co-bidders, the Ontario Pension Board and RioCan REIT.
December 24, 2012: Primaris's legal counsel at McCarthy Tétrault files a complaint letter with the Ontario Securities Commission outlining what it sees as regulatory problems in KingSett's bid. That buys Primaris time to continue looking for a white knight as the OSC examines the issues it raised.
January 16, 2013: Primaris finds its white knight, announcing that, subject to unitholder approvals, H&R REIT will acquire 100 per cent of Primaris. Primaris unitholders can either get 1.13 stapled units of H&R or $28 cash per unit, subject to a maximum cash amount of $700 million.
January 25, 2013: KingSett's Jon Love telephones H&R CEO Tom Hofstedter. Carefully wording his request so as not to impede any standstill agreement between Primaris and H&R, he asks Hofstedter if they can meet to discuss a possible tag-team deal.
January 27, 2013: Hofstedter reports to Primaris CEO John Morrison that his meeting with Love has been productive. While Primaris doesn't like the first rearrangement of its standing deal with H&R, the ball has been set in motion for a five-way “friendly” deal.
February 5, 2013: Primaris, H&R and KingSett's consortium enter into an amended arrangement agreement under which Primaris unitholders will get $28 per unit or 1.66 H&R units for each of theirs.
April 4, 2013: The five-way deal is completed as H&R completes its acquisition of 27 Primaris properties. KingSett's consortium divvies up the remaining 17 Primaris portfolio properties.
EDITOR'S NOTE: Lexpert has covered this transaction before in our Top Ten Deals of 2013 in January 2014. For this issue we invited the lawyers to reflect on the lessons learned, and give us a “behind the scenes” look at the strategic considerations they and their clients needed to make throughout the deal.
Commercial real estate sizzled in Canada in 2012. And Real Estate Investment Trusts (REITs) were the frying pan heating up the market. The public – craving reliable yields – invested more heavily than ever in the favourably taxed, dividend-paying units from a wellspring of REITs that had popped up since their 1993 creation. With the hundreds of millions of dollars REITs raised on the TSX, they went on a tear buying up residential developments, office towers, nursing homes, industrial space and shopping malls around the country.
Then, as Christmas 2012 approached and rain slicked Toronto's Bay Street, veteran real estate executive and investor Jon Love scrambled things up in the Canadian REIT world. On December 4, the wily managing partner of KingSett Capital, the leading Canadian private-equity firm specializing in commercial real estate, called on an old acquaintance, John Morrison, the CEO of Primaris Retail REIT.
Two of the more powerful people in Canadian real estate met at a Tim Hortons. Morrison's antennae were up, according to Graham Gow, a partner in McCarthy Tétrault LLP's Business Law Group in Toronto. Gow had represented Primaris since its 2003 inception. “I don't think John finished his coffee,” says Gow, who got a call from Morrison soon after.
Love had jolted Morrison, declaring that KingSett coveted Primaris's portfolio of 33 shopping malls. “All heck broke loose” at Primaris, says Gow. Primaris, which was also represented in this deal by Cassels Brock & Blackwell LLP with a team led by Frank DeLuca, was a thriving operation: It had given unitholders a 275 per cent return on their investment over its nine years. Love told Morrison that KingSett had put together a consortium that included the Ontario Pension Board (OPB) and RioCan Real Estate Investment Trust and it was going to announce – the very next day – a $4.4-billion unsolicited bid to buy Primaris. The bid amounted to $26 per unit, just under a 13 per cent premium (considered slim by many analysts) to the trading price the day Love and Morrison were eyeballing each other over that coffee.
Canadian M&A practitioners tend to favour the velveteen phrase “unsolicited bid” when a bidder bypasses a target company's board and makes an offer directly to shareholders. But let's not maple-sugar coat things here and call this what it was; what Morrison saw it as that day. A hostile takeover attempt.
Hostiles are relatively rare in Canada compared to the US. To this point, in the nearly two decades they'd been around, no one had ever gone the hostile route in the REIT sector.
“This was not a meeting to say, ‘can we talk?' Or I have been admiring Primaris for a while, could I [meaning Love] do some due diligence to see if anything might be possible?” recounts Gow, who would lead Primaris's legal defence against KingSett and its cohorts in the coming months. Gow estimates 95 per cent of Canadian M&As are friendly.
Yet Gow wasn't entirely shocked at KingSett's move. “I wouldn't underestimate Jon Love for one nanosecond. He's a smart guy. He's well known in real estate circles. He's done a lot of deals and he's been very successful. But that he chose not to try [a friendly acquisition] had implications for what came next.”
PREPARING FOR BATTLE
One implication actually happened months before at the Toronto home of Emmanuel Pressman, Chair of the Mergers & Acquisitions Specialty Group at Osler, Hoskin & Harcourt LLP in Toronto. Osler has long been KingSett's legal firm and Pressman has handled many of its transactions. In the summer of 2012, Love prepared for battle, searching, Game of Thrones-style, for the clans that would help finance his seizure of Primaris. By that September, now knowing he would have a leading legal role in KingSett's plans, Pressman sat down with his wife and two young children. “I warned my family not to make any Christmas vacation plans. I would have to make it up to them in the springtime.”
Love had wrangled the OPB, with $19 billion in assets, which like many pension funds found REITs attractive investment vehicles, into the consortium. RioCan, Canada's largest REIT focused solely on retail real estate, also joined forces. “I knew going into this in October my Christmas vacation would be this take-over bid,” says Pressman, who would lead Osler's legal squadron. “The good news in this regard was I had a lot of warning.”
Others weren't so lucky. Love's intention to gulp down Primaris would, pretty much, fray holiday season plans for 84 lawyers at nine major Canadian law firms as they plunged into what the Globe and Mail dubbed “The Mall Brawl.” That was an apt title in the beginning. But in a curiously Canadian way, by the time it was all over on April 4, 2013, what started as a hostile bid had by then included a rescue effort by a white knight – H&R REIT – and then morphed into a friendly five-way deal few imagined could happen.
It was a highly complex, at times tense, affair that would, among other things, feature a controversial break fee. That fee, in all likelihood, fomented a horse-trading huddle between KingSett, H&R, OPB, RioCan and Primaris that dramatically changed the final shape of the deal. In the end, the $5-billion deal ranked as Canada's fifth-biggest transaction in 2013.
Osler, also representing the OPB, would pitch in 17 lawyers and articling students, with specialists in corporate securities, pensions, banking and finance, tax and competition. Pressman's partner Doug Bryce would lead the team handling RioCan's interests. Meanwhile, Bennett Jones LLP was also working for KingSett, focusing on the related real estate and banking matters. Paul Mantini and Simon Crawford, both in Toronto, would lead a team of 11 Bennett Jones lawyers.
BULLET-PROOFING
“A hostile take-over requires that you have to have a bullet-proof financing package,” says Crawford. He's acted on some of Canada's largest commercial real estate transactions, including the 78-storey Aura condominium project in Toronto, Canada's tallest residential development.
Pressman of Osler and Crawford of Bennett Jones have known each other for years. And they got to know each other even better. “There are times when two firms, especially when you are representing the same community of clients, have to effectively work as one,” says Crawford. “There can be no secrets, no gamesmanship, no one-upmanship …”
Although they didn't share office space, Crawford and Pressman had so many nearly daily conference calls with each other, “it felt like it at times,” laughs Crawford. “I know Manny from this transaction better than I know some of my own partners.”
Bullet-proofing KingSett's hostile bid before it launched would require some educated crystal-ball gazing on Osler's part. What would Primaris and its formidable lead lawyer Gow – with 18 McCarthys lawyers to help him – do to fend off the KingSett consortium? No doubt, all he could.
Primaris promptly rejected KingSett's bid as too low, saying their unitholders deserved more than $26 a unit. At this point it was up to McCarthys to buy Primaris time so it could figure out how to get them more. A take-over bidder has 35 calendar days from the time it issues its bid circular to make a deal happen. But there are ways to stretch that.
KingSett's investment bankers, says Pressman, “were very concerned about the defensive tactics that might significantly complicate the transaction for us or potentially bust up the deal.” Could Primaris issue a large amount of its stock to a so-called “white squire,” putting that stock – in a highly dilutive move – into the friendly hands of a strategic investor? That would make a subsequent bid by KingSett much more expensive. Might it – though it seemed unlikely at the time – even find a white knight, another company that would top KingSett's bid for Primaris?
Take-over bid rules have been designed by securities commissions to protect the interests of shareholders. They require careful navigation before a bidder makes its move, because, notes Pressman, “any failure to comply with the rules strictly is the easiest way your bid can be attacked by the target.”
Though Pressman insists it was not intentional, the timing of KingSett's bid announcement a few weeks before Christmas gave it an advantage over Primaris's counsel. It's a common take-over tactic; the timing eats up more of those 35 days with holiday time. Finding a white knight is that much harder. And with KingSett having cleverly tied up several of the most likely competitors for its own bid by engaging them as co-bidders, few thought Primaris could come up with a white knight.
BACK-END FINANCING
What made this bid dicier than most for the firms representing the KingSett consortium was the unusual, complicated, multi-party back-end financing it had cobbled together with OPB and RioCan. That was where Osler figured Gow would likely probe for a weak link. “There was nothing boilerplate in this one,” says Pressman.
It went like this: Prior to launch, KingSett entered into conditional asset sale agreements withOPB and RioCan to secure their financial support. As soon as KingSett could convince Primaris unitholders to accept an offer, that would immediately trigger the sale of some Primaris properties to OPB and RioCan, while KingSett kept others for itself. It would be the proceeds of those sales to OPB and RioCan that would actually fund much of the $4.4 billion that comprised KingSett's initial bid. But one depended on the other and vice versa. Primaris, it should be noted, knew nothing of the intricacies of these arrangements.
IT'S LETTER TIME
The day after Love sprang his news on Morrison, Gow was in the Primaris boardroom addressing the company's directors. He often attended Primaris board meetings, but never one like this. “There is some anxiety at Primaris. Lots of uncertainty,” he says. “Suddenly people who thought they had a career at Primaris for the next 20 years are worried that things are going to change.”
Gow took the trustees through the mechanics and basic rules of an unsolicited take-over. But first, he told them, “Just relax. Don't do anything urgent.”
The next step, taken the following 24 hours, was to find financial advisors to get a precise handle on what Primaris was worth, and then send them on a global mission to find a white knight. They interviewed six firms and hired two: Canaccord Genuity and Evercore Partners. “They immediately had a hard look at Primaris and came back, saying, ‘you know what, we think Primaris is worth more than $26,'” says Gow. Primaris put out a press release urging unit-holders to reject KingSett's offer.
Then the tough question. “Graham, what else can we do?”
Graham Gow replays the moment: “I shrivelled in my chair and said I wish we were sitting in the United States of America. There are not a lot of tools in Canada to hold off a take-over bid.” In both Canada and the US shareholder rights plans exist as a possible defence against a hostile bid. Typically they give existing shareholders of a target (but not the bidder, even if it has shares) the right to buy more shares in that company at a discount. That dilution raises the cost of a bid. Once a rights plan is approved by shareholders and then invoked, it forces a hostile bidder, instead of going directly to shareholders, to deal instead with the target board.
In the US, as Gow explains, a 2011 ruling in a Delaware court case reaffirmedaboard's power to invoke its shareholder rights plans almost indefinitely to prevent an unwanted take-over. Air Products and Chemicals, Inc. had accused the board of Airgas Inc. of improperly and repeatedly invoking its rights plan for nearly a year to prevent its shareholders from tendering their shares to Air Products in a $5.9-billion bid. In bidder-friendly Canada, though, regulators– in this case it would be the Ontario Securities Commission – only permit boards to use a shareholder rights plan for between 45 and 70 days after the start of a hostile bid, believing in the end it's up to shareholders to decide whether to sell or not.
Gow told Primaris's board: “I am pretty darn sure I can use that rights plan to extend 35 days to a somewhat longer period.
“They say to me, ‘Stop with the gobbledegook. How much longer?' And the answer is I don't know exactly. Probably at least 45 days. Probably I can get you 65 days from the time they actually start the take-over bid. But it's going to depend on the circumstance.”
A CHRISTMAS EVE GRENADE
When Primaris put out its directors' circular recommending rejection of KingSett's bid, Osler got a look at it four days before Christmas. Pressman and his team sighed with relief. “It wasn't a heavy-hitting, assaulting directors' circular. It was critical of the bid, but it wasn't a nasty, offensive rejection document.” Seemed it wouldn't terribly complicate KingSett's strategy.
Then, on Christmas Eve, Gow lobbed what Pressman describes as a “grenade.” It was a complaint letter to the OSC. That part was expected: the job for McCarthys was to convince the OSC with that letter there were serious problems with KingSett's bid that it should investigate. That would buy Primaris more time.
For lawyers, the complaint letter needs to be a carefully tuned document. Commissions are on alert for management and directors at target companies who might inappropriately thwart a hostile bid to protect their careers and board seats. “It's M&A Law 101 that you do look at the other guy's documentation and if anything looks even close to being questionable under the [takeover] statutes, you would consider whether to challenge it or not,” says Gow. But “if it's a harmless misstep, then you might say to yourself, ‘I'm going to look silly by raising this. Yes I have a technical point, but nothing turns on it. I'm going to look like I'm making trouble for the sake of making trouble.” It's a judgment call, he says, and you can lose credibility if you go overboard. “My own style is not to do that stuff.”
Gow tackled several things in his letter. First, KingSett's timing. The bid's December launch inhibited Primaris's ability to canvass alternatives. Primaris deserved more time. Gow also complained certain prescribed form requirements weren't complied with. But what got OSC's attention was Gow's suggestion there were problems with what are known as collateral benefit issues in the KingSett consortium's bid.
Though he saw McCarthys' arguments as “a stretch,” that topic, concedes Pressman, “is a very hot-button issue for the OSC.” To make everything fair for shareholders in the middle of a bidding war, the Ontario Securities Commission, like all provincial securities commissions, has a prohibition against any bidder conferring special benefits on some shareholders, but not others. Everyone must get identical consideration.
It was up to Pressman and his Osler partner Doug Bryce to answer the OSC complaint. Primaris alleged that certain funds within the KingSett family of funds that were pre-existing unitholders (of Primaris) would, improperly, receive collateral benefits in connection with the KingSett bid. Having already conceded that those funds were “joint actors” in KingSett's bid, Osler successfully argued those particular actors should be better understood as buyers, not sellers (even if they did own Primaris shares). Therefore, Osler successfully argued, those joint actors could not be in a position to confer any collateral benefits on themselves in a potential KingSett deal. “We spent a lot of time whacking that mole,” says Pressman. “Ultimately we whacked it. But it took a lot of time. It was a distraction from our bid.”
Just what Gow wanted. Time. And time would change everything. As Osler dealt with the OSC complaint, Primaris found its white knight. On January 16, 2013, it announced that H&R REIT had entered into an agreement with it. H&R would acquire 100 per cent of the issued and outstanding Primaris units for $28 per unit or an equivalent 1.13 stapled H&R units. That equated to about a $4.6-billion bid; a 21 per cent premium over Primaris's unit price the day before KingSett made its bid.
DON'T GO BREAK FEEING MY HEART
What's more, Primaris and H&R had come up with a controversial $106-million break fee that was a rare mix of cash and assets. If Primaris for some reason accepted a bid from someone other than H&R, it would pay H&R $70 million in cash. It would also fork over several properties – including the Dufferin Mall and some downtown Toronto properties on Yonge Street – at a discount to pegged value. Dubbed “The Crown Jewel Defence” by the press because of those assets, it was an unusual, though not unprecedented, break fee that would ultimately rip some tears in KingSett's sails.
Enter Michael Gans, a Toronto M&A lawyer and partner at Blake, Cassels & Graydon LLP. Gans and co-lead Will Fung, who had long been Blakes' relationship lawyer with Canada's biggest REIT, would – along with 16 other Blakes lawyers – represent H&R. On some US issues H&R also got help from Davies Ward Phillips & Vineberg LLP.
Gans says Blakes, on behalf of H&R, proposed the asset lock-up break fee to Primaris. “When we were brought into the transaction we knew we were behind the eight ball. We knew we were up against very deep pockets; what we perceived was almost unlimited access to cash resources versus our own constrained access to cash.”
H&R CEO Tom Hofstedter and CFO Larry Froom worried they might still get shoved aside by a higher KingSett offer. “We felt there was a very real possibility we wouldn't be successful, that we might just get the break fee,” says Gans. “And that caused us to focus on ensuring that the break fee would very appropriately compensate us for transaction risk and management time.”
Asset lock-ups are rarely used in Canada but precedent has established them as legitimate defence in a take-over war. As it happened, McCarthys' Gow understood the law here better than most. Good news for Primaris. He had been involved in a 1998 Ontario Superior Court case – CW Shareholdings Inc. v. WIC Western International Communications Ltd. – that upheld the use of asset-lockup break fees to ward off hostile bidders. In that case, the directors of WIC, a broadcasting company, promised a break fee to Shaw Communications Inc. that included $30-million cash and the option to purchase some valuable radio assets – all to ward off a hostile take-over by CanWest Global Communications.
With his experience from that case, but the pressure on, Gow was able to help the Primaris board quickly wrap its mind around the implications of H&R's proposed break fee when they asked if it was defensible in court.
Good question. A break fee is a balancing act. It's okay if it gives a big thank-you hug to your white knight and at the same time sends a baton to the knees of a hostile bidder. But it can't knock him out. In other words, you can't make a break fee so punishing it would have an unfair auction-inhibiting effect for KingSett or anyone else still interested in Primaris. The combined value of this break fee represented about 3.5 per cent of the undiluted equity value of Primaris, says Gans, “a quantum we felt was consistent with market norms.” Except the market didn't see it that way. To Gans's surprise, the break fee was criticized by some commentators in the press as excessive.
Meanwhile, Gow told the Primaris board he couldn't say for sure whether KingSett might attack the break fee in court or not. “But my judgment is that if it is attacked, it will prevail.”
A TWIST IN THE JEWELS
Primaris, unlike outside observers, never thought of the Dufferin Mall and those Yonge Street properties as crown jewels. “Nobody ever would have said Dufferin was the best shopping mall in our portfolio,” says Gow. “We had lots of others we liked just as much if not better.” The other properties, partly vacant, were in an “unfashionable” part of Toronto and generating little revenue.
But what Gow and Primaris didn't know then was that Jon Love was particularly interested in those Yonge Street properties. KingSett owned land and buildings around them. Together with those Primaris properties, KingSett could complete a significant redevelopment of that area. “But Jon Love didn't tell us that when he made his hostile take-over bid,” says Gow. “So then we put out a press release and KingSett then said, ‘Holy mackerel, we wanted those properties! Those are particularly attractive for us.'”
KingSett's interest in the properties tied up by the lockup was a stroke of luck and a game changer. It posed a delicate problem for Osler. Its client, Love, now wanted to see if he could broker a new deal between his consortium and H&R to harmoniously carve Primaris up amongst them.
At Osler, Pressman assumed, correctly, there was a confidentiality and standstill agreement between Primaris and H&R. That didn't exactly mean that KingSett couldn't confab with H&R CEO Hofstedter; after all, KingSett wasn't a party to that agreement. But if Love was seen to induce H&R to break its contract with Primaris, he could find himself in trouble with the OSC.
In the end, on January 25, 2013, according to an H&R circular, Love telephoned Hofstedter and essentially said, as Gans recounts it, “enough with the mudslinging. Let's see if we can find a compromise that will be beneficial to all three parties.” Primaris, if reluctantly, gave Hofstedter permission to chat with Love, notwithstanding the standstill agreement.
For Primaris's lead and loyal counsel, Gow, this was all a dramatic turnabout. “It was his job to keep the auction alive and he wouldn't want anything to happen to that that could chill the bidding,” says Pressman.
On the following Sunday, Hofstedter reported to Primaris CEO Morrison that the meeting with Love had been productive. But Primaris didn't like KingSett's first plan and price for carving up its portfolio. Morrison told H&R if it wanted to be released from the standstill, they needed to convince bidders to put more money on the table. And so they did.
FIVE WAYS TO SETTLEMENT
On February 5, Primaris, H&R and the KingSett crowd announced they had entered into an amended arrangement agreement. Under it, KingSett would eventually get 17 Primaris properties, enough to satisfy its hunger. Primaris unitholders could elect to receive $28 per unit or 1.66 H&R units for every one of their units they tendered. H&R would get 27 Primaris properties, making it the largest REIT in the country.
Enter Ray Gelgoot, a partner in Fogler, Rubinoff LLP's Commercial Real Estate Group who has since retired. Along with a team from Stikeman Elliott LLP, led by Joel Binder in Toronto, Fogler, Rubinoff represented RioCan. Gelgoot was used to negotiating conditional real estate sale in his career, but never before one dependent on the hostile take-over of a major property owner. “It was different because you didn't have a deal until there was peace made.”
And it was different because RioCan couldn't do the usual due diligence on the properties it wanted without tipping offPrimaris that a take-over was afoot. “You are buying the properties as is,” says Gelgoot. He wasn't entirely uncomfortable with that prospect. “You have to understand that you are dealing with Primaris REIT, who bought properties with very qualified lawyers over the years. It's not likely that there will be anything majorly wrong from a legal side of things. Very unlikely. So you take your risk. The end game, the big picture, is more important than if you find a $20,000 item that has to be fixed.”
By April 6, all the cash had traded hands, the monopoly pieces were shuffled.
There's a lesson here for those going into corporate law, suggests Paul Mantini, who co-led Bennett Jones's efforts on real estate and banking for KingSett. “The important ‘take-away' from my perspective for this transaction was that all of the lawyers and clients involved found a middle ground to cooperate and restructure the deal so that everyone came away reasonably satisfied rather than following the usual competitive approach on ‘takeovers,' which results in only one winner.” Often, he says, that approach comes at “great cost to the deal, the winner and the other bidders.” Not this time.
DEAL TIME LINE
They went from foes to friends. Or, at least, from a hostile take-over to a friendly deal. A consortium led by king sett capital tried to nab Primaris REIT. But in the end, Primaris found a white knight in H&R REIT and Kingsett decided some horse-trading was in order
Below is the chronology on how the deal evolved:
December 4, 2012: At a Tim Hortons in Toronto, KingSett founder and CEO Jon Love meets with Primaris CEO John Morrison and drops a bomb; KingSett will announce the next day its intention to make a hostile $4.4-billion bid for the REIT's shopping malls and other property holdings.
December 10, 2012: KingSett, via KS Acquisition II LP, formally offer to all issued and outstanding trust units of Primaris for $26 cash per unit, about a 13 per cent premium over the unit price on Dec. 4.
December 19, 2012: In a directors' circular, Primaris recommends to its unitholders they reject the offer from KingSett and its co-bidders, the Ontario Pension Board and RioCan REIT.
December 24, 2012: Primaris's legal counsel at McCarthy Tétrault files a complaint letter with the Ontario Securities Commission outlining what it sees as regulatory problems in KingSett's bid. That buys Primaris time to continue looking for a white knight as the OSC examines the issues it raised.
January 16, 2013: Primaris finds its white knight, announcing that, subject to unitholder approvals, H&R REIT will acquire 100 per cent of Primaris. Primaris unitholders can either get 1.13 stapled units of H&R or $28 cash per unit, subject to a maximum cash amount of $700 million.
January 25, 2013: KingSett's Jon Love telephones H&R CEO Tom Hofstedter. Carefully wording his request so as not to impede any standstill agreement between Primaris and H&R, he asks Hofstedter if they can meet to discuss a possible tag-team deal.
January 27, 2013: Hofstedter reports to Primaris CEO John Morrison that his meeting with Love has been productive. While Primaris doesn't like the first rearrangement of its standing deal with H&R, the ball has been set in motion for a five-way “friendly” deal.
February 5, 2013: Primaris, H&R and KingSett's consortium enter into an amended arrangement agreement under which Primaris unitholders will get $28 per unit or 1.66 H&R units for each of theirs.
April 4, 2013: The five-way deal is completed as H&R completes its acquisition of 27 Primaris properties. KingSett's consortium divvies up the remaining 17 Primaris portfolio properties.
Lawyer(s)
Firm(s)
McCarthy Tétrault LLP
Cassels Brock & Blackwell LLP
Osler, Hoskin & Harcourt LLP
Bennett Jones LLP
Blake, Cassels & Graydon LLP
Davies Ward Phillips & Vineberg LLP
Stikeman Elliott LLP